[Federal Register Volume 74, Number 202 (Wednesday, October 21, 2009)]
[Proposed Rules]
[Pages 54124-54332]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-23733]
[[Page 54123]]
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Part II
Federal Reserve System
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12 CFR Part 226
Truth in Lending; Proposed Rule
Federal Register / Vol. 74 , No. 202 / Wednesday, October 21, 2009 /
Proposed Rules
[[Page 54124]]
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FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-1370]
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Proposed rule; request for public comment.
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SUMMARY: The Board proposes to amend Regulation Z, which implements the
Truth in Lending Act, and the staff commentary to the regulation in
order to implement provisions of the Credit Card Accountability
Responsibility and Disclosure Act of 2009 that are effective on
February 22, 2010. This proposal would establish a number of new
substantive and disclosure requirements to establish fair and
transparent practices pertaining to open-end consumer credit plans,
including credit card accounts. In particular, the proposed rule would
limit the application of increased rates to existing credit card
balances, require credit card issuers to consider a consumer's ability
to make the required payments, establish special requirements for
extensions of credit to consumers who are under the age of 21, and
limit the assessment of fees for exceeding the credit limit on a credit
card account.
DATES: Comments must be received on or before November 20, 2009.
ADDRESSES: You may submit comments, identified by Docket No. R-1370, 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.
FOR FURTHER INFORMATION CONTACT: Jennifer S. Benson or Stephen Shin,
Attorneys, Amy Burke, Benjamin K. Olson, or Vivian Wong, Senior
Attorneys, or Krista Ayoub or Ky Tran-Trong, Counsels, Division of
Consumer and Community Affairs, Board of Governors of the Federal
Reserve System, at (202) 452-3667 or 452-2412; for users of
Telecommunications Device for the Deaf (TDD) only, contact (202) 263-
4869.
SUPPLEMENTARY INFORMATION:
I. Background and Implementation of the Credit Card Act
January 2009 Regulation Z and FTC Act Rules
On December 18, 2008, the Board adopted two final rules pertaining
to open-end (not home-secured) credit. These rules were published in
the Federal Register on January 29, 2009. The first rule makes
comprehensive changes to Regulation Z's provisions applicable to open-
end (not home-secured) credit, including amendments that affect all of
the five major types of required disclosures: credit card applications
and solicitations, account-opening disclosures, periodic statements,
notices of changes in terms, and advertisements. See 74 FR 5244
(January 2009 Regulation Z Rule). The second is a joint rule published
with the Office of Thrift Supervision (OTS) and the National Credit
Union Administration (NCUA) under the Federal Trade Commission Act (FTC
Act) to protect consumers from unfair acts or practices with respect to
consumer credit card accounts. See 74 FR 5498 (January 2009 FTC Act
Rule). The effective date for both rules is July 1, 2010.
On May 5, 2009, the Board published proposed clarifications and
technical amendments to the January 2009 Regulation Z Rule (May 2009
Regulation Z Proposed Clarifications) in the Federal Register. See 74
FR 20784. The Board, the OTS, and the NCUA (collectively, the Agencies)
concurrently published proposed clarifications and technical amendments
to the January 2009 FTC Act Rule. See 74 FR 20804 (May 2009 FTC Act
Rule Proposed Clarifications). In both cases, as stated in the Federal
Register, these proposals were intended to clarify and facilitate
compliance with the consumer protections contained in the January 2009
final rules and not to reconsider the need for--or the extent of--those
protections. The comment period on both of these proposed sets of
amendments ended on June 4, 2009. Where relevant, the Board has
considered the comments submitted in preparing this proposed rule and
is republishing the proposed amendments with several revisions as
discussed in V. Section-by-Section Analysis. The Board intends to
finalize the amendments, with revisions as appropriate, in connection
with this rulemaking.
The Credit Card Act
On May 22, 2009, the Credit Card Accountability Responsibility and
Disclosure Act of 2009 (Credit Card Act) was signed into law. Public
Law 111-24, 123 Stat. 1734 (2009). The Credit Card Act primarily amends
the Truth in Lending Act (TILA) and establishes a number of new
substantive and disclosure requirements to establish fair and
transparent practices pertaining to open-end consumer credit plans.
Several of the provisions of the Credit Card Act are similar to
provisions in the Board's January 2009 Regulation Z and FTC Act Rules,
while other portions of the Credit Card Act address practices or
mandate disclosures that were not addressed in the Board's rules.
The requirements of the Credit Card Act that pertain to credit
cards or other open-end credit for which the Board has rulemaking
authority become effective in three stages. First, provisions generally
requiring that consumers receive 45 days' advance notice of interest
rate increases and significant changes in terms (new TILA Section
127(i)) and provisions regarding the amount of time that consumers have
to make payments (revised TILA Section 163) became effective on August
20, 2009 (90 days after enactment of the Credit Card Act). A majority
of the requirements under the Credit Card Act for which the Board has
rulemaking authority, including, among other things, provisions
regarding interest rate increases (revised TILA Section 171), over-the-
limit transactions (new TILA Section 127(k)), and student cards (new
TILA Sections 127(c)(8), 127(p), and 140(f)) become effective on
February 22, 2010 (9 months after enactment). Finally, two provisions
of the Credit Card Act addressing the reasonableness and
proportionality of penalty fees and charges (new TILA Section 149) and
re-evaluation by creditors of rate increases (new TILA Section 148) are
effective on August 22, 2010 (15 months after enactment). The Credit
Card Act also requires the Board to conduct several studies and to make
several reports to Congress, and sets forth differing time
[[Page 54125]]
periods in which these studies and reports must be completed.
Implementation Plan
On July 22, 2009, the Board published an interim final rule to
implement those provisions of the Credit Card Act that became effective
on August 20, 2009 (July 2009 Regulation Z Interim Final Rule). See 74
FR 36077. As discussed in the supplementary information to the July
2009 Regulation Z Interim Final Rule, the Board is implementing the
provisions of the Credit Card Act in stages, consistent with the
statutory timeline established by Congress. Accordingly, the interim
final rule implemented those provisions of the statute that became
effective August 20, 2009, primarily addressing change-in-terms notice
requirements and the amount of time that consumers have to make
payments. The Board issued rules in interim final form based on its
determination that, given the short implementation period established
by the Credit Card Act and the fact that similar rules were already the
subject of notice-and-comment rulemaking, it would be impracticable and
unnecessary to issue a proposal for public comment followed by a final
rule. The Board solicited comment on the interim final rule; the
comment period ended on September 21, 2009. The Board intends to
consider comments on the interim final rule when finalizing this
rulemaking implementing those provisions of the Credit Card Act that
become effective February 22, 2010.\1\
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\1\ The Board has already begun consideration of the comment
letters received on the July 2009 Regulation Z Interim Final Rule.
However, the review of the comment letters is ongoing, and
accordingly the supplementary information to this proposal does not
discuss the comments received. The Board anticipates addressing the
comments in their entirety when it issues a final rule based on this
proposal.
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The Board intends to separately consider the two remaining
provisions under the Credit Card Act regarding reasonable and
proportional penalty fees and charges and the re-evaluation of rate
increases, and to finalize implementing regulations in accordance with
the timeline established by Congress, upon notice and after giving the
public an opportunity to comment.
To the extent appropriate, the Board has used its January 2009
rules and the underlying rationale as the basis for its rulemakings
under the Credit Card Act. The Board also intends to retain those
portions of its January 2009 Regulation Z Rule that are unaffected by
the Credit Card Act. The Board is not withdrawing any provisions of the
January 2009 Regulation Z Rule or its January 2009 FTC Act Rule at this
time. The Board anticipates that in connection with finalizing this
proposed rule for those provisions of the Credit Card Act that are
effective February 22, 2010, it will amend or withdraw those portions
of the January 2009 Regulation Z Rule that are inconsistent with the
requirements of the Credit Card Act. In addition, as discussed further
in V. Section-by-Section Analysis, the Board is proposing to move the
requirements in its January 2009 FTC Act Rule into Regulation Z and
intends to withdraw the requirements adopted under Regulation AA,
consistent with Congress's approach of amending the Truth in Lending
Act.\2\ Finally, except as otherwise noted, the Board is considering
comments received on the May 2009 Regulation Z Proposed Clarifications
and plans to incorporate those final clarifications, to the extent
appropriate, when it promulgates final rules pursuant to this proposal.
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\2\ See also OTS Memorandum for Chief Executive Officers: Credit
CARD Act: Interest Rate Increases and Rules on Unfair Practices
(issued July 13, 2009) (available at http://files.ots.treas.gov/25312.pdf); NCUA Press Release: Working with Other Regulators on
Credit CARD Act and UDAP Rule (issued July 1, 2009) (available at
http://www.ncua.gov/news/press_releases/2009/MR09-0701.htm).
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Republication of Provisions of January 2009 Regulation Z Rule
The Board has published four proposed or final rules in 2009 that
amend or propose to amend Regulation Z's provisions applicable to open-
end (not home-secured) credit: the January 2009 Regulation Z Rule, the
May 2009 Regulation Z Proposed Clarifications, the July 2009 Regulation
Z Interim Final Rule, and the present proposal. The Board is aware that
the existence of multiple concurrent Regulation Z rulemakings
pertaining to open-end (not home-secured) credit has the potential to
cause confusion. In particular, the Board understands that it may be
difficult for interested parties to ascertain how the four proposed or
final rules will read as an integrated whole once all final rules are
adopted and effective.
In order to more clearly illustrate the cumulative changes in the
four proposed or final rules, the Board is republishing in this
proposal all sections of Regulation Z from the four proposed or final
rules that pertain to open-end (not home-secured) credit. As discussed
further in this supplementary information, the requirements of the
Board's January 2009 FTC Act Rule are also being incorporated into this
proposal under Regulation Z, with proposed amendments as necessary to
conform to the requirements of the Credit Card Act. The Board believes
that this is the clearest way to present the proposed and final
revisions to Regulation Z in an integrated format. The Board thinks
that it is important that commenters be able to consider the changes
included in this proposal in light of the complete package of changes
effected by the Board's recent rulemakings pertaining to open-end (not
home-secured) credit.
The Board is not reconsidering the need for or the extent of the
January 2009 Regulation Z Rule, except to the extent that it is
inconsistent with the requirements of the Credit Card Act. Accordingly,
although the Board is republishing the provisions of Regulation Z that
pertain to open-end (not home-secured) credit in their entirety, the
Board is requesting that interested parties limit the scope of their
comments to the proposed changes, which are discussed in the
supplementary information. As necessary, the Board has made technical
and conforming changes to the regulatory text from the January 2009
Regulation Z Rule in order to conform with the proposed regulations
implementing the Credit Card Act. These changes are not substantive in
nature and are therefore not discussed in detail in V. Section-by-
Section Analysis.
The Board is not republishing in connection with this proposal
several sections of the January 2009 Regulation Z Rule that are
applicable only to home-equity lines of credit subject to the
requirements of Sec. 226.5b (HELOCs). In particular, the Board is not
republishing Sec. Sec. 226.6(a), 226.7(a) and 226.9(c)(1). These
sections, as discussed in the supplementary information to the January
2009 Regulation Z Rule, are intended to preserve the existing
requirements of Regulation Z for home-equity lines of credit until the
Board's ongoing review of the rules that apply to HELOCs is completed.
On August 26, 2009, the Board published proposed revisions to those
portions of Regulation Z affecting HELOCs in the Federal Register. See
74 FR 43428 (August 2009 Regulation Z HELOC Proposal). In order to
clarify that this proposed rule is not intended to amend or otherwise
affect the August 2009 Regulation Z HELOC Proposal, the Board is not
republishing several sections of the January 2009 Regulation Z Rule
that apply only to HELOCs in this Federal Register notice.
The Board anticipates, however, that a final rule will be issued
with regard to this proposal prior to completion of
[[Page 54126]]
final rules regarding HELOCs. Therefore, the Board anticipates that it
will include Sec. Sec. 226.6(a), 226.7(a), and 226.9(c)(1), as adopted
in the January 2009 Regulation Z Rule, in its final rulemaking based on
this proposal, to give HELOC creditors clear guidance as to the
applicable Regulation Z requirements between the effective date of this
rule and the effective date of the forthcoming HELOC final rules.
The Board is, however, republishing several provisions of general
applicability to all credit subject to Regulation Z that were included
in the January 2009 Regulation Z Rule, such as the definitions in Sec.
226.2 and the rules regarding finance charges in Sec. 226.4. The Board
notes that these provisions, and any other provisions applicable to
HELOCs, could be subject to revision in connection with finalizing the
August 2009 Regulation Z HELOC Proposal. In addition, on August 26,
2009, the Board also published in the Federal Register proposed
revisions to Regulation Z's provisions addressing closed-end credit
secured by real property or a consumer's dwelling. 74 FR 43232 (August
2009 Regulation Z Closed-End Credit Proposal). Among other things, the
August 2009 Regulation Z Closed-End Credit Proposal includes several
proposed revisions to Sec. 226.4, which addresses finance charges.
This proposal is not intended to affect or withdraw any proposed
changes to such provisions of general applicability included in either
the August 2009 Regulation Z HELOC Proposal or the August 2009
Regulation Z Closed-End Credit Proposal.
Finally, the Board has incorporated in the regulatory text and
commentary for Sec. Sec. 226.1, 226.2, and 226.3 several changes that
were adopted in the Board's recent rulemaking pertaining to private
education loans. See 74 FR 41194 (August 14, 2009) for further
discussion of these changes. The Board is not soliciting comment on
these amendments.
When publishing a proposed rule for comment under Regulation Z, the
Board generally denotes regulatory and commentary text proposed to be
deleted by use of bolded brackets. Similarly, the Board generally
denotes the proposed insertion of text with bolded arrows. For this
proposal, the Board is not displaying proposed insertions and deletions
of text using brackets and arrows. As noted above, the Board has
published four proposed or final rules pertaining to open-end (not
home-secured) credit under Regulation Z in 2009, many of which impact
the same provisions, and therefore the Board believes that the use of
brackets and arrows for just those changes introduced in this proposal
could cause confusion.
Effective Date
As noted above, the effective date of the Board's January 2009
Regulation Z Rule is July 1, 2010. However, the effective date of the
provisions of the Credit Card Act implemented by this proposal is
February 22, 2010. Many of the provisions of the Credit Card Act as
implemented by this proposal are closely related to provisions of the
January 2009 Regulation Z Rule. For example, proposed Sec.
226.9(c)(2)(ii), which describes ``significant changes in terms'' for
which 45 days' advance notice is required, cross-references Sec.
226.6(b)(1) and (b)(2) as adopted in the January 2009 Regulation Z
Rule. In order to implement the Credit Card Act in a manner consistent
with the January 2009 Regulation Z Rule, the Board intends to make the
effective date for the final rule pursuant to this proposal February
22, 2010. The Board is considering whether this effective date should
apply to both the provisions of the January 2009 Regulation Z Rule that
are not directly affected by the Credit Card Act that are included in
the proposed rule as well as new and amended requirements proposed
pursuant to the Credit Card Act.
The Board recognizes that there are certain provisions of the
January 2009 Regulation Z Rule that impose substantial operational
burdens on creditors that are not directly required by the Credit Card
Act. For such provisions, the Board is considering retaining the
original mandatory compliance date of July 1, 2010, consistent with the
effective date it adopted when the January 2009 Regulation Z Rule was
issued. In particular, the Board is considering whether the original
mandatory compliance date of July 1, 2010 would be appropriate for
certain tabular or other formatting requirements applicable to account-
opening disclosures under Sec. 226.6(b), portions of the periodic
statement under Sec. 226.7(b),\3\ disclosures provided with checks
that access a credit card account under Sec. 226.9(b)(3), change-in-
terms notices provided pursuant to Sec. 226.9(c)(2), and notices of a
rate increase due to a consumer's default, delinquency, or as a penalty
pursuant to Sec. 226.9(g). The Board understands that creditors are
already in the process of updating their systems in order to provide
these disclosures in the appropriate tabular format by the July 1, 2010
effective date of the January 2009 Regulation Z Rule, and that
retaining a July 1, 2010 effective date for the formatting requirements
associated with such disclosures may be appropriate. The Board solicits
comment on this approach, as well as whether there are other provisions
of this proposed rule that are not directly required by the Credit Card
Act for which a mandatory compliance date of July 1, 2010 would also be
appropriate. The Board also seeks comment on appropriate transition
rules for the proposed amendments to Regulation Z.
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\3\ The Board notes that the Credit Card Act does, however,
require a tabular format for the repayment disclosures under
proposed Sec. 226.7(b)(12), and accordingly does not intend to
provide a July 1, 2010 mandatory compliance date for such formatting
requirements.
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II. Summary of Major Proposed Revisions
A. Increases in Annual Percentage Rates
Existing balances. Consistent with the Credit Card Act, the
proposed rule would prohibit creditors from applying increased annual
percentage rates and certain fees and charges to existing credit card
balances, except in the following circumstances: (1) When a temporary
rate lasting at least six months expires; (2) when the rate is
increased due to the operation of an index (i.e., when the rate is a
variable rate); (3) when the minimum payment has not been received
within 60 days after the due date; and (4) when the consumer
successfully completes or fails to comply with the terms of a workout
arrangement. In addition, when the annual percentage rate on an
existing balance has been reduced pursuant to the Servicemembers Civil
Relief Act (SCRA), the proposed rule would permit the creditor to
increase that rate once the SCRA ceases to apply.
New transactions. The proposed rule would implement the Credit Card
Act's prohibition on increasing an annual percentage rate during the
first year after an account is opened. After the first year, the
proposed rule would provide that creditors are permitted to increase
the annual percentage rates that apply to new transactions so long as
the creditor complies with the Credit Card Act's 45-day advance notice
requirement, which was implemented in the July 2009 Regulation Z
Interim Final Rule.
B. Evaluation of Consumer's Ability To Pay
General requirements. The Credit Card Act prohibits creditors from
opening a new credit card account or increasing the credit limit for an
existing credit card account unless the creditor considers the
consumer's ability to make the required payments
[[Page 54127]]
under the terms of the account. Because credit card accounts typically
require consumers to make a minimum monthly payment that is a
percentage of the total balance (plus, in some cases, accrued interest
and fees), the proposed rule would require creditors to consider the
consumer's ability to make the required minimum payments.
However, because a creditor will not know the exact amount of a
consumer's minimum payments at the time it is evaluating the consumer's
ability to make those payments, the proposal would require creditors to
use a reasonable method for estimating a consumer's minimum payments
and would provide a safe harbor that creditors could use to satisfy
this requirement. For example, with respect to the opening of a new
credit card account, the safe harbor would provide that it would be
reasonable for a creditor to estimate minimum payments based on a
consumer's utilization of the full credit line using the minimum
payment formula employed by the creditor with respect to the credit
card product for which the consumer is being considered.
The proposed rule would also clarify the types of factors creditors
should review in considering a consumer's ability to make the required
minimum payments. Specifically, an evaluation of a consumer's ability
to pay must include a review of the consumer's income or assets as well
as the consumer's current obligations, and a creditor must establish
reasonable policies and procedures for considering that information.
When considering a consumer's income or assets and current obligations,
a creditor would be permitted to rely on information provided by the
consumer or information in a consumer's credit report.
Specific requirements for underage consumers. Consistent with the
Credit Card Act, the proposed rule prohibits a creditor from issuing a
credit card to a consumer who has not attained the age of 21 unless the
consumer has submitted a written application that meets certain
requirements. Specifically, the application must include either: (1)
The signature of a cosigner who has attained the age of 21, who has the
means to repay debts incurred by the underage consumer in connection
with the account, and who assumes joint liability for such debts; or
(2) information indicating that the underage consumer has the ability
to make the required payments for the account.
C. Marketing to Students
Prohibited inducements. The Credit Card Act limits a creditor's
ability to offer a student at an institution of higher education any
tangible item to induce the student to apply for or open an open-end
consumer credit plan offered by the creditor. Specifically, the Credit
Card Act prohibits such offers: (1) On the campus of an institution of
higher education; (2) near the campus of an institution of higher
education; or (3) at an event sponsored by or related to an institution
of higher education.
The proposed commentary would provide guidance to assist creditors
in complying with the rule. For example, the proposed commentary would
clarify that ``tangible item'' means a physical item (such as a gift
card, t-shirt, or magazine subscription) and does not include non-
physical items (such as discounts, rewards points, or promotional
credit terms). The proposed commentary would also clarify that a
location that is within 1,000 feet of the border of the campus of an
institution of higher education (as defined by the institution) is
considered near the campus of that institution. Finally, consistent
with guidance recently adopted by the Board with respect to certain
private education loans, the proposed commentary would state that an
event is related to an institution of higher education if the marketing
of such event uses words, pictures, or symbols identified with the
institution in a way that implies that the institution endorses or
otherwise sponsors the event.
Disclosure and reporting requirements. The proposed rule would also
implement the provisions of the Credit Card Act requiring institutions
of higher education to publicly disclose agreements with credit card
issuers regarding the marketing of credit cards. The proposal would
state that an institution may comply with this requirement by, for
example, posting the agreement on its Web site or by making the
agreement available upon request.
D. Fees or Charges for Transactions That Exceed the Credit Limit
Consumer consent requirement. Consistent with the Credit Card Act,
the proposed rule would require that a creditor obtain a consumer's
express consent (or opt-in) before imposing any fees on a consumer's
credit card account for making an extension of credit that exceeds the
account's credit limit. Prior to obtaining this consent, the creditor
must disclose, among other things, the dollar amount of any fees or
charges that will be assessed for an over-the-limit transaction as well
as any increased rate that may apply if the consumer exceeds the credit
limit. In addition, if the consumer consents, the creditor is also
required to provide a notice of the consumer's right to revoke that
consent on any periodic statement that reflects the imposition of an
over-the-limit fee or charge.
The proposed rule would apply these requirements to all consumers
(including existing account holders) if the creditor imposes a fee or
charge for paying an over-the-limit transaction. Thus, after the
February 22, 2010 effective date, creditors would be prohibited from
assessing any over-the-limit fees or charges on an account until the
consumer consents to the payment of transactions that exceed the credit
limit.
Prohibited practices. Even if the consumer has affirmatively
consented to the creditor's payment of over-the-limit transactions, the
Credit Card Act prohibits certain practices in connection with the
assessment of over-the-limit fees or charges. Consistent with these
statutory prohibitions, the proposed rule would prohibit a creditor
from imposing more than one over-the-limit fee or charge per billing
cycle. In addition, a creditor could not impose an over-the-limit fee
or charge on the account for the same over-the-limit transaction in
more than three billing cycles.
The Credit Card Act also directs the Board to prescribe regulations
that prevent unfair or deceptive acts or practices in connection with
the manipulation of credit limits designed to increase over-the-limit
fees or other penalty fees. Pursuant to this authority, the proposed
rule would prohibit a creditor from assessing an over-the-limit fee or
charge that is caused by the creditor's failure to promptly replenish
the consumer's available credit. The proposed rule would also prohibit
creditors from conditioning the amount of available credit on the
consumer's consent to the payment of over-the-limit transactions.
Finally, the proposed rule would prohibit the imposition of any over-
the-limit fees or charges if the credit limit is exceeded solely
because of the creditor's assessment of fees or charges (including
accrued interest charges) on the consumer's account.
E. Timely Settlement of Estates
The Credit Card Act directs the Board to prescribe regulations
requiring creditors to establish procedures ensuring that any
administrator of an estate can resolve the outstanding credit card
balance of a deceased accountholder in a timely manner. The proposed
rule would impose two
[[Page 54128]]
specific requirements designed to enable administrators to determine
the amount of and pay a deceased consumer's balance in a timely manner.
First, upon request by the administrator, the creditor would be
required to disclose the amount of the balance in a timely manner.
Second, once an administrator has made such a request, the creditor
would be required to cease the imposition of fees and charges on the
account (including the accrual of interest) so that the amount of the
balance does not increase while the administrator is arranging for
payment.
F. On-line Disclosure of Credit Card Agreements
The Credit Card Act requires creditors to post credit card
agreements on their Web sites and to submit those agreements to the
Board for posting on its Web site. The Credit Card Act further provides
that the Board may establish exceptions to these requirements in any
case where the administrative burden outweighs the benefit of increased
transparency, such as where a credit card plan has a de minimis number
of accountholders.
The proposed rule would require a creditor to post on its Web site
or otherwise make available its credit card agreements with its current
cardholders. However, the proposed rule would establish two limitations
with respect to the submission of agreements to the Board. First, the
proposed rule would establish a de minimis exception for creditors with
fewer than 10,000 open credit card accounts. Because the overwhelming
majority of credit card accounts are held by creditors that have more
than 10,000 open accounts, the information provided through the Board's
Web site would still reflect virtually all of the terms available to
consumers.
Second, creditors would not be required to submit agreements that
are not currently offered to the public. The Board believes that the
primary purpose of the information provided through the Board's Web
site is to assist consumers in comparing credit card agreements offered
by different issuers when shopping for a new credit card. Including
agreements that are no longer offered to the public would not
facilitate comparison shopping by consumers. In addition, including
such agreements could create confusion regarding which terms are
currently available.
G. Additional Provisions
The proposed rule also implements the following provisions of the
Credit Card Act, all of which go into effect on February 22, 2010.
Limitations on fees. The Board's January 2009 FTC Act Rule
prohibited banks from charging to a credit card account during the
first year after account opening certain account-opening and other fees
that, in total, constituted the majority of the initial credit limit.
The Credit Card Act contains a similar provision, except that it
applies to all fees (other than fees for late payments, returned
payments, and exceeding the credit limit) and limits the total fees to
25% of the initial credit limit.
Payment allocation. When different rates apply to different
balances on a credit card account, the Board's January 2009 FTC Act
Rule required banks to allocate payments in excess of the minimum first
to the balance with the highest rate or pro rata among the balances.
The Credit Card Act contains a similar provision, except that excess
payments must always be allocated first to the balance with the highest
rate.
Double-cycle billing. The Board's January 2009 FTC Act Rule
prohibited banks from imposing finance charges on balances for days in
previous billing cycles as a result of the loss of a grace period (a
practice sometimes referred to as ``double-cycle billing''). The Credit
Card Act contains a similar prohibition. In addition, when a consumer
pays some but not all of a balance prior to expiration of a grace
period, the Credit Card Act prohibits the creditor from imposing
finance charges on the portion of the balance that has been repaid.
Fees for making payment. The Credit Card Act prohibits creditors
from charging a fee for making a payment, except for payments involving
an expedited service by a service representative of the creditor.
Minimum payments. The Board's January 2009 Regulation Z Rule
implemented provisions of the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005 requiring creditors to provide a toll-free
telephone number where consumers could receive an estimate of the time
to repay their account balances if they made only the required minimum
payment each month. The Credit Card Act substantially revised the
statutory requirements for these disclosures. In particular, the Credit
Card Act requires the following new disclosures on the periodic
statement: (1) The amount of time and the total cost (interest and
principal) involved in paying the balance in full making only minimum
payments; and (2) the monthly payment amount required to pay off the
balance in 36 months and the total cost (interest and principal) of
repaying the balance in 36 months.
III. Statutory Authority
Section 2 of the Credit Card Act states that the Board ``may issue
such rules and publish such model forms as it considers necessary to
carry out this Act and the amendments made by this Act.'' This proposed
rule implements several sections of the Credit Card Act, which amend
TILA. TILA mandates that the Board prescribe regulations to carry out
its purposes and specifically authorizes the Board, among other things,
to do the following:
Issue regulations that contain such classifications,
differentiations, or other provisions, or that provide for such
adjustments and exceptions for any class of transactions, that in the
Board's judgment are necessary or proper to effectuate the purposes of
TILA, facilitate compliance with the act, or prevent circumvention or
evasion. 15 U.S.C. 1604(a).
Exempt from all or part of TILA any class of transactions
if the Board determines that TILA coverage does not provide a
meaningful benefit to consumers in the form of useful information or
protection. The Board must consider factors identified in the act and
publish its rationale at the time it proposes an exemption for comment.
15 U.S.C. 1604(f).
Add or modify information required to be disclosed with
credit and charge card applications or solicitations if the Board
determines the action is necessary to carry out the purposes of, or
prevent evasions of, the application and solicitation disclosure rules.
15 U.S.C. 1637(c)(5).
Require disclosures in advertisements of open-end plans.
15 U.S.C. 1663.
For the reasons discussed in this notice, the Board is using its
specific authority under TILA and the Credit Card Act, in concurrence
with other TILA provisions, to effectuate the purposes of TILA, to
prevent the circumvention or evasion of TILA, and to facilitate
compliance with the act.
IV. Applicability of Proposed Provisions
While several provisions under the Credit Card Act apply to all
open-end credit, others apply only to certain types of open-end credit,
such as credit card accounts under open-end consumer credit plans. As a
result, the Board understands that some additional clarification may be
helpful as to which provisions of the Credit Card Act as proposed to be
implemented in Regulation Z are applicable to which types of open-end
credit products. In order to clarify the scope of the
[[Page 54129]]
proposed revisions to Regulation Z, the Board is providing the below
table, which summarizes the applicability of each of the major
revisions to Regulation Z.\4\
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\4\ This table summarizes the applicability only of those new
paragraphs or provisions added to Regulation Z in order to implement
the Credit Card Act, as well as the applicability of proposed
provisions addressing deferred interest or similar offers. The Board
notes that it is not proposing to change the applicability of
provisions of Regulation Z amended by the January 2009 Regulation Z
Rule or May 2009 Regulation Z Proposed Clarifications.
----------------------------------------------------------------------------------------------------------------
Provision Applicability
----------------------------------------------------------------------------------------------------------------
Sec. 226.5(a)(2)(iii)............................................. All open-end (not home-secured) consumer
credit plans.
Sec. 226.5(b)(2)(ii).............................................. All open-end consumer credit plans.
Sec. 226.7(b)(11)................................................. Credit card accounts under an open-end
(not home-secured) consumer credit plan.
Sec. 226.7(b)(12)................................................. Credit card accounts under an open-end
(not home-secured) consumer credit plan.
Sec. 226.7(b)(14)................................................. All open-end (not home-secured) consumer
credit plans.
Sec. 226.9(c)(2).................................................. All open-end (not home-secured) consumer
credit plans.
Sec. 226.9(e)..................................................... Credit or charge card accounts subject to
Sec. 226.5a.
Sec. 226.9(g)..................................................... All open-end (not home-secured) consumer
credit plans.
Sec. 226.9(h)..................................................... Credit card accounts under an open-end
(not home-secured) consumer credit plan.
Sec. 226.10(b)(2)(ii)............................................. All open-end consumer credit plans.
Sec. 226.10(b)(3)................................................. Credit card accounts under an open-end
(not home-secured) consumer credit plan.
Sec. 226.10(d).................................................... All open-end consumer credit plans.
Sec. 226.10(e).................................................... Credit card accounts under an open-end
(not home-secured) consumer credit plan.
Sec. 226.10(f).................................................... Credit card accounts under an open-end
(not home-secured) consumer credit plan.
Sec. 226.11(c).................................................... Credit card accounts under an open-end
(not home-secured) consumer credit plan.
Sec. 226.16(f).................................................... All open-end consumer credit plans.
Sec. 226.16(h).................................................... All open-end (not home-secured) consumer
credit plans.
Sec. 226.51....................................................... Credit card accounts under an open-end
(not home-secured) consumer credit plan.
Sec. 226.52....................................................... Credit card accounts under an open-end
(not home-secured) consumer credit plan.
Sec. 226.53....................................................... Credit card accounts under an open-end
(not home-secured) consumer credit plan.
Sec. 226.54....................................................... Credit card accounts under an open-end
(not home-secured) consumer credit plan.
Sec. 226.55....................................................... Credit card accounts under an open-end
(not home-secured) consumer credit plan.
Sec. 226.56....................................................... Credit card accounts under an open-end
(not home-secured) consumer credit plan.
Sec. 226.57....................................................... Credit card accounts under an open-end
(not home-secured) consumer credit plan,
except that Sec. 226.57(c) applies to
all open-end consumer credit plans.
Sec. 226.58....................................................... Credit card accounts under an open-end
(not home-secured) consumer credit plan.
----------------------------------------------------------------------------------------------------------------
V. Section-by-Section Analysis
Section 226.2 Definitions and Rules of Construction
2(a) Definitions
2(a)(15) Credit Card
In the January 2009 Regulation Z Rule, the Board revised Sec.
226.2(a)(15) to read as follows: ``Credit card means any card, plate,
or other single credit device that may be used from time to time to
obtain credit. Charge card means a credit card on an account for which
no periodic rate is used to compute a finance charge.'' 74 FR 5257. In
order to clarify the application of certain provisions of the Credit
Card Act that apply to ``credit card account[s] under an open end
consumer credit plan,'' the Board proposes to further revise Sec.
226.2(a)(15) by adding a definition of ``credit card account under an
open-end (not home-secured) consumer credit plan.'' Specifically,
proposed Sec. 226.2(a)(15)(ii) would define this term to mean any
credit account accessed by a credit card except a credit card that
accesses a home-equity plan subject to the requirements of Sec. 226.5b
or an overdraft line of credit accessed by a debit card. The
definitions of ``credit card'' and ``charge card'' in the January 2009
Regulation Z Rule would be moved to proposed Sec. 226.2(a)(15)(i) and
(iii), respectively.
The exclusion of credit cards that access a home-equity plan
subject to Sec. 226.5b is consistent with the approach adopted by the
Board in the July 2009 Regulation Z Interim Final Rule. See 74 FR
36083. Specifically, the Board used its authority under TILA Section
105(a) and Sec. 2 of the Credit Card Act to interpret the term
``credit card account under an open-end consumer credit plan'' in new
TILA Section 127(i) to exclude home-equity lines of credit subject to
Sec. 226.5b, even if those lines could be accessed by a credit card.
Instead, the Board applied the disclosure requirements in current Sec.
226.9(c)(2)(i) and (g)(1) to ``credit card accounts under an open-end
(not home-secured) consumer credit plan.'' See 74 FR 36094-36095. For
consistency with the interim final rule, the Board would generally use
its authority under TILA Section 105(a) and Sec. 2 of the Credit Card
Act to apply the same interpretation to other provisions of the Credit
Card Act that apply to a ``credit card account under an open end
consumer credit plan.'' See, e.g., revised TILA Sec. 127(j), (k), (l),
(n); revised TILA Sec. 171; new TILA Sec. Sec. 140A, 148, 149,
172.\5\ This interpretation is also consistent with the Board's
historical treatment of HELOC accounts accessible by a credit card
under TILA; for example, the credit and charge card application and
solicitation disclosure requirements under Sec. 226.5a expressly do
not apply to home-equity plans accessible by a credit card that are
subject to Sec. 226.5b. See current Sec. 226.5a(a)(3); revised Sec.
226.5a(a)(5)(i), 74 FR 5403. The Board has issued the August 2009
Regulation Z HELOC Proposal to address changes to Regulation Z that it
believes are necessary and appropriate for HELOCs and will consider any
appropriate revisions to the requirements for HELOCs in connection with
that review.
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\5\ In certain cases, the Board has applied a statutory
provision that refers to ``credit card accounts under an open end
consumer credit plan'' to a wider range of products. Specifically,
see the discussion below regarding the implementation of new TILA
Section 127(i) in proposed Sec. 226.9(c)(2), the implementation of
new TILA Section 127(m) in proposed Sec. Sec. 226.5(a)(2)(iii) and
226.16(f), and the implementation of new TILA Section 127(o) in
proposed Sec. 226.10(d).
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The Board also proposes to interpret the term ``credit card account
under an open end consumer credit plan'' to exclude a debit card that
accesses an overdraft line of credit. Although such cards are ``credit
cards'' under current
[[Page 54130]]
Sec. 226.2(a)(15), the Board has generally excluded them from the
provisions of Regulation Z that specifically apply to credit cards. For
example, as with credit cards that access HELOCs, the provisions in
Sec. 226.5a regarding credit and charge card applications and
solicitations do not apply to overdraft lines of credit tied to asset
accounts accessed by debit cards. See current Sec. 226.5a(a)(3);
revised Sec. 226.5a(a)(5)(ii), 74 FR 5403.
Instead, Regulation E (Electronic Fund Transfers) generally governs
debit cards that access overdraft lines of credit. See 12 CFR part 205.
For example, Regulation E generally governs the issuance of debit cards
that access an overdraft line of credit, although Regulation Z's
issuance provisions apply to the addition of a credit feature (such as
an overdraft line) to a debit card. See 12 CFR 205.12(a)(1)(ii) and
(a)(2)(i). Similarly, when a transaction that debits a checking or
other asset account also draws on an overdraft line of credit,
Regulation Z treats the extension of credit as incident to an
electronic fund transfer and the error resolution provisions in
Regulation E generally govern the transaction. See 12 CFR 205.12
comment 12(a)-1.i.\6\
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\6\ However, the error resolution provisions in Sec. 226.13(d)
and (g) do apply to such transactions. See 12 CFR 205.12 comment
12(a)-1.ii.D; see also current Sec. Sec. 226.12(g) and 13(i);
current comments 12(c)(1)-1 and 13(i)-3; new comment 12(c)-3, 74 FR
5488; revised comment 12(c)(1)-1.iv., 74 FR 5488. In addition, if
the transaction solely involves an extension of credit and does not
include a debit to a checking or other asset account, the liability
limitations and error resolution requirements in Regulation Z apply.
See 12 CFR 205.12(a)-1.i.
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Consistent with this approach, the Board believes that debit cards
that access overdraft lines of credit should not be subject to the
regulations implementing the provisions of the Credit Card Act that
apply to ``credit card accounts under an open end consumer credit
plan.'' As discussed in the January 2009 Regulation Z Rule, the Board
understands that overdraft lines of credit are not in wide use.\7\
Furthermore, as a general matter, the Board understands that creditors
do not generally engage in the practices addressed in the relevant
provisions of the Credit Card Act with respect to overdraft lines of
credit. For example, as discussed in the January 2009 Regulation Z
Rule, overdraft lines of credit are not typically promoted as--or used
for--long-term extensions of credit. See 74 FR 5331. Therefore, because
proposed Sec. 226.9(c)(2) would require a creditor to provide 45 days'
notice before increasing an annual percentage rate for an overdraft
line of credit, a creditor is unlikely to engage in the practices
prohibited by revised TILA Section 171 with respect to the application
of increased rates to existing balances. Similarly, because creditors
generally do not apply different rates to different balances or provide
grace periods with respect to overdraft lines of credit, the provisions
in proposed Sec. Sec. 226.53 and 226.54 would not provide any
meaningful protection. Accordingly, the Board proposes to use its
authority under TILA Section 105(a) and Sec. 2 of the Credit Card Act
to create an exception for debit cards that access an overdraft line of
credit. The Board notes this proposed definition is not intended to
alter the scope or coverage of provisions of Regulation Z that refer
generally to credit cards or open-end credit rather than the new
defined term ``credit card account under an open-end (not home-secured
consumer credit plan.''
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\7\ The 2007 Survey of Consumer Finances data indicates that few
families (1.7 percent) had a balance on lines of credit other than a
home-equity line or credit card at the time of the interview. In
comparison, 73 percent of families had a credit card, and 60.3
percent of these families had a credit card balance at the time of
the interview. See Brian Bucks, et al., Changes in U.S. Family
Finances from 2004 to 2007: Evidence from the Survey of Consumer
Finances, Federal Reserve Bulletin (February 2009).
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Section 226.5 General Disclosure Requirements
5(a) Form of Disclosures
5(a)(2) Terminology
Section 103 of the Credit Card Act creates a new TILA Section
127(m) (15 U.S.C. 1637(m)), which states that with respect to the terms
of any credit card account under an open-end consumer credit plan, the
term ``fixed,'' when appearing in conjunction with a reference to the
APR or interest rate applicable to such account, may only be used to
refer to an APR or interest rate that will not change or vary for any
reason over the period specified clearly and conspicuously in the terms
of the account. 15 U.S.C. 1637(m). In the January 2009 Regulation Z
Rule, the Board had adopted Sec. Sec. 226.5(a)(2)(iii) and 226.16(f)
to restrict the use of the term ``fixed,'' or any similar term, to
describe a rate disclosed in certain required disclosures and in
advertisements only to instances when that rate would not increase
until the expiration of a specified time period. If no time period is
specified, then the term ``fixed,'' or any similar term, may not be
used to describe the rate unless the rate will not increase while the
plan is open.
The Board believes that Sec. Sec. 226.5(a)(2)(iii) and 226.16(f),
as adopted in the January 2009 Regulation Z Rule, would be consistent
with new TILA Section 127(m). Therefore, the Board is not proposing any
changes to these rules.
While TILA Section 127(m) applies only to credit card accounts
under an open-end consumer credit plan, Sec. 226.5(a)(2)(iii) applies
to all open-end (not home-secured) plans and Sec. 226.16(f) applies to
all open-end plans. The Board continues to believe this scope is
appropriate, so consumers of non-credit card products that are open-end
(not home-secured) plans will still benefit from the protections of
this requirement. The Board accordingly proposes to use its TILA
Section 105(a) authority to apply the requirements of Sec.
226.5(a)(2)(iii) to all open-end (not home-secured) plans and Sec.
226.16(f) to all open-end plans. Furthermore, although TILA Section
127(m) only references the term ``fixed,'' Sec. Sec. 226.5(a)(2)(iii)
and 226.16(f) restrict use of the word ``fixed'' as well as other
similar terms. The Board believes this interpretation is necessary to
prevent creditors from circumventing the rule by using different
terminology that would essentially have the same meaning as ``fixed''
in the minds of consumers. As a result, the Board proposes to use its
authority under TILA Section 105(a) to apply the provision to other
terms similar to the term ``fixed.''
Also, TILA Section 127(m) implies that a time period for which the
rate is fixed must be specified in the account terms. While most
creditors will likely state a term for the which the rate is fixed, the
Board believes the rule should address instances when a rate is
described as ``fixed'' but no time period is provided. The Board,
therefore, proposes to use its authority under TILA Section 105(a) to
provide that if a creditor describes a rate as ``fixed,'' but does not
disclose a time period for which the rate will be fixed, the rate must
not increase while the plan is open. Finally, TILA Section 127(m)
states that a rate described as ``fixed'' may not change or vary for
any reason. The Board believes, however, that it would be beneficial to
consumers to permit a creditor to decrease a rate described as
``fixed.'' Accordingly, the Board proposes to use its authority under
TILA Section 105(a) to provide that a rate described as ``fixed'' may
not be increased.
5(b) Time of Disclosures
5(b)(1) Account-Opening Disclosures
5(b)(1)(i) General Rule
In certain circumstances, a creditor may substitute or replace one
credit card account with another credit card account. For example, if
an existing
[[Page 54131]]
cardholder requests additional features or benefits (such as rewards on
purchases), the creditor may substitute or replace the existing credit
card account with a new credit card account that provides those
features or benefits. The Board also understands that creditors often
charge higher annual percentage rates or annual fees to compensate for
additional features and benefits. As discussed below, proposed Sec.
226.55 and its commentary address the application of the general
prohibitions on increasing annual percentage rates, fees, and charges
during the first year after account opening and on applying increased
rates to existing balances in these circumstances. See proposed Sec.
226.55(d); proposed comments 55(b)(3)-3 and 55(d)-1 through -3.
In order to clarify the application of the disclosure requirements
in Sec. Sec. 226.6(b) and 226.9(c)(2) when one credit card account is
substituted or replaced with another, the Board proposes to adopt
comment 5(b)(1)(i)-6, which states that, when a card issuer substitutes
or replaces an existing credit card account with another credit card
account, the card issuer must either provide notice of the terms of the
new account consistent with Sec. 226.6(b) or provide notice of the
changes in the terms of the existing account consistent with Sec.
226.9(c)(2). The Board understands that, when an existing cardholder
requests new features or benefits, disclosure of the new terms pursuant
to Sec. 226.6(b) may be preferable because the cardholder generally
will not want to wait 45 days for the new terms to take effect (as
would be the case if notice were provided pursuant to Sec.
226.9(c)(2)). Thus, this comment is intended to provide card issuers
with some flexibility regarding whether to treat the substitution or
replacement as the opening of a new account (subject to Sec. 226.6(b))
or a change in the terms of an existing account (subject to Sec.
226.9(c)(2)).
However, the Board does not intend to permit card issuers to
circumvent the disclosure requirements in Sec. 226.9(c)(2) by treating
a change in terms as the opening of a new account. Accordingly, the
comment would further state that whether a substitution or replacement
results in the opening of a new account or a change in the terms of an
existing account for purposes of the disclosure requirements in
Sec. Sec. 226.6(b) and 226.9(c)(2) is determined in light of all the
relevant facts and circumstances.
The comment provides the following list of relevant facts and
circumstances: (1) Whether the card issuer provides the consumer with a
new credit card; (2) whether the card issuer provides the consumer with
a new account number; (3) whether the account provides new features or
benefits after the substitution or replacement (such as rewards on
purchases); (4) whether the account can be used to conduct transactions
at a greater or lesser number of merchants after the substitution or
replacement; (5) whether the card issuer implemented the substitution
or replacement on an individualized basis; and (6) whether the account
becomes a different type of open-end plan after the substitution or
replacement (such as when a charge card is replaced by a credit card).
The comment states that, when most of these facts and circumstances are
present, the substitution or replacement likely constitutes the opening
of a new account for which Sec. 226.6(b) disclosures are appropriate.
However, the comment also states that, when few of these facts and
circumstances are present, the substitution or replacement likely
constitutes a change in the terms of an existing account for which
Sec. 226.9(c)(2) disclosures are appropriate.\8\
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\8\ The comment also provides cross-references to other
provisions in Regulation Z and its commentary that address the
substitution or replacement of credit card accounts.
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The Board solicits comment on whether additional facts and
circumstances are relevant. The Board also solicits comment on
alternative approaches to determining whether a substitution or
replacement results in the opening of a new account or a change in the
terms of an existing account for purposes of the disclosure
requirements in Sec. Sec. 226.6(b) and 226.9(c)(2).
5(b)(2) Periodic Statements
The Board is proposing to amend comment 5(b)(2)(ii)-2 in several
respects in order to clarify the consequences of a failure to comply
with the requirement in Sec. 226.5(b)(2)(ii) that creditors adopt
reasonable procedures designed to ensure that periodic statements for
open-end credit plans are mailed or delivered at least 21 days before
the payment due date and the date on which any grace period expires.
First, the title of the comment would be amended to cover both treating
a payment as late for any purpose and collecting any finance or other
charge. Second, because Sec. 226.5(b)(2)(ii) only prohibits the
creditor from treating a payment as late for any purpose or collecting
any finance or other charge as a result of a failure to comply with the
general 21-day requirement, the comment would be amended to clarify
that the prohibition in Sec. 226.5(b)(2)(ii) on treating a payment as
late for any purpose or collecting finance or other charges applies
only during the 21-day period following mailing or delivery of the
periodic statement. Thus, if a creditor does not receive a payment
within 21 days of mailing or delivery of the periodic statement, the
prohibition does not apply and the creditor may, for example, impose a
late payment fee.
Third, for similar reasons, the amended comment would clarify that,
when an account is not eligible for a grace period, a creditor may
impose a finance charge due to a periodic interest rate without
treating a payment as late or collecting finance or other charges as a
result of a failure to comply with Sec. 226.5(b)(2)(ii).
The Board is also proposing to amend the cross-reference in comment
5(b)(2)(ii)-6 to reflect the restructuring of the commentary to Sec.
226.7.
Section 226.5a Credit and Charge Card Applications and Solicitations
5a(b) Required Disclosures
5a(b)(1) Annual Percentage Rate
To complement the proposed disclosure requirements for deferred
interest or similar plans proposed in Sec. Sec. 226.7(b) and 226.16(h)
in the May 2009 Regulation Z Proposed Clarifications, the Board also
proposed a new comment 5a(b)(1)-9 to clarify that an issuer offering a
deferred interest or similar plan may not disclose a rate as 0% due to
the possibility that the consumer may not be obligated for interest
regarding the deferred interest or similar transaction. 74 FR 20797.
The Board is republishing proposed comment 5a(b)(1)-9 in this Federal
Register notice.
Section 226.7 Periodic Statement
7(b) Rules Affecting Open-End (Not Home-Secured) Plans
7(b)(11) Due Date; Late Payment Costs
In 2005, the Bankruptcy Act amended TILA to add Section 127(b)(12),
which required creditors that charge a late payment fee to disclose on
the periodic statement (1) the payment due date or, if the due date
differs from when a late payment fee would be charged, the earliest
date on which the late payment fee may be charged, and (2) the amount
of the late payment fee. See 15 U.S.C. 1637(b)(12). In the January 2009
Regulation Z Rule, the Board implemented this section of TILA for open-
end (not home-secured) credit plans. Specifically, the final rule added
Sec. 226.7(b)(11) to require creditors offering open-end (not home-
secured) credit plans that charge a fee or impose
[[Page 54132]]
a penalty rate for paying late to disclose on the periodic statement:
the payment due date, and the amount of any late payment fee and any
penalty APR that could be triggered by a late payment. For ease of
reference, this supplementary information will refer to the disclosure
of any late payment fee and any penalty APR that could be triggered by
a late payment as ``the late payment disclosures.''
Section 226.7(b)(13), as adopted in the January 2009 Regulation Z
Rule, sets forth formatting requirements for the due date and the late
payment disclosures. Specifically, Sec. 226.7(b)(13) requires that the
due date be disclosed on the front side of the first page of the
periodic statement. Further, the amount of any late payment fee and any
penalty APR that could be triggered by a late payment must be disclosed
in close proximity to the due date.
Section 202 of the Credit Card Act amends TILA Section 127(b)(12)
to provide that for a ``credit card account under an open-end consumer
credit plan,'' a creditor that charges a late payment fee must disclose
in a conspicuous location on the periodic statement (1) the payment due
date, or, if the due date differs from when a late payment fee would be
charged, the earliest date on which the late payment fee may be
charged, and (2) the amount of the late payment fee. In addition, if a
late payment may result in an increase in the APR applicable to the
credit card account, a creditor also must provide on the periodic
statement a disclosure of this fact, along with the applicable penalty
APR. The disclosure related to the penalty APR must be placed in close
proximity to the due-date disclosure discussed above.
In addition, Section 106 of the Credit Card Act adds new TILA
Section 127(o), which requires that the payment due date for a credit
card account under an open-end (not home-secured) consumer credit plan
be the same day each month. 15 U.S.C. 1637(o).
As discussed in more detail below, the Board proposes to retain the
due date and the late payment disclosure provisions adopted in Sec.
226.7(b)(11) as part of the January 2009 Regulation Z Rule, with
several revisions. Format requirements relating to the due date and the
late payment disclosure provisions are discussed in more detail in the
section-by-section analysis to proposed Sec. 226.7(b)(13).
Applicability of the due date and the late payment disclosure
requirements. The due date and the late payment disclosures added to
TILA Section 127(b)(12) by the Bankruptcy Act applied to all open-end
credit plans. Consistent with TILA Section 127(b)(12), as added by the
Bankruptcy Act, the due date and the late payment disclosures in Sec.
226.7(b)(11) (as adopted in the January 2009 Regulation Z Rule) apply
to all open-end (not home-secured) credit plans, including credit card
accounts, overdraft lines of credit and other general purpose lines of
credit that are not home secured.
The Credit Card Act amended TILA Section 127(b)(12) to apply the
due date and the late payment disclosures only to creditors offering a
credit card account under an open-end consumer credit plan. Consistent
with newly-revised TILA Section 127(b)(12), the Board proposes to amend
Sec. 226.7(b)(11) to require the due date and the late payment
disclosures only for a ``credit card account under an open-end (not
home-secured) consumer credit plan,'' as that term is defined under
proposed Sec. 226.2(a)(15)(ii). As discussed in more detail in the
section-by-section analysis to proposed Sec. 226.2(a)(15)(ii), the
term ``credit card account under an open-end (not home-secured)
consumer credit plan'' means any account accessed by a credit card,
except this term does not include HELOC accounts subject to Sec.
226.5b that are accessed by a credit card device or overdraft lines of
credit that are accessed by a debit card. Thus, based on the proposed
definition of ``credit card account under an open-end (not home-
secured) consumer credit plan,'' the due date and the late payment
disclosures would not apply to (1) open-end credit plans that are not
credit card accounts such as general purpose lines of credit that are
not accessed by a credit card; (2) HELOC accounts subject to Sec.
226.5b even if they are accessed by a credit card device; and (3)
overdraft lines of credit even if they are accessed by a debit card. In
addition, as discussed in more detail below, under proposed Sec.
226.7(b)(11)(ii), the Board also proposes to exempt charge card
accounts from the late payment disclosure requirements.
Charge card accounts. As discussed above, the late payment
disclosures in TILA Section 127(b)(12), as amended by the Credit Card
Act, apply to ``creditors'' offering credit card accounts under an
open-end consumer credit plan. Issuers of ``charge cards'' (which are
typically products where outstanding balances cannot be carried over
from one billing period to the next and are payable when a periodic
statement is received) are ``creditors'' for purposes of specifically
enumerated TILA disclosure requirements. 15 U.S.C. 1602(f); Sec.
226.2(a)(17). The late payment disclosure requirement in TILA Section
127(b)(12), as amended by the Credit Card Act, is not among those
specifically enumerated.
For the reasons discussed in more detail below, a charge card
issuer would be required to disclose the due date on the periodic
statement, and this payment due date must be the same day each month.
Nonetheless, under proposed Sec. 226.7(b)(11)(ii), a charge card
issuer would not be required to disclose on the periodic statement the
late payment disclosures, namely any late payment fee or penalty APR
that could be triggered by a late payment. As discussed above, the late
payment disclosure requirements are not specifically enumerated in TILA
Section 103(f) to apply to charge card issuers. In addition, the Board
notes that for some charge card issuers, payments are not considered
``late'' for purposes of imposing a fee until a consumer fails to make
payments in two consecutive billing cycles. It would be undesirable to
encourage consumers who in January receive a statement with the balance
due upon receipt, for example, to avoid paying the balance when due
because a late payment fee may not be assessed until mid-February; if
consumers routinely avoided paying a charge card balance by the due
date, it could cause issuers to change their practice with respect to
charge cards.
Section 226.7(b)(11)(ii) makes clear the exemption is for periodic
statements provided solely for charge card accounts; periodic
statements provided for card accounts with a charge card feature and
revolving feature must comply with the late payment disclosure
provisions as to the revolving feature. The Board also proposes to
retain comment app. G-9 (which was adopted in the January 2009
Regulation Z Rule). Comment app. G-9 explains that creditors offering
card accounts with a charge card feature and a revolving feature may
revise disclosures, such as the late payment disclosures and the
repayment disclosures discussed in the section-by-section analysis to
proposed Sec. 226.7(b)(12) below, to make clear the feature to which
the disclosures apply.
Payment due date. As adopted in the January 2009 Regulation Z Rule,
Sec. 226.7(b)(11) requires creditors offering open-end (not home-
secured) credit to disclose the due date for a payment if a late
payment fee or penalty rate could be imposed under the credit
agreement, as discussed in more detail as follows. As adopted in the
January 2009 Regulation Z Rule, Sec. 226.7(b)(11) applies to all open-
end (not home-secured) credit plans, even those plans that are not
accessed by a credit card device. The Board proposes generally to
retain
[[Page 54133]]
the due date disclosure, except that this disclosure would be required
only for a card issuer offering a ``credit card account under an open-
end (not home-secured) consumer credit plan,'' as that term is defined
in proposed Sec. 226.2(a)(15)(ii).
In addition, as discussed below, the Board is proposing several
other revisions to Sec. 226.7(b)(11) in order to implement new TILA
Section 127(o), which requires that the payment due date for a credit
card account under an open-end (not home-secured) consumer credit plan
be the same day each month. In addition to requiring that the due date
disclosed be the same day each month, in order to implement new TILA
Section 127(o), the Board proposes to require that the due date
disclosure be provided regardless of whether a late payment fee or
penalty rate could be imposed. Second, the Board proposes to amend
Sec. 226.7(b)(11)(ii) to require that the due date be disclosed for
charge card accounts, although charge card issuers would not be
required to provide the late payment disclosures set forth in proposed
Sec. 226.7(b)(11)(i)(B).
1. Courtesy periods. In the January 2009 Regulation Z Rule, Sec.
226.7(b)(11) interpreted the due date to be a date that is required by
the legal obligation. Comment 7(b)(11)-1 clarified that creditors need
not disclose informal ``courtesy periods'' not part of the legal
obligation that creditors may observe for a short period after the
stated due date before a late payment fee is imposed, to account for
minor delays in payments such as mail delays. The Board proposes to
retain comment 7(b)(11)-1 with technical revisions to refer to card
issuers, rather than creditors, consistent with the proposal to limit
the due date and late payment disclosures to a ``credit card account
under an open-end (not home-secured) consumer credit plan,'' as that
term is defined in proposed Sec. 226.2(a)(15)(ii).
2. Assessment of late fees. Under TILA Section 127(b)(12), as
revised by the Credit Card Act, a card issuer must disclose on periodic
statements the payment due date or, if different, the earliest date on
which the late payment fee may be charged. Some State laws require that
a certain number of days must elapse following a due date before a late
payment fee may be imposed. Under such a State law, the later date
arguably would be required to be disclosed on periodic statements.
In the January 2009 Regulation Z Rule, the Board required creditors
to disclose the due date under the terms of the legal obligation, and
not a later date, such as when creditors are restricted by State or
other law from imposing a late payment fee unless a payment is late for
a certain number of days following the due date. Specifically, comment
7(b)(12)-2 (as adopted as part of the January 2009 Regulation Z Rule)
notes that some State or other laws require that a certain number of
days must elapse following a due date before a late payment fee may be
imposed. For example, assume a payment is due on March 10 and State law
provides that a late payment fee cannot be assessed before March 21.
Comment 7(b)(11)-2 clarifies that creditors must disclose the due date
under the terms of the legal obligation (March 10 in this example), and
not a date different than the due date, such as when creditors are
restricted by State or other law to delay from imposing a late payment
fee unless a payment is late for a certain number of days following the
due date (March 21 in this example). Consumers' rights under State law
to avoid the imposition of late payment fees during a specified period
following a due date are unaffected by the disclosure requirement. In
this example, the creditor would disclose March 10 as the due date for
purposes of Sec. 226.7(b)(11), even if under State law the creditor
could not assess a late payment fee before March 21.
The Board was concerned that disclosure of the later date would not
provide a meaningful benefit to consumers in the form of useful
information or protection and would result in consumer confusion. In
the example above, highlighting March 20 as the last date to avoid a
late payment fee may mislead consumers into thinking that a payment
made any time on or before March 20 would have no adverse financial
consequences. However, failure to make a payment when due is considered
an act of default under most credit contracts, and can trigger higher
costs due to loss of a grace period, interest accrual, and perhaps
penalty APRs. The Board considered additional disclosures on the
periodic statement that would more fully explain the consequences of
paying after the due date and before the date triggering the late
payment fee, but such an approach appeared cumbersome and overly
complicated.
For these reasons, notwithstanding TILA Section 127(b)(12), as
revised by the Credit Card Act, the Board proposes to continue to
require card issuers to disclose the due date under the terms of the
legal obligation, and not a later date, such as when creditors are
restricted by State or other law from imposing a late payment fee
unless a payment is late for a certain number of days following the due
date. The Board proposes this exception to the TILA requirement to
disclose the later date pursuant to the Board's authority under TILA
Section 105(a) to make adjustments that are necessary to effectuate the
purposes of TILA. 15 U.S.C. 1604(a).
The Board proposes to retain comment 7(b)(11)-2 with several
revisions. First, the comment would be revised to refer to card
issuers, rather than creditors, consistent with the proposal to limit
the due date and late payment disclosures to a ``credit card account
under an open-end (not home-secured) consumer credit plan,'' as that
term is defined in proposed Sec. 226.2(a)(15)(ii). Second, the comment
would be revised to address the situation where the terms of the
account agreement (rather than State law) limit a card issuer from
imposing a late payment fee unless a payment is late a certain number
of days following a due date. The Board proposes to revise comment
7(b)(11)-2 to provide that in this situation a card issuer must
disclose the date the payment is due under the terms of the legal
obligation, and not the later date when a late payment fee may be
imposed under the contract.
3. Same due date each month. The Credit Card Act created a new TILA
Section 127(o), which states in part that the payment due date for a
credit card account under an open end consumer credit plan shall be the
same day each month. The Board is proposing to implement this
requirement by revising Sec. 226.7(b)(11)(i). The text the Board is
proposing to insert into amended Sec. 226.7(b)(11)(i) would generally
track the statutory language in new TILA Section 127(o) and would state
that for credit card accounts under open-end (not home-secured)
consumer credit plans, the due date disclosed pursuant to Sec.
226.7(b)(11)(i) must be the same day of the month for each billing
cycle.
The Board is proposing several new comments to clarify the
requirement that the due date be the same day of the month for each
billing cycle. Proposed comment 7(b)(11)(i)-6 would clarify that the
same day of the month means the same numerical day of the month. The
comment notes that one example of a compliant practice would be to have
a due date that is the 25th of every month. In contrast, it would not
be permissible for the payment due date to be the same relative date,
but not numerical date, of each month, such as the third Tuesday of the
month. The Board believes that the intent of new TILA Section 127(o) is
to promote predictability and to enhance consumer awareness of due
dates each month to make it easier to make timely payments. The Board
believes that requiring the
[[Page 54134]]
due date to be the same numerical day each month effectuates the
statute, and that permitting the due date to be the same relative day
each month would not as effectively promote predictability for
consumers.
The Board notes that in practice the requirement that the due date
be the same numerical date each month would preclude creditors from
setting due dates that are the 29th, 30th, or 31st of the month. The
Board is aware that some credit card issuers currently set due dates
for a portion of their accounts on every day of the month, in order to
distribute the burden associated with processing payments more evenly
throughout the month. The Board solicits comment on any operational
burden associated with processing additional payments received on the
1st through 28th of the month in those months with more than 28 days.
Proposed comment 7(b)(11)(i)-7 would clarify that a creditor may
adjust a consumer's due date from time to time, for example in response
to a consumer-initiated request, provided that the new due date will be
the same numerical date each month on an ongoing basis. The proposed
comment would cross-reference existing comment 2(a)(4)-3 for guidance
on transitional billing cycles that might result when the consumer's
due date is changed. The Board believes that it is appropriate to
permit creditors to change the consumer's due date from time to time,
for example, if the creditor wishes to honor a consumer request for a
new due date that better coincides with the time of the month when the
consumer is paid by his or her employer. The Board notes that while the
proposed comment refers to consumer-initiated requests as one example
of when a change in due date might occur, proposed Sec.
226.7(b)(11)(i) and comment 7(b)(11)(i)-7 would not prohibit changes in
the consumer's due date from time to time that are not consumer-
initiated, for example, if a creditor acquires a portfolio and changes
the consumer's due date as it migrates acquired accounts onto its own
systems.
Regulation Z's definition of ``billing cycle'' in Sec. 226.2(a)(4)
contemplates that the interval between the days or dates of regular
periodic statements must be equal and no longer than a quarter of a
year. Therefore, some creditors may have billing cycles that are two or
three months in duration. The Board is proposing comment 7(b)(11)(i)-8
to clarify that new Sec. 226.7(b)(11)(i) does not prohibit billing
cycles that are two or three months, provided that the due date for
each billing cycle is on the same numerical date of each month. The
Board believes that it was not the intent of new TILA Section 127(o) to
require that each billing cycle be exactly one month, so long as the
due date is always the same day of the month for each billing cycle.
For example, the comment notes that a creditor that establishes two-
month billing cycles could send a consumer periodic statements
disclosing due dates of January 25, March 25, and May 25.
Finally, the Board is proposing comment 7(b)(11)(i)-9 to clarify
the relationship between Sec. Sec. 226.7(b)(11)(i) and 226.10(d). As
discussed elsewhere in this supplementary information, proposed Sec.
226.10(d) provides that if the payment due date is a day on which the
creditor does not receive or accept payments by mail, the creditor is
generally required to treat a payment received the next business day as
timely. It is likely that, from time to time, a due date that is the
same numerical date each month as required by Sec. 226.7(b)(11)(i) may
fall on a date on which the creditor does not accept or receive mailed
payments, such as a holiday or weekend. However, proposed comment
7(b)(11)(i)-9 clarifies that in such circumstances the creditor must
disclose the due date according to the legal obligation between the
parties, not the date as of which the creditor is permitted to treat
the payment as late. For example, assume that the consumer's due date
is the 4th of every month and the creditor does not accept or receive
payments by mail on Thursday, July 4. Pursuant to Sec. 226.10(d), the
creditor may not treat a mailed payment received on the following
business day, Friday, July 5, as late for any purpose. The creditor
must nonetheless, however, disclose July 4 as the due date on the
periodic statement and may not disclose a July 5 due date. This is
consistent with the approach that the Board has taken with regard to
payment due dates in comment 5(b)(2)(ii)-3 of the July 2009 Regulation
Z Interim Final Rule, where the due date disclosed is required to
reflect the legal obligation between the parties, not any courtesy
period offered by the creditor or required by State or other law.
Late payment fee and penalty APR. In the January 2009 Regulation Z
Rule, the Board adopted Sec. 226.7(b)(11) to require creditors
offering open-end (not home-secured) credit plans that charge a fee or
impose a penalty rate for paying late to disclose on the periodic
statement the amount of any late payment fee and any penalty APR that
could be triggered by a late payment (in addition to the payment due
date discussed above). Consistent with TILA Section 127(b)(12), as
revised by the Credit Card Act, proposed Sec. 226.7(b)(11) would
continue to require that a card issuer disclose any late payment fee
and any penalty APR that may be imposed on the account as a result of a
late payment, in addition to the payment due date discussed above.
Fee or rate triggered by multiple events. In the January 2009
Regulation Z Rule, the Board added comment 7(b)(11)-3 to provide
guidance on complying with the late payment disclosure if a late fee or
penalty APR is triggered after multiple events, such as two late
payments in six months. Comment 7(b)(11)-3 provides that in such cases,
the creditor may, but is not required to, disclose the late payment and
penalty APR disclosure each month. The disclosures must be included on
any periodic statement for which a late payment could trigger the late
payment fee or penalty APR, such as after the consumer made one late
payment in this example. The Board proposes to retain this comment with
technical revisions to refer to card issuers, rather than creditors,
consistent with the proposal to limit the late payment disclosures to a
``credit card account under an open-end (not home-secured) consumer
credit plan,'' as that term is defined in proposed Sec.
226.2(a)(15)(ii).
Range of fees and rates. In the January 2009 Regulation Z Rule,
Sec. 226.7(b)(11)(i)(B) provides that if a range of late payment fees
or penalty APRs could be imposed on the consumer's account, creditors
may disclose the highest late payment fee and rate and at creditors'
option, an indication (such as using the phrase ``up to'') that lower
fees or rates may be imposed. Comment 7(b)(11)-4 was added to
illustrate the requirement. The final rule also permits creditors to
disclose a range of fees or rates. The Board proposes to retain Sec.
226.7(b)(11)(i)(B) and comment 7(b)(11)-4 with technical revisions to
refer to card issuers, rather than creditors, consistent with the
proposal to limit the late payment disclosures to a ``credit card
account under an open-end (not home-secured) consumer credit plan,'' as
that term is defined in proposed Sec. 226.2(a)(15)(ii). This approach
recognizes the space constraints on periodic statements and provides
card issuers flexibility in disclosing possible late payment fees and
penalty rates.
Penalty APR in effect. In the January 2009 Regulation Z Rule,
comment 7(b)(11)-5 was added to provide that if the highest penalty APR
has previously been triggered on an account, the
[[Page 54135]]
creditor may, but is not required to, delete as part of the late
payment disclosure the amount of the penalty APR and the warning that
the rate may be imposed for an untimely payment, as not applicable.
Alternatively, the creditor may, but is not required to, modify the
language to indicate that the penalty APR has been increased due to
previous late payments, if applicable. The Board proposes to retain
this comment with technical revisions to refer to card issuers, rather
than creditors, consistent with the proposal to limit the late payment
disclosures to a ``credit card account under an open-end (not home-
secured) consumer credit plan,'' as that term is defined in proposed
Sec. 226.2(a)(15)(ii).
7(b)(12) Repayment Disclosures
The Bankruptcy Act added TILA Section 127(b)(11) to require
creditors that extend open-end credit to provide a disclosure on the
front of each periodic statement in a prominent location about the
effects of making only minimum payments. 15 U.S.C. 1637(b)(11). This
disclosure included: (1) a ``warning'' statement indicating that making
only the minimum payment will increase the interest the consumer pays
and the time it takes to repay the consumer's balance; (2) a
hypothetical example of how long it would take to pay off a specified
balance if only minimum payments are made; and (3) a toll-free
telephone number that the consumer may call to obtain an estimate of
the time it would take to repay his or her actual account balance
(``generic repayment estimate''). In order to standardize the
information provided to consumers through the toll-free telephone
numbers, the Bankruptcy Act directed the Board to prepare a ``table''
illustrating the approximate number of months it would take to repay an
outstanding balance if the consumer pays only the required minimum
monthly payments and if no other advances are made. The Board was
directed to create the table by assuming a significant number of
different APRs, account balances, and minimum payment amounts; the
Board was required to provide instructional guidance on how the
information contained in the table should be used to respond to
consumers' requests.
Alternatively, the Bankruptcy Act provided that a creditor may use
a toll-free telephone number to provide the actual number of months
that it will take consumers to repay their outstanding balances
(``actual repayment disclosure'') instead of providing an estimate
based on the Board-created table. A creditor that does so would not
need to include a hypothetical example on its periodic statements, but
must disclose the warning statement and the toll-free telephone number
on its periodic statements. 15 U.S.C. 1637(b)(11)(J)-(K).
For ease of reference, this supplementary information will refer to
the above disclosures in the Bankruptcy Act about the effects of making
only the minimum payment as ``the minimum payment disclosures.''
In the January 2009 Regulation Z Rule, the Board implemented this
section of TILA. In that rulemaking, the Board limited the minimum
payment disclosures required by the Bankruptcy Act to credit card
accounts, pursuant to the Board's authority under TILA Section 105(a)
to make adjustments that are necessary to effectuate the purposes of
TILA. 15 U.S.C. 1604(a). In addition, the final rule in Sec.
226.7(b)(12) provided that credit card issuers could choose one of
three ways to comply with the minimum payment disclosure requirements
set forth in the Bankruptcy Act: (1) Provide on the periodic statement
a warning about making only minimum payments, a hypothetical example,
and a toll-free telephone number where consumers may obtain generic
repayment estimates; (2) provide on the periodic statement a warning
about making only minimum payments, and a toll-free telephone number
where consumers may obtain actual repayment disclosures; or (3) provide
on the periodic statement the actual repayment disclosure. The Board
issued guidance in Appendix M1 to part 226 for how to calculate the
generic repayment estimates, and guidance in Appendix M2 to part 226
for how to calculate the actual repayment disclosures. Appendix M3 to
part 226 provided sample calculations for the generic repayment
estimates and the actual repayment disclosures discussed in Appendices
M1 and M2 to part 226.
The Credit Card Act substantially revised Section 127(b)(11) of
TILA. Specifically, Section 201 of the Credit Card Act amends TILA
Section 127(b)(11) to provide that creditors that extend open-end
credit must provide the following disclosures on each periodic
statement: (1) A ``warning'' statement indicating that making only the
minimum payment will increase the interest the consumer pays and the
time it takes to repay the consumer's balance; (2) the number of months
that it would take to repay the outstanding balance if the consumer
pays only the required minimum monthly payments and if no further
advances are made; (3) the total cost to the consumer, including
interest and principal payments, of paying that balance in full, if the
consumer pays only the required minimum monthly payments and if no
further advances are made; (4) the monthly payment amount that would be
required for the consumer to pay off the outstanding balance in 36
months, if no further advances are made, and the total cost to the
consumer, including interest and principal payments, of paying that
balance in full if the consumer pays the balance over 36 months; and
(5) a toll-free telephone number at which the consumer may receive
information about credit counseling and debt management services. For
ease of reference, this supplementary information will refer to the
above disclosures in the Credit Card Act as ``the repayment
disclosures.''
The Credit Card Act provides that the repayment disclosures
discussed above (except for the warning statement) must be disclosed in
the form and manner which the Board prescribes by regulation and in a
manner that avoids duplication; and be placed in a conspicuous and
prominent location on the billing statement. By regulation, the Board
must require that the disclosure of the repayment information (except
for the warning statement) be in the form of a table that contains
clear and concise headings for each item of information and provides a
clear and concise form stating each item of information required to be
disclosed under each such heading. In prescribing the table, the Board
must require that all the information in the table, and not just a
reference to the table, be placed on the billing statement and the
items required to be included in the table must be listed in the order
in which such items are set forth above. In prescribing the table, the
statute states that the Board shall use terminology different from that
used in the statute, if such terminology is more easily understood and
conveys substantially the same meaning. With respect to the toll-free
telephone number for providing information about credit counseling and
debt management services, the Credit Card Act provides that the Board
must issue guidelines by rule, in consultation with the Secretary of
the Treasury, for the establishment and maintenance by creditors of a
toll-free telephone number for purposes of providing information about
a accessing credit counseling and debt management services. These
guidelines must ensure that referrals provided by the toll-free
telephone number include only those nonprofit budget and credit
counseling agencies approved by a U.S. bankruptcy trustee pursuant to
11 U.S.C. 111(a).
As discussed in more detail below, the Board proposes to revise
[[Page 54136]]
Sec. 226.7(b)(12) to implement Section 201 of the Credit Card Act.
Proposal to limit the repayment disclosure requirements to credit
card accounts. Under the Credit Card Act, the repayment disclosure
requirements apply to all open-end accounts (such as credit card
accounts, HELOCs, and general purpose credit lines). As discussed
above, in the January 2009 Regulation Z Rule, the Board limited the
minimum payment disclosures required by the Bankruptcy Act to credit
card accounts. For similar reasons, the Board proposes to limit the
repayment disclosures in the Credit Card Act to credit card accounts
under open-end (not home-secured) consumer credit plans, as that term
is defined in proposed Sec. 226.2(a)(15)(ii).
As discussed in more detail in the section-by-section analysis to
proposed Sec. 226.2(a)(15)(ii), the term ``credit card account under
an open-end (not home-secured) consumer credit plan'' means any account
accessed by a credit card, except this term does not include HELOC
accounts subject to Sec. 226.5b that are accessed by a credit card
device or overdraft lines of credit that are accessed by a debit card.
Thus, based on the proposed exemption to limit the repayment
disclosures to credit card accounts under open-end (not home-secured)
consumer credit plans, the following products would be exempt from the
repayment disclosures in TILA Section 127(b)(11), as set forth in the
Credit Card Act: (1) HELOC accounts subject to Sec. 226.5b even if
they are accessed by a credit card device; (2) overdraft lines of
credit even if they are accessed by a debit card; and (3) open-end
credit plans that are not credit card accounts, such as general purpose
lines of credit that are not accessed by a credit card.
The Board proposes this rule pursuant to its exception and
exemption authorities under TILA Section 105. Section 105(a) authorizes
the Board to make exceptions to TILA to effectuate the statute's
purposes, which include facilitating consumers' ability to compare
credit terms and helping consumers avoid the uninformed use of credit.
See 15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes the Board to
exempt any class of transactions from coverage under any part of TILA
if the Board determines that coverage under that part does not provide
a meaningful benefit to consumers in the form of useful information or
protection. See 15 U.S.C. 1604(f)(1). The Board must make this
determination in light of specific factors. See 15 U.S.C. 1604(f)(2).
These factors are (1) the amount of the loan and whether the disclosure
provides a benefit to consumers who are parties to the transaction
involving a loan of such amount; (2) the extent to which the
requirement complicates, hinders, or makes more expensive the credit
process; (3) the status of the borrower, including any related
financial arrangements of the borrower, the financial sophistication of
the borrower relative to the type of transaction, and the importance to
the borrower of the credit, related supporting property, and coverage
under TILA; (4) whether the loan is secured by the principal residence
of the borrower; and (5) whether the exemption would undermine the goal
of consumer protection.
As discussed in more detail below, the Board has considered each of
these factors carefully, and based on that review, believes that the
proposed exemption is appropriate.
1. HELOC accounts. In the August 2009 Regulation Z HELOC Proposal,
the Board proposed that the repayment disclosures required by TILA
Section 127(b)(11), as amended by the Credit Card Act, not apply to
HELOC accounts, including HELOC accounts that can be accessed by a
credit card device. See 74 FR 43428. The Board proposed this rule
pursuant to its exception and exemption authorities under TILA Section
105(a) and 105(f), as discussed above. In the supplementary information
to the August 2009 Regulation Z HELOC Proposal, the Board stated its
belief that the minimum payment disclosures in the Credit Card Act
would be of limited benefit to consumers for HELOC accounts and are not
necessary to effectuate the purposes of TILA. First, the Board
understands that most HELOCs have a fixed repayment period. Under the
August 2009 Regulation Z HELOC Proposal, in proposed Sec.
226.5b(c)(9)(i), creditors offering HELOCs subject to Sec. 226.5b
would be required to disclose the length of the plan, the length of the
draw period and the length of any repayment period in the disclosures
that must be given within three business days after application (but
not later than account opening). In addition, this information also
must be disclosed at account opening under proposed Sec.
226.6(a)(2)(v)(A), as set forth in the August 2009 Regulation Z HELOC
Proposal. Thus, for a HELOC account with a fixed repayment period, a
consumer could learn from those disclosures the amount of time it would
take to repay the HELOC account if the consumer only makes required
minimum payments. The cost to creditors of providing this information a
second time, including the costs to reprogram periodic statement
systems, appears not to be justified by the limited benefit to
consumers.
In addition, in the supplementary information to the August 2009
Regulation Z HELOC Proposal, the Board stated its belief that the
disclosure about total cost to the consumer of paying the outstanding
balance in full (if the consumer pays only the required minimum monthly
payments and if no further advances are made) would not be useful to
consumers for HELOC accounts because of the nature of consumers' use of
HELOC accounts. The Board understands that HELOC consumers tend to use
HELOC accounts for larger transactions that they can finance at a lower
interest rate than is offered on unsecured credit cards, and intend to
repay these transactions over the life of the HELOC account. By
contrast, consumers tend to use unsecured credit cards to engage in a
significant number of small dollar transactions per billing cycle, and
may not intend to finance these transactions for many years. The Board
also understands that HELOC consumers often will not have the ability
to repay the balances on the HELOC account at the end of each billing
cycle, or even within a few years. To illustrate, the Board's 2007
Survey of Consumer Finances data indicates that the median balance on
HELOCs (for families that had a balance at the time of the interview)
was $24,000, while the median balance on credit cards (for families
that had a balance at the time of the interview) was $3,000.\9\
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\9\ Brian Bucks, et al., Changes in U.S. Family Finances from
2004 to 2007: Evidence from the Survey of Consumer Finances, Federal
Reserve Bulletin (February 2009).
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As discussed in the supplementary information to the August 2009
Regulation Z HELOC Proposal, the nature of consumers' use of HELOCs
also underlies the Board's belief that periodic disclosure of the
monthly payment amount required for the consumer to pay off the
outstanding balance in 36 months, and the total cost to the consumer of
paying that balance in full if the consumer pays the balance over 36
months, would not provide useful information to consumers for HELOC
accounts.
For all these reasons, in the August 2009 Regulation Z HELOC
Proposal, the Board proposed to exempt HELOC accounts (even when they
are accessed by a credit card account) from the repayment disclosure
requirements set forth in TILA Section 127(b)(11), as revised by the
Credit Card Act.
[[Page 54137]]
2. Overdraft lines of credit and other general purpose credit
lines. The Board also proposes to exempt overdraft lines of credit
(even if they are accessed by a debit card) and general purpose credit
lines that are not accessed by a credit card from the repayment
disclosure requirements set forth in TILA Section 127(b)(11), as
revised by the Credit Card Act, for several reasons. 15 U.S.C.
1637(b)(11). First, these lines of credit are not in wide use. The 2007
Survey of Consumer Finances data indicates that few families--1.7
percent--had a balance on lines of credit other than a home-equity line
or credit card at the time of the interview. (By comparison, 73 percent
of families had a credit card, and 60.3 percent of these families had a
credit card balance at the time of the interview.) \10\ Second, these
lines of credit typically are neither promoted, nor used, as long-term
credit options of the kind for which the repayment disclosures are
intended. Third, the Board is concerned that the operational costs of
requiring creditors to comply with the repayment disclosure
requirements for overdraft lines of credit and other general purpose
lines of credit may cause some institutions to no longer provide these
products as accommodations to consumers, to the detriment of consumers
who currently use these products. For these reasons, the Board proposes
to use its TILA Section 105(a) and 105(f) authority (as discussed
above) to exempt overdraft lines of credit and other general purpose
credit lines from the repayment disclosure requirements, because in
this context the Board believes the repayment disclosures are not
necessary to effectuate the purposes of TILA. 15 U.S.C. 1604(a) and
(f).
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\10\ Brian Bucks, et al., Changes in U.S. Family Finances from
2004 to 2007: Evidence from the Survey of Consumer Finances, Federal
Reserve Bulletin (February 2009).
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7(b)(12)(i) In General
TILA Section 127(b)(11)(A), as amended by the Credit Card Act,
requires that a creditor that extends open-end credit must provide the
following disclosures on each periodic statement: (1) A ``warning''
statement indicating that making only the minimum payment will increase
the interest the consumer pays and the time it takes to repay the
consumer's balance; (2) the number of months that it would take to
repay the outstanding balance if the consumer pays only the required
minimum monthly payments and if no further advances are made; (3) the
total cost to the consumer, including interest and principal payments,
of paying that balance in full, if the consumer pays only the required
minimum monthly payments and if no further advances are made; (4) the
monthly payment amount that would be required for the consumer to pay
off the outstanding balance in 36 months, if no further advances are
made, and the total cost to the consumer, including interest and
principal payments, of paying that balance in full if the consumer pays
the balance over 36 months; and (5) a toll-free telephone number at
which the consumer may receive information about accessing credit
counseling and debt management services.
In implementing these statutory disclosures, proposed Sec.
226.7(b)(12)(i) sets forth the repayment disclosures that a credit card
issuer generally must provide on the periodic statement. As discussed
in more detail below, proposed Sec. 226.7(b)(12)(ii) sets forth the
repayment disclosures that a credit card issuer must provide on the
periodic statement when negative or no amortization occurs on the
account.
Warning statement. TILA Section 127(b)(11)(A), as amended by the
Credit Card Act, requires that a creditor include the following
statement on each periodic statement: ``Minimum Payment Warning: Making
only the minimum payment will increase the amount of interest you pay
and the time it takes to repay your balance,'' or a similar statement
that is required by the Board pursuant to consumer testing. 15 U.S.C.
1637(b)(11)(A). Under proposed Sec. 226.7(b)(12)(i)(A), if
amortization occurs on the account, a credit card issuer generally
would be required to disclose the following statement with a bold
heading on each periodic statement: ``Minimum Payment Warning: If you
make only the minimum payment each period, you will pay more in
interest and it will take you longer to pay off your balance.'' The
proposed warning statement contains several stylistic revisions to the
statutory language, based on plain language principles, in an attempt
to make the language of the warning more understandable to consumers.
The Board tested the proposed warning statement as part of the consumer
testing conducted by the Board on credit card disclosures in relation
to the January 2009 Regulation Z Rule. Participants in that consumer
testing reviewed periodic statement disclosures with the proposed
warning statement, and they indicated they understood from this
statement that paying only the minimum payment would increase both
interest charges and the length of time it would take to pay off a
balance.
Minimum payment disclosures. TILA Section 127(b)(11)(B)(i) and
(ii), as amended by the Credit Card Act, requires that a creditor
provide on each periodic statement: (1) The number of months that it
would take to pay the entire amount of the outstanding balance, if the
consumer pays only the required minimum monthly payments and if no
further advances are made; and (2) the total cost to the consumer,
including interest and principal payments, of paying that balance in
full, if the consumer pays only the required minimum monthly payments
and if no further advances are made. 15 U.S.C. 1637(b)(11)(B)(i) and
(ii). The Board proposes new Sec. 226.7(b)(12)(i)(B) and (C) to
implement these statutory provisions.
1. Minimum payment repayment estimate. Under proposed Sec.
226.7(b)(12)(i)(B), if amortization occurs on the account, a credit
card issuer generally would be required to disclose on each periodic
statement the minimum payment repayment estimate, as described in
proposed Appendix M1 to part 226. As described in more detail in the
section-by-section analysis to proposed Appendix M1 to part 226, the
minimum payment repayment estimate would be an estimate of the number
of months that it would take to pay the entire amount of the
outstanding balance shown on the periodic statement, if the consumer
pays only the required minimum monthly payments and if no further
advances are made. Under proposed Appendix M1 to part 226, a credit
card issuer generally would calculate the minimum payment repayment
estimate based on the minimum payment formula(s), the APRs and the
outstanding balance currently applicable to a consumer's account. For
other terms that may impact the calculation of the minimum payment
repayment estimate, the Board proposes to allow issuers to make certain
assumption about these terms.
Proposed Sec. 226.7(b)(12)(i)(B) provides that if the minimum
payment repayment estimate is less than 2 years, a credit card issuer
must disclose the estimate in months. Otherwise, the estimate would be
disclosed in years. If the estimate is 2 years or more, the estimate
would be rounded to the nearest whole year, meaning that if the
estimate contains a fractional year less than 0.5, the estimate would
be rounded down to the nearest whole year. The estimate would be
rounded up to the nearest whole year if the estimate contains a
fractional year equal to or greater than 0.5. The Board proposes that
the minimum payment repayment estimate be disclosed in years (if the
[[Page 54138]]
estimated payoff period is 2 years or more), pursuant to the Board's
authority to make adjustments to TILA's requirements to effectuate the
statute's purposes, which include facilitating consumers' ability to
compare credit terms and helping consumers avoid the uninformed use of
credit. See 15 U.S.C. 1601(a), 1604(a).
The Board believes that disclosing the estimated minimum payment
repayment period in years (if the estimated payoff period is 2 years or
more) allows consumers to better comprehend longer repayment periods
without having to convert the repayment periods themselves from months
to years. In consumer testing conducted by the Board on credit card
disclosures in relation to the January 2009 Regulation Z Rule,
participants reviewed disclosures with estimated minimum payment
repayment periods in years, and they indicated they understood the
length of time it would take to repay the balance if only minimum
payments were made.
2. Minimum payment total cost estimate. Consistent with TILA
Section 127(b)(11)(B)(ii), as revised by the Credit Card Act, proposed
Sec. 226.7(b)(12)(i)(C) provides that if amortization occurs on the
account, a credit card issuer generally must disclose on each periodic
statement the minimum payment total cost estimate, as described in
proposed Appendix M1 to part 226. As described in more detail in the
section-by-section analysis to proposed Appendix M1 to part 226, the
minimum payment total cost estimate would be an estimate of the total
dollar amount of the interest and principal that the consumer would pay
if he or she made minimum payments for the length of time calculated as
the minimum payment repayment estimate, as described in proposed
Appendix M1 to part 226. Under the proposal, the minimum payment total
cost estimate must be rounded to the nearest whole dollar.
3. Disclosure of assumptions used to calculate the minimum payment
repayment estimate and the minimum payment total cost estimate. Under
the proposal, a creditor would be required to provide on the periodic
statement the following statements: (1) A statement that the minimum
payment repayment estimate and the minimum payment total cost estimate
are based on the current outstanding balance shown on the periodic
statement; and (2) a statement that the minimum payment repayment
estimate and the minimum payment total cost estimate are based on the
assumption that only minimum payments are made and no other amounts are
added to the balance. The Board believes that this information is
needed to help consumers understand the minimum payment repayment
estimate and the minimum payment total cost estimate. The Board does
not propose to require issuers to disclose other assumptions used to
calculate these estimates. The many assumptions that are necessary to
calculate the minimum payment repayment estimate and the minimum
payment total cost estimate are complex and unlikely to be meaningful
or useful to most consumers.
Repayment disclosures based on repayment in 36 months. TILA Section
127(b)(11)(B)(iii), as revised by the Credit Card Act, requires that a
creditor disclose on each periodic statement: (1) The monthly payment
amount that would be required for the consumer to pay off the
outstanding balance in 36 months, if no further advances are made; and
(2) the total costs to the consumer, including interest and principal
payments, of paying that balance in full if the consumer pays the
balance over 36 months. 15 U.S.C. 1637(b)(11)(B)(iii).
1. Estimated monthly payment for repayment in 36 months and total
cost estimate for repayment in 36 months. In implementing TILA Section
127(b)(11)(B)(iii), as revised by the Credit Card Act, proposed Sec.
226.7(b)(12)(i)(F) provides that except when the minimum payment
repayment estimate disclosed under proposed Sec. 226.7(b)(12)(i)(B) is
3 years or less, a credit card issuer must disclose on each periodic
statement the estimated monthly payment for repayment in 36 months and
the total cost estimate for repayment in 36 months, as described in
proposed Appendix M1 to part 226. As described in more detail in the
section-by-section analysis to proposed Appendix M1 to part 226, the
estimated monthly payment for repayment in 36 months would be an
estimate of the monthly payment amount that would be required to pay
off the outstanding balance shown on the statement within 36 months,
assuming the consumer paid the same amount each month for 36 months.
Also, as described in proposed Appendix M1 to part 226, the total cost
estimate for repayment in 36 months would be the total dollar amount of
the interest and principal that the consumer would pay if he or she
made the estimated monthly payment each month for 36 months. Under the
proposal, the estimated monthly payment for repayment in 36 months and
the total cost estimate for repayment in 36 months must be rounded to
the nearest whole dollar. Proposed Sec. 226.7(b)(12)(i)(F)(2) provides
that a credit card issuer generally must disclose on each periodic
statement a statement that the card issuer estimates that the consumer
will repay the outstanding balance shown on the periodic statement in 3
years if the consumer pays the estimated monthly payment each month for
3 years. The Board believes that this information is needed to help
consumers understand the estimated monthly payment for repayment in 36
months. The Board does not propose to require issuers to disclose
assumptions used to calculate this estimated monthly payment. The many
assumptions that are necessary to calculate the estimated monthly
payment for repayment in 36 months are complex and unlikely to be
meaningful or useful to most consumers.
2. Savings estimate for repayment in 36 months. In addition to the
disclosure of the estimated monthly payment for repayment in 36 months
and the total cost estimate for repayment in 36 months, proposed Sec.
226.7(b)(12)(i)(F) also requires that a credit card issuer generally
must disclose on each periodic statement the savings estimate for
repayment in 36 months, as described in proposed Appendix M1 to part
226. As described in proposed Appendix M1 to part 226, the savings
estimate for repayment in 36 months would be calculated as the
difference between the minimum payment total cost estimate and the
total cost estimate for repayment in 36 months. Thus, the savings
estimate for repayment in 36 months would represent an estimate of the
amount of interest that a consumer would ``save'' if the consumer
repaid the balance shown on the statement in 3 years by making the
estimated monthly payment for repayment in 36 months each month, rather
than making minimum payments each month. The Board proposes to require
that credit card issuers disclose the savings estimate for repayment in
36 months on the periodic statement pursuant to the Board's authority
to make adjustments to TILA's requirements to effectuate the statute's
purposes, which include facilitating consumers' ability to compare
credit terms and helping consumers avoid the uninformed use of credit.
See 15 U.S.C. 1601(a), 1604(a).
The Board believes that the savings estimate for repayment in 36
months will allow consumers more easily to understand the potential
savings of paying the balance shown on the periodic statement in 3
years rather than making minimum payments each month. This potential
savings appears to be Congress' purpose in requiring that
[[Page 54139]]
the total cost for making minimum payments and the total cost for
repayment in 36 months be disclosed on the periodic statement. The
Board believes that including the savings estimate on the periodic
statement allows consumers to comprehend better the potential savings
without having to compute this amount themselves from the total cost
estimates disclosed on the periodic statement. In consumer testing
conducted by the Board on closed-end mortgage disclosures in relation
to the August 2009 Regulation Z Closed-End Credit Proposal, some
participants were shown two offers for mortgage loans with different
APRs and different totals of payments. In that consumer testing, in
comparing the two mortgage loans, participants tended not to calculate
for themselves the difference between the total of payments for the two
loans (i.e., the potential savings in choosing one loan over another),
and use that amount to compare the two loans. Instead, participants
tended to disregard the total of payments for both loans, because both
totals were large numbers. Given the results of that consumer testing,
the Board believes it is important to disclose the savings estimate on
the periodic statement to focus consumers' attention explicitly on the
potential savings of repaying the balance in 36 months.
3. Minimum payment repayment estimate disclosed on the periodic
statement is three years or less. Under proposed Sec.
226.7(b)(12)(i)(F), a credit card issuer would not be required to
provide the disclosures related to repayment in 36 months if the
minimum payment repayment estimate disclosed under proposed Sec.
226.7(b)(12)(i)(B) is 3 years or less. The Board proposes this
exemption pursuant to the Board's authority exception and exemption
authorities under TILA Section 105(a) and (f). The Board has considered
the statutory factors carefully, and based on that review, believes
that the proposed exemption is appropriate. The Board believes that the
estimated monthly payment for repayment in 36 months, and the total
cost estimate for repayment in 36 months would not be useful and may be
misleading to consumers where based on the minimum payments that would
be due on the account, a consumer would be required to repay the
outstanding balance in three years or less. For example, assume that
based on the minimum payments due on an account, a consumer would repay
his or her outstanding balance in two years if the consumer only makes
minimum payments and take no additional advances. The consumer under
the account terms would not have the option to repay the outstanding
balance in 36 months (i.e., 3 years). In this example, disclosure of
the estimated monthly payment for repayment in 36 months and the total
cost estimate for repayment in 36 months would be misleading, because
under the account terms the consumer does not have the option to make
the estimated monthly payment each month for 36 months. Requiring that
this information be disclosed on the periodic statement where it might
be misleading to consumers would undermine TILA's goal of consumer
protection, and could make the credit process more expensive by
requiring card issuers to incur costs to address customer confusion
about these disclosures.
Toll-free telephone number. TILA Section 127(b)(11)(B)(iii), as
revised by the Credit Card Act, requires that a creditor disclose on
each periodic statement a toll-free telephone number at which the
consumer may receive information about credit counseling and debt
management services. 15 U.S.C. 1637(b)(11)(B)(iii). Proposed Sec.
226.7(b)(12)(i)(E) provides that a credit card issuer generally must
disclose on each periodic statement a toll-free telephone number where
the consumer may obtain information about credit counseling services
consistent with the requirements set forth in proposed Sec.
226.7(b)(12)(iv). As discussed in more detail below, proposed Sec.
226.7(b)(12)(iv) sets forth the information that a credit card issuer
must provide through the toll-free telephone number.
7(b)(12)(ii) Negative or No Amortization
Negative or no amortization can occur if the required minimum
payment is the same as or less than the total finance charges and other
fees imposed during the billing cycle. Several major credit card
issuers have established minimum payment requirements that prevent
prolonged negative or no amortization. But some creditors may use a
minimum payment formula that allows negative or no amortization (such
as by requiring a payment of 2 percent of the outstanding balance,
regardless of the finance charges or fees incurred).
The Credit Card Act appears to require the following disclosures
even when negative or no amortization occurs: (1) A ``warning''
statement indicating that making only the minimum payment will increase
the interest the consumer pays and the time it takes to repay the
consumer's balance; (2) the number of months that it would take to
repay the outstanding balance if the consumer pays only the required
minimum monthly payments and if no further advances are made; (3) the
total cost to the consumer, including interest and principal payments,
of paying that balance in full, if the consumer pays only the required
minimum monthly payments and if no further advances are made; (4) the
monthly payment amount that would be required for the consumer to pay
off the outstanding balance in 36 months, if no further advances are
made, and the total cost to the consumer, including interest and
principal payments, of paying that balance in full if the consumer pays
the balance over 36 months; and (5) a toll-free telephone number at
which the consumer may receive information about credit counseling and
debt management services.
Nonetheless, for the reasons discussed in more detail below, the
Board proposes to make adjustments to the above statutory requirements
when negative or no amortization occurs, pursuant to the Board's
authority under TILA Section 105(a) to make adjustments or exceptions
to effectuate the purposes of TILA. 15 U.S.C. 1604(a). Specifically,
when negative or no amortization occurs, the Board proposes in new
Sec. 226.7(b)(12)(ii) to require a credit card issuer to disclose to
the consumer on the periodic statement the following information: (1)
The following statement: ``Minimum Payment Warning: Even if you make no
more charges using this card, if you make only the minimum payment each
month we estimate you will never pay off the balance shown on this
statement because your payment will be less than the interest charged
each month''; (2) the following statement: ``If you make more than the
minimum payment each period, you will pay less in interest and pay off
your balance sooner''; (3) the estimated monthly payment for repayment
in 36 months; (4) the fact that the card issuer estimates that the
consumer will repay the outstanding balance shown on the periodic
statement in 3 years if the consumer pays the estimated monthly payment
each month for 3 years; and (5) the toll-free telephone number for
obtaining information about credit counseling services.
When negative or no amortization occurs, the number of months to
repay the balance shown on the statement if minimum payments are made
and the total cost in interest and principal if the balance is repaid
making only minimum payments cannot be calculated because the balance
will never be repaid if only minimum payments are made. The Board
proposes to replace these statutory disclosures with a warning
[[Page 54140]]
that the consumer will never repay the balance if making minimum
payments each month.
In addition, if negative or no amortization occurs, card issuers
would be required to disclose the following statement: ``If you make
more than the minimum payment each period, you will pay less in
interest and pay off your balance sooner.'' This sentence is similar
to, and accomplishes the goals of, the statutory warning statement, by
informing consumers that they can pay less interest and pay off the
balance sooner if the consumer pays more than the minimum payment each
month.
In addition, consistent with TILA Section 127(b)(11) as revised by
the Credit Card Act, if negative or no amortization occurs, the Board
proposes that the credit card issuer disclose to the consumer the
estimated monthly payment for repayment in 36 months and a statement of
the fact the card issuer estimates that the consumer will repay the
outstanding balance shown on the periodic statement in 3 years if the
consumer pays the estimated monthly payment each month for 3 years.
If negative or no amortization occurs, a card issuer, however,
would not disclose the total cost estimate for repayment in 36 months,
as described in proposed Appendix M1 to part 226. The Board proposes an
exception to TILA's requirement to disclose the total cost estimate for
repayment in 36 months pursuant to the Board's exception and exemption
authorities under TILA Section 105(f).
The Board has considered each of the statutory factors carefully,
and based on that review, believes that the proposed exemption is
appropriate. As discussed above, when negative or no amortization
occurs, a minimum payment cost estimate cannot be calculated because
the balance shown on the statement will never be repaid if only minimum
payments are made. Thus, under the proposal, a credit card issuer would
not be required to disclose a minimum payment cost estimate as
described in proposed Appendix M1 to part 226. Because the minimum
payment cost estimate will not be disclosed when negative or no
amortization occurs, the Board does not believe that the total cost
estimate for repayment in 36 months would be useful to consumers. The
Board believes that the total cost estimate for repayment in 36 months
is useful when it can be compared to the minimum payment total cost
estimate. Requiring that this information be disclosed on the periodic
statement when it is not useful to consumers could distract consumers
from more important information on the periodic statement, which could
undermine TILA's goal of consumer protection.
7(b)(12)(iii) Format Requirements
As discussed above, TILA Section 127(b)(11)(D), as revised by the
Credit Card Act, provides that the repayment disclosures (except for
the warning statement) must be disclosed in the form and manner which
the Board prescribes by regulation and in a manner that avoids
duplication; and must be placed in a conspicuous and prominent location
on the billing statement. 15 U.S.C. 1637(b)(11)(D). By regulation, the
Board must require that the disclosure of the repayment information
(except for the warning statement) be in the form of a table that
contains clear and concise headings for each item of information and
provides a clear and concise form stating each item of information
required to be disclosed under each such heading. In prescribing the
table, the Board must require that all the information in the table,
and not just a reference to the table, be placed on the billing
statement. In addition, the items required to be included in the table
must be listed in the following order: (1) The minimum payment
repayment estimate; (2) the minimum payment total cost estimate; (3)
the estimated monthly payment for repayment in 36 months; (4) the total
cost estimate for repayment in 36 months; and (5) the toll-free
telephone number. In prescribing the table, the Board must use
terminology different from that used in the statute, if such
terminology is more easily understood and conveys substantially the
same meaning.
Samples G-18(C)(1), G-18(C)(2) and G-18(C)(3). Proposed Sec.
226.7(b)(12)(iii) provides that a credit card issuer must provide the
repayment disclosures in a format substantially similar to proposed
Samples G-18(C)(1), G-18(C)(2) and G-18(C)(3) in Appendix G to part
226, as applicable.
Proposed Sample G-18(C)(1) applies when amortization occurs and the
minimum payment repayment estimate disclosed on the periodic statement
is more than 3 years. In this case, as discussed above, a credit card
issuer would be required under proposed Sec. 226.7(b)(12) to disclose
on the periodic statement: (1) The warning statement; (2) the minimum
payment repayment estimate; (3) the minimum payment total cost
estimate; (4) the fact that the minimum payment repayment estimate and
the minimum payment total cost estimate are based on the current
outstanding balance shown on the periodic statement, and the fact that
the minimum payment repayment estimate and the minimum payment total
cost estimate are based on the assumption that only minimum payments
are made and no other amounts are added to the balance; (5) the
estimated monthly payment for repayment in 36 months; (6) the total
cost estimate for repayment in 36 months; (7) the savings estimate for
repayment in 36 months; (8) the fact that the card issuer estimates
that the consumer will repay the outstanding balance shown on the
periodic statement in 3 years if the consumer pays the estimated
monthly payment each month for 3 years; and (9) the toll-free telephone
number for obtaining information about credit counseling services.
As shown in proposed Sample G-18(C)(1), a card issuer would be
required to provide the following disclosures in the form of a table
with headings, content and format substantially similar to proposed
Sample G-18(C)(1): (1) The fact that the minimum payment repayment
estimate and the minimum payment total cost estimate are based on the
assumption that only minimum payments are made; (2) the minimum payment
repayment estimate; (3) the minimum payment total cost estimate; (4)
the estimated monthly payment for repayment in 36 months; (5) the fact
the card issuer estimates that the consumer will repay the outstanding
balance shown on the periodic statement in 3 years if the consumer pays
the estimated monthly payment each month for 3 years; (6) total cost
estimate for repayment in 36 months; and (7) the savings estimate for
repayment in 36 months. The following information would be incorporated
into the headings for the proposed table: (1) The fact that the minimum
payment repayment estimate and the minimum payment total cost estimate
are based on the current outstanding balance shown on the periodic
statement; and (2) the fact that the minimum payment repayment estimate
and the minimum payment total cost estimate are based on the assumption
that no other amounts are added to the balance. The warning statement
would be disclosed above the proposed table and the toll-free telephone
number would be disclosed below the proposed table.
Proposed Sample G-18(C)(2) applies when amortization occurs and the
minimum payment repayment estimate disclosed on the periodic statement
is equal to or less than 3 years. In this case, as discussed above, a
credit card issuer would be required under proposed Sec. 226.7(b)(12)
to disclose on the periodic statement: (1) The warning statement; (2)
the minimum payment repayment estimate; (3) the minimum payment total
cost estimate; (4) the fact
[[Page 54141]]
that the minimum payment repayment estimate and the minimum payment
total cost estimate are based on the current outstanding balance shown
on the periodic statement, and the fact that the minimum payment
repayment estimate and the minimum payment total cost estimate are
based on the assumption that only minimum payments are made and no
other amounts are added to the balance; and (5) the toll-free telephone
number for obtaining information about credit counseling services.
As shown in proposed Sample G-18(C)(2), disclosure of the above
information would be similar in format to how this information is
disclosed in proposed Sample G-18(C)(1). Specifically, as shown in
proposed Sample G-18(C)(2), a card issuer would be required to disclose
the following disclosures in the form of a table with headings, content
and format substantially similar to proposed Sample G-18(C)(2): (1) The
fact that the minimum payment repayment estimate and the minimum
payment total cost estimate are based on the assumption that only
minimum payments are made; (2) the minimum payment repayment estimate;
and (3) the minimum payment total cost estimate. The following
information would be incorporated into the headings for the proposed
table: (1) The fact that the minimum payment repayment estimate and the
minimum payment total cost estimate are based on the current
outstanding balance shown on the periodic statement; and (2) the fact
that the minimum payment repayment estimate and the minimum payment
total cost estimate are based on the assumption that no other amounts
are added to the balance. The warning statement would be disclosed
above the proposed table and the toll-free telephone number would be
disclosed below the proposed table.
Proposed Sample G-18(C)(3) applies when negative or no amortization
occurs. In this case, as discussed above, a credit card issuer would be
required under proposed Sec. 226.7(b)(12) to disclose on the periodic
statement: (1) The following statement: Minimum Payment Warning: Even
if you make no more charges using this card, if you make only the
minimum payment each month we estimate you will never pay off the
balance shown on this statement because your payment will be less than
the interest charged each month;'' (2) the following statement: ``If
you make more than the minimum payment each period, you will pay less
in interest and pay off your balance sooner;'' (3) the estimated
monthly payment for repayment in 36 months; (4) the fact the card
issuer estimates that the consumer will repay the outstanding balance
shown on the periodic statement in 3 years if the consumer pays the
estimated monthly payment each month for 3 years; and (5) the toll-free
telephone number for obtaining information about credit counseling
services.
As shown in proposed Sample G-18(C)(3), none of the above
information would be required to be in the form of a table,
notwithstanding TILA's requirement that the repayment information
(except the warning statement) be in the form of a table. The Board
proposes an exemption to this TILA requirement pursuant to the Board's
authority exception and exemption authorities under TILA Section
105(a). The Board does not believe that the tabular format is a useful
format for disclosing that negative or no amortization is occurring.
The Board believes that a narrative format is better than a tabular
format for communicating to consumers that making only minimum payments
will not repay the balance shown on the periodic statement. For
consistency, proposed Sample G-18(C)(3) also provides the disclosures
about repayment in 36 months in a narrative form as well. To help
ensure that consumers notice the disclosures about negative or no
amortization and the disclosures about repayment in 36 months, the
Board would require that card issuers disclose certain key information
in bold text, as shown in proposed Sample G-18(C)(3).
As discussed above, TILA Section 127(b)(11)(D), as revised by the
Credit Card Act, provides that the toll-free telephone number for
obtaining credit counseling information must be disclosed in the table
with: (1) The minimum payment repayment estimate; (2) the minimum
payment total cost estimate; (3) the estimated monthly payment for
repayment in 36 months; and (4) the total cost estimate for repayment
in 36 months. As discussed above, the Board does not propose that the
toll-free telephone number be in a tabular format. See proposed Samples
G-18(C)(1), G-18(C)(2) and G-18(C)(3). The Board proposes this
exemption pursuant to the Board's exception and exemption authorities
under TILA Section 105(a), as discussed above. The Board believes that
it might be confusing to consumers to include the toll-free telephone
number in the table because it does not logically flow from the other
information included in the table. To help ensure that the toll-free
telephone number is noticeable to consumer, the Board proposes to
require that the toll-free telephone number be grouped with the other
repayment information.
Format requirements set forth in proposed Sec. 226.7(b)(13).
Proposed Sec. 226.7(b)(12)(iii) also provides that a credit card
issuer must provide the repayment disclosures in accordance with the
format requirements of proposed Sec. 226.7(b)(13). As discussed in
more detail in the section-by-section analysis to proposed Sec.
226.7(b)(13), the Board proposes in Sec. 226.7(b)(13) to require that
the repayment disclosures required to be disclosed under proposed Sec.
226.7(b)(12) must be disclosed closely proximate to the minimum payment
due. In addition, under the proposal, the repayment disclosures must be
grouped together with the due date, late payment fee and annual
percentage rate, ending balance, and minimum payment due, and this
information must be disclosed on the front of the first page of the
periodic statement.
7(b)(12)(iv) Provision of Information About Credit Counseling Services
Section 201(c) of the Credit Card Act requires the Board to issue
guidelines by rule, in consultation with the Secretary of the Treasury,
for the establishment and maintenance by creditors of the toll-free
number disclosed on the periodic statement from which consumers can
obtain information about accessing credit counseling and debt
management services. The Credit Card Act requires that these guidelines
ensure that consumers are referred ``only [to] those nonprofit and
credit counseling agencies approved by a United States bankruptcy
trustee pursuant to [11 U.S.C. 111(a)].'' The Board proposes to
implement Section 201(c) of the Credit Card Act in Sec.
226.7(b)(12)(iv). In developing this proposal, the Board consulted with
the Treasury Department as well as the Executive Office for United
States Trustees.
Prior to filing a bankruptcy petition, a consumer generally must
have received ``an individual or group briefing (including a briefing
conducted by telephone or on the Internet) that outlined the
opportunities for available credit counseling and assisted [the
consumer] in performing a related budget analysis.'' 11 U.S.C. 109(h).
This briefing can only be provided by ``nonprofit budget and credit
counseling agencies that provide 1 or more [of these] services * * *
[and are] currently approved by the United States trustee (or the
bankruptcy administrator, if any).'' 11 U.S.C. 111(a)(1); see also 11
U.S.C. 109(h). In order to be approved to provide credit counseling
services, an agency must, among other things: Be a nonprofit entity;
demonstrate that it will
[[Page 54142]]
provide qualified counselors, maintain adequate provision for
safekeeping and payment of client funds, and provide adequate
counseling with respect to client credit problems; charge only a
reasonable fee for counseling services and make such services available
without regard to ability to pay the fee; and provide trained
counselors who receive no commissions or bonuses based on the outcome
of the counseling services. See 11 U.S.C. 111(c).
Proposed Sec. 226.7(b)(12)(iv)(A) provides that a card issuer must
provide through the toll-free telephone number disclosed pursuant to
proposed Sec. 226.7(b)(12)(i)(E) or (ii)(E) the name, street address,
telephone number, and Web site address for at least three organizations
that have been approved by the United States Trustee or a bankruptcy
administrator pursuant to 11 U.S.C. 111(a)(1) to provide credit
counseling services in the State in which the billing address for the
account is located or the State specified by the consumer. In addition,
proposed Sec. 226.7(b)(12)(iv)(B) requires that, upon the request of
the consumer and to the extent available from the United States Trustee
or a bankruptcy administrator, the card issuer must provide the
consumer with the name, street address, telephone number, and Web site
address for at least one organization meeting the above requirements
that provides credit counseling services in a language other than
English that is specified by the consumer.
The United States Trustee collects the name, street address,
telephone number, and Web site address for approved organizations and
provides that information to the public through its Web site.\11\ The
United States Trustee's Web site organizes this information by State as
well as by the language in which the organization can provide credit
counseling services. For jurisdictions where credit counseling
organizations are approved by a bankruptcy administrator pursuant to 11
U.S.C. 111(a)(1), a card issuer can obtain this information from the
relevant administrator. Accordingly, the information that a card issuer
is required to provide by proposed Sec. 226.7(b)(12)(iv) is readily
available.
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\11\ See U.S Trustee Program, List of Credit Counseling Agencies
Approved Pursuant to 11 U.S.C. 111 (available at http://www.usdoj.gov/ust/eo/bapcpa/ccde/cc_approved.htm).
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Because different credit counseling organizations may provide
different services and charge different fees, the Board believes that
providing information regarding at least three approved organizations
will enable consumers to make a choice about the organization that best
suits their needs. However, the Board solicits comment on whether card
issuers should provide information regarding a different number of
approved organizations.
As proposed, Sec. 226.7(b)(12)(iv) relies in two respects on the
Board's authority under TILA Section 105(a) to make adjustments or
exceptions to effectuate the purposes of TILA or to facilitate
compliance therewith. See 15 U.S.C. 1604(a). First, although revised
TILA Section 127(b)(11)(B)(iv) and Section 201(c)(1) of the Credit Card
Act refer to the creditors' obligation to provide information about
accessing ``credit counseling and debt management services,'' proposed
Sec. 226.7(b)(12)(iv) only requires the creditor to provide
information about obtaining credit counseling services.\12\ Although
credit counseling may include information that assists the consumer in
managing his or her debts, 11 U.S.C. 109(h) and 111(a)(1) do not
require the United States Trustee or a bankruptcy administrator to
approve organizations to provide debt management services. Because
Section 201(c) of the Credit Card Act requires that creditors only
provide information about organizations approved pursuant to 11 U.S.C.
111(a), the Board does not believe that Congress intended to require
creditors to provide information about services that are not subject to
that approval process. Accordingly, proposed Sec. 226.7(b)(12)(iv)
would not require card issuers to disclose information about debt
management services.
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\12\ Similarly, proposed Sec. 226.7(b)(12)(i)(E) and (ii)(E)
only require a card issuer to disclose on the periodic statement a
toll-free telephone number where the consumer may acquire from the
card issuer information about obtaining credit counseling services.
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Second, although Section 201(c)(2) of the Credit Card Act refers to
credit counseling organizations approved pursuant to 11 U.S.C. 111(a),
proposed Sec. 226.7(b)(12)(iv) clarifies that creditors may provide
information only regarding organizations approved pursuant to 11 U.S.C.
111(a)(1), which addresses the approval process for credit counseling
organizations. In contrast, 11 U.S.C. 111(a)(2) addresses a different
approval process for instructional courses concerning personal
financial management.
Proposed comment 7(b)(12)(iv)-1 would clarify that, when providing
the information required by Sec. 226.7(b)(12)(iv)(A), the card issuer
may use the billing address for the account or, at its option, allow
the consumer to specify a State. The comment would also clarify that a
card issuer does not satisfy the requirement to provide information
regarding credit counseling agencies approved pursuant to 11 U.S.C.
111(a)(1) by providing information regarding providers that have been
approved to offer personal financial management courses pursuant to 11
U.S.C. 111(a)(2).
Proposed comment 7(b)(12)(iv)-2 would clarify that a card issuer
complies with the requirements of Sec. 226.7(b)(12)(iv) if it provides
the consumer with the information provided by the United States Trustee
or a bankruptcy administrator, including information provided on the
Web site operated by the United States Trustee. If, for example, the
Web site address for an organization approved by the United States
Trustee is not available from the Web site operated by the United
States Trustee, a card issuer is not required to provide a Web site
address for that organization. However, at least annually, the card
issuer must verify and update the information it provides for
consistency with the information provided by the United States Trustee
or a bankruptcy administrator. The Board solicits comment on whether
card issuers should be required to verify and update the credit
counseling information they provide to consumers more or less
frequently.
Proposed comment 7(b)(12)(iv)-3 would clarify that, at their
option, card issuers may use toll-free telephone numbers that connect
consumers to automated systems, such as an interactive voice response
system, through which consumers may obtain the information required by
Sec. 226.7(b)(12)(iv) by inputting information using a touch-tone
telephone or similar device.
Proposed comment 7(b)(12)(iv)-4 would clarify that a card issuer
may provide a toll-free telephone number that is designed to handle
customer service calls generally, so long as the option to receive the
information required by Sec. 226.7(b)(12)(iv) is prominently disclosed
to the consumer. For automated systems, the option to receive the
information required by Sec. 226.7(b)(12)(iv) is prominently disclosed
to the consumer if it is listed as one of the options in the first menu
of options given to the consumer, such as ``Press or say `3' if you
would like information about credit counseling services.'' If the
automated system permits callers to select the language in which the
call is conducted and in which information is provided, the menu to
select the language may precede the menu with the option to receive
information about accessing credit counseling services.
[[Page 54143]]
Proposed comment 7(b)(12)(iv)-5 would clarify that, at their
option, card issuers may use a third party to establish and maintain a
toll-free telephone number for use by the issuer to provide the
information required by Sec. 226.7(b)(12)(iv).
Proposed comment 7(b)(12)(iv)-6 would clarify that, when providing
the toll-free telephone number on the periodic statement pursuant to
Sec. 226.7(b)(12)(iv), a card issuer at its option may also include a
reference to a Web site address (in addition to the toll-free telephone
number) where its customers may obtain the information required by
Sec. 226.7(b)(12)(iv), so long as the information provided on the Web
site complies with Sec. 226.7(b)(12)(iv). The Web site address
disclosed must take consumers directly to the Web page where
information about accessing credit counseling may be obtained. In the
alternative, the card issuer may disclose the Web site address for the
Web page operated by the United States Trustee where consumers may
obtain information about approved credit counseling organizations.
Finally, proposed comment 7(b)(12)(iv)-7 would clarify that, if a
consumer requests information about credit counseling services, the
card issuer may not provide advertisements or marketing materials to
the consumer (except for providing the name of the issuer) prior to
providing the information required by Sec. 226.7(b)(12)(iv). However,
educational materials that do not solicit business are not considered
advertisements or marketing materials for this purpose. The comment
would also provide examples of how the restriction on the provision of
advertisements and marketing materials applies in the context of the
toll-free number and a Web page.
7(b)(12)(v) Exemptions
As explained above, the Board proposes that the repayment
disclosures required under proposed Sec. 226.7(b)(12) be provided only
for a ``credit card account under an open-end (not home-secured)
consumer credit plan,'' as that term is defined in proposed Sec.
226.2(a)(15)(ii).
In addition, as discussed below, the Board proposes several
additional exemptions from the repayment disclosure requirements
pursuant to the Board's exception and exemption authorities under TILA
Section 105(a) and (f).
As discussed in more detail below, the Board has considered the
statutory factors carefully, and based on that review, believes that
the following proposed exemptions are appropriate.
Exemption for charge cards. The Board proposes to exempt charge
cards from the repayment disclosure requirements because the Board
believes that the repayment disclosures would not be useful for
consumers with charge card accounts. See proposed Sec.
226.7(b)(12)(vii)(A). Charge cards are used in connection with an
account on which outstanding balances cannot be carried from one
billing cycle to another and are payable when a periodic statement is
received.
Exemption where cardholders have paid their accounts in full for
two consecutive billing cycles. In proposed Sec. 226.7(b)(vii)(B), the
Board proposes to provide that a card issuer is not required to include
the repayment disclosures on the periodic statement for a particular
billing cycle immediately following two consecutive billing cycles in
which the consumer paid the entire balance in full, had a zero balance
or had a credit balance. The Board believes this approach strikes an
appropriate balance between benefits to consumers of the repayment
disclosures, and compliance burdens on issuers in providing the
disclosures. Consumers who might benefit from the repayment disclosures
would receive them. Consumers who carry a balance each month would
always receive the repayment disclosures, and consumers who pay in full
each month would not. Consumers who sometimes pay their bill in full
and sometimes do not would receive the repayment disclosures if they do
not pay in full two consecutive months (cycles). Also, if a consumer's
typical payment behavior changes from paying in full to revolving, the
consumer would begin receiving the repayment disclosures after not
paying in full one billing cycle, when the disclosures would appear to
be useful to the consumer. In addition, credit card issuers typically
provide a grace period on new purchases to consumers (that is,
creditors do not charge interest to consumers on new purchases) if
consumers paid both the current balance and the previous balance in
full. Thus, card issuers already currently capture payment history for
consumers for two consecutive months (or cycles).
The Board notes that card issuers would not be required to use this
proposed exemption. A card issuer would be allowed to provide the
repayment disclosures to all of its cardholders, even to those
cardholders that fall within this proposed exemption. If issuers choose
to provide voluntarily the repayment disclosures to those cardholders
that fall within this exemption, the Board would expect issuers to
follow the disclosure rules set forth in proposed Sec. 226.7(b)(12),
the accompanying commentary, and proposed Appendix M1 to part 226 for
those cardholders.
Exemption where minimum payment would pay off the entire balance
for a particular billing cycle. In proposed Sec. 226.7(b)(12)(v)(C),
the Board proposes to exempt a card issuer from providing the repayment
disclosure requirements for a particular billing cycle where paying the
minimum payment due for that billing cycle will pay the outstanding
balance on the account for that billing cycle. For example, if the
entire outstanding balance on an account for a particular billing cycle
is $20 and the minimum payment is $20, an issuer would not need to
comply with the repayment disclosure requirements for that particular
billing cycle. The Board believes that the repayment disclosures would
not be helpful to consumers in this context.
Other exemptions. In the January 2009 Regulation Z Rule, the Board
in Sec. 226.7(b)(12)(v)(E) exempted a credit card account from the
minimum payment disclosure requirements where a fixed repayment period
for the account is specified in the account agreement and the required
minimum payments will amortize the outstanding balance within the fixed
repayment period. This exemption would be applicable to, for example,
accounts that have been closed due to delinquency and the required
monthly payment has been reduced or the balance decreased to
accommodate a fixed payment for a fixed period of time designed to pay
off the outstanding balance. See comment 7(b)(12)(v)-1.
In addition, in the January 2009 Regulation Z Rule, the Board in
Sec. 226.7(b)(12)(v)(F) exempted credit card issuers from providing
the minimum payment disclosures on periodic statements in a billing
cycle where the entire outstanding balance held by consumers in that
billing cycle is subject to a fixed repayment period specified in the
account agreement and the required minimum payments applicable to that
balance will amortize the outstanding balance within the fixed
repayment period. Some retail credit cards have several credit features
associated with the account. One of the features may be a general
revolving feature, where the required minimum payment for this feature
does not pay off the balance in a specific period of time. The card
also may have another feature that allows consumers to make specific
types of purchases (such as furniture purchases, or other large
purchases), and the required minimum payments for that feature will pay
off the purchase
[[Page 54144]]
within a fixed period of time, such as one year. This exemption was
meant to cover retail cards where the entire outstanding balance held
by a consumer in a particular billing cycle is subject to a fixed
repayment period specified in the account agreement. On the other hand,
this exemption would not have applied in those cases where all or part
of the consumer's balance for a particular billing cycle is held in a
general revolving feature, where the required minimum payment for this
feature does not pay off the balance in a specific period of time set
forth in the account agreement. See comment 7(b)(12)(v)-2.
In adopting these two exemptions to the minimum payment disclosure
requirements in the January 2009 Regulation Z Rule, the Board stated
that in these two situations, the minimum payment disclosure does not
appear to provide additional information to consumers that they do not
already have in their account agreements.
The Board proposes not to include these two exemptions in proposed
Sec. 226.7(b)(12)(v). In implementing Section 201 of the Credit Card
Act, proposed Sec. 226.7(b)(12) would require additional repayment
information beyond the disclosure of the estimated length of time it
would take to repay the outstanding balance if only minimum payments
are made, which was the main type of information that was required to
be disclosed under the January 2009 Regulation Z Rule. As discussed
above, under proposed Sec. 226.7(b)(12)(i), a card issuer would be
required to disclose on the periodic statement information about the
total costs in interest and principal to repay the outstanding balance
if only minimum payments are made, and information about repayment of
the outstanding balance in 36 months. Consumers would not know from the
account agreements this additional information about the total cost in
interest and principal of making minimum payments, and information
about repayment of the outstanding balance in 36 months. Thus, these
two exemptions may no longer be appropriate given the additional
repayment information that must be provided on the periodic statement
pursuant to proposed Sec. 226.7(b)(12). Nonetheless, the Board
solicits comment on whether these exemptions should be retained. For
example, the Board solicits comment on whether the repayment
disclosures relating to repayment in 36 months would be helpful where a
fixed repayment period longer than 3 years is specified in the account
agreement and the required minimum payments will amortize the
outstanding balance within the fixed repayment period. For these types
of accounts, the Board solicits comment on whether consumers tend to
enter into the agreement with the intent (and the ability) to repay the
account balance over the life of the account, such that the disclosures
for repayment of the account in 36 months would not be useful to
consumers.
7(b)(13) Format Requirements
Under the January 2009 Regulation Z Rule, creditors offering open-
end (not home-secured) plans are required to disclose the payment due
date (if a late payment fee or penalty rate may be imposed) on the
front side of the first page of the periodic statement. The amount of
any late payment fee and penalty APR that could be triggered by a late
payment is required to be disclosed in close proximity to the due date.
In addition, the ending balance and the minimum payment disclosures
must be disclosed closely proximate to the minimum payment due. Also,
the due date, late payment fee, penalty APR, ending balance, minimum
payment due, and the minimum payment disclosures must be grouped
together. See Sec. 226.7(b)(13). In the supplementary information to
the January 2009 Regulation Z Rule, the Board stated that these
formatting requirements were intended to fulfill Congress' intent to
have the due date, late payment and minimum payment disclosures enhance
consumers' understanding of the consequences of paying late or making
only minimum payments, and were based on consumer testing conducted for
the Board in relation to the January 2009 Regulation Z Rule that
indicated improved understanding when related information is grouped
together. For the reasons described below, the Board proposes to retain
these format requirements, with several revisions. Proposed Sample G-
18(D) in Appendix G to part 226 illustrates the proposed requirements.
Due date and late payment disclosures. As discussed above under the
section-by-section analysis to proposed Sec. 226.7(b)(11), Section 202
of the Credit Card Act amends TILA Section 127(b)(12) to provide that
for a ``credit card account under an open-end consumer credit plan,'' a
creditor that charges a late payment fee must disclose in a conspicuous
location on the periodic statement (1) the payment due date, or, if the
due date differs from when a late payment fee would be charged, the
earliest date on which the late payment fee may be charged, and (2) the
amount of the late payment fee. In addition, if a late payment may
result in an increase in the APR applicable to the credit card account,
a creditor also must provide on the periodic statement a disclosure of
this fact, along with the applicable penalty APR. The disclosure
related to the penalty APR must be placed in close proximity to the
due-date disclosure discussed above.
Consistent with TILA Section 127(b)(12), as revised by the Credit
Card Act, the Board proposes to retain the requirement in Sec.
226.7(b)(13) that credit card issuers disclose the payment due date on
the front side of the first page of the periodic statement. In
addition, credit card issuers would be required to disclose the amount
of any late payment fee and penalty APR that could be triggered by a
late payment in close proximity to the due date. Also, the due date,
late payment fee, penalty APR, ending balance, minimum payment due, and
the repayment disclosures required by proposed Sec. 226.7(b)(12) must
be grouped together. See Sec. 226.7(b)(13). The Board believes that
these format requirements fulfill Congress' intent that the due date
and late payment disclosures be grouped together and be disclosed in a
conspicuous location on the periodic statement.
Repayment disclosures. As discussed above under the section-by-
section analysis to proposed Sec. 226.7(b)(12), TILA Section
127(b)(11)(D), as revised by the Credit Card Act, provides that the
repayment disclosures (except for the warning statement) must be
disclosed in the form and manner which the Board prescribes by
regulation and in a manner that avoids duplication; and must be placed
in a conspicuous and prominent location on the billing statement. 15
U.S.C. 1637(b)(11)(D).
Under proposed Sec. 226.7(b)(13), the ending balance and the
repayment disclosures required under proposed Sec. 226.7(b)(12) must
be disclosed closely proximate to the minimum payment due. In addition,
proposed Sec. 226.7(b)(13) provides that the repayment disclosures
must be grouped together with the due date, late payment fee, penalty
APR, ending balance, and minimum payment due, and this information must
appear on the front of the first page of the periodic statement. The
Board believes that these proposed format requirements fulfill
Congress' intent that the repayment disclosures be placed in a
conspicuous and prominent location on the billing statement.
Samples G-18(D), 18(E), 18(F) and 18(G). As adopted in the January
2009 Regulation Z Rule, Samples G-18(D) and G-18(E) in Appendix G to
part 226 illustrate the requirement to group together the due date,
late payment fee,
[[Page 54145]]
penalty APR, ending balance, minimum payment due, and the repayment
disclosures required by Sec. 226.7(b)(12). Sample G-18(D) applies to
credit cards and includes all of the above disclosures grouped
together. Sample G-18(E) applies to non-credit card accounts, and
includes all of the above disclosures except for the repayment
disclosures because the repayment disclosures only apply to credit card
accounts. Samples G-18(F) and G-18(G) illustrate the front side of
sample periodic statements and show the disclosures listed above.
The Board proposes to revise Sample G-18(D), G-18(F) and G-18(G) to
incorporate the new format requirements for the repayment disclosures,
as shown in proposed Sample G-18(C)(1) and G-18(C)(2). See section-by-
section analysis to proposed Sec. 226.7(b)(12) for a discussion of
these new format requirements. In addition, the Board proposes to
delete Sample G-18(E) (which applies to non-credit card accounts) as
unnecessary. Under the proposal, the formatting requirements in
proposed Sec. 226.7(b)(13) generally are applicable only to credit
card issuers because the due date, late payment fee, penalty APR, and
repayment disclosures would apply only to a ``credit card account under
an open-end (not home-secured) consumer credit plan,'' as that term is
defined in proposed Sec. 226.2(a)(15)(ii).
7(b)(14) Deferred Interest or Similar Transactions
In the May 2009 Regulation Z Proposed Clarifications, the Board
proposed revisions to comment 7(b)-1 to require creditors to provide
consumers with information regarding deferred interest or similar
balances on which interest may be imposed under a deferred interest or
similar program, as well as the interest charges accruing during the
term of a deferred interest or similar program. 74 FR 20797-20798. The
Board also proposed to add a new Sec. 226.7(b)(14) to require
creditors to include on a consumer's periodic statement, for two
billing cycles immediately preceding the date on which deferred
interest or similar transactions must be paid in full in order to avoid
the imposition of interest charges, a disclosure that the consumer must
pay such transactions in full by that date in order to avoid being
obligated for the accrued interest. 74 FR 20793. Furthermore, to
provide additional guidance on compliance with the disclosure
requirement set forth in proposed Sec. 226.7(b)(14), the Board
proposed several complementary changes to comment 7(b)-1.
Moreover, proposed Sample G-18(H) provided model language for
making the disclosure required by proposed Sec. 226.7(b)(14), and the
Board proposed that the language used to make the disclosure under
Sec. 226.7(b)(14) would be required to be substantially similar to
Sample G-18(H). 74 FR 20797. Finally, the Board proposed conforming
technical changes to comment 5(b)(2)(ii)-1, which cross-references
comment 7(b)-1. 74 FR 20797. The Board is republishing these same
revisions for additional comment in this Federal Register notice, with
some technical changes to account for the fact that related provisions
previously set forth in the January 2009 FTC Act Final Rule, and
proposed in the May 2009 FTC Act Rule Proposed Clarifications, have
been modified and proposed in this Federal Register notice under
Regulation Z.
Section 226.9 Subsequent Disclosure Requirements
9(c) Change in Terms
Section 226.9(c) sets forth the advance notice requirements when a
creditor changes the terms applicable to a consumer's account. As
discussed below, the Board is proposing several changes to Sec.
226.9(c)(2) as adopted in the January 2009 Regulation Z Rule and the
associated staff commentary in order to conform to the new requirements
of the Credit Card Act.
9(c)(1) Rules Affecting Home-Equity Plans
In the January 2009 Regulation Z Rule, the Board preserved the
existing rules for changes in terms for home-equity lines of credit in
a new Sec. 226.9(c)(1), in order to clearly delineate the requirements
for HELOCs from those applicable to other open-end credit. The Board
noted that possible revisions to rules affecting HELOCs would be
considered in the Board's review of home-secured credit, which was
underway at the time that the January 2009 Regulation Z rule was
published. On August 26, 2009, the Board published proposed revisions
to those portions of Regulation Z affecting HELOCs in the Federal
Register. As discussed in I. Background and Implementation of the
Credit Card Act, in order to clarify that this proposed rule is not
intended to amend or otherwise affect the August 2009 Regulation Z
HELOC Proposal, the Board is not republishing Sec. 226.9(c)(1) in this
Federal Register notice.
The Board anticipates, however, that a final rule will be issued
with regard to this proposal prior to completion of final rules
regarding HELOCs. Therefore, the Board anticipates that it will include
Sec. 226.9(c)(1), as adopted in the January 2009 Regulation Z Rule, in
its final rulemaking based on this proposal, to give HELOC creditors
guidance on how to comply with change-in-terms requirements between the
effective date of this rule and the effective date of the forthcoming
HELOC rules.
9(c)(2) Rules Affecting Open-End (Not Home-Secured) Plans
Credit Card Act \13\
New TILA Section 127(i)(1) generally requires creditors to provide
consumers with a written notice of an annual percentage rate increase
at least 45 days prior to the effective date of the increase, for
credit card accounts under an open-end consumer credit plan. 15 U.S.C.
1637(i)(1). The statute establishes several exceptions to this general
requirement. 15 U.S.C. 1637(i)(1) and (i)(2). The first exception
applies when the change is an increase in an annual percentage rate
upon expiration of a specified period of time, provided that prior to
commencement of that period, the creditor clearly and conspicuously
disclosed to the consumer the length of the period and the rate that
would apply after expiration of the period. The second exception
applies to increases in variable annual percentage rates that change
according to operation of a publicly available index that is not under
the control of the creditor. Finally, a third exception applies to rate
increases due to the completion of, or failure of a consumer to comply
with, the terms of a workout or temporary hardship arrangement,
provided that prior to the commencement of such arrangement the
creditor clearly and conspicuously disclosed to the consumer the terms
of the arrangement, including any increases due to completion or
failure.
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\13\ For convenience, this section summarizes the provisions of
the Credit Card Act that apply both to advance notices of changes in
terms and rate increases. Consistent with the approach it took in
the January 2009 Regulation Z Rule and the July 2009 Regulation Z
Interim Final Rule, the Board is implementing the advance notice
requirements applicable to contingent rate increases set forth in
the cardholder agreement in a separate section (Sec. 226.9(g)) from
those advance notice requirements applicable to changes in the
cardholder agreement (Sec. 226.9(c)). The distinction between these
types of changes is that Sec. 226.9(g) addresses changes in a rate
being applied to a consumer's account consistent with the existing
terms of the cardholder agreement, while Sec. 226.9(c) addresses
changes in the underlying terms of the agreement.
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In addition to the rules in new TILA Section 127(i)(1) regarding
rate increases, new TILA Section 127(i)(2) establishes a 45-day advance
notice
[[Page 54146]]
requirement for significant changes, as determined by rule of the
Board, in the terms (including an increase in any fee or finance
charge) of the cardholder agreement between the creditor and the
consumer. 15 U.S.C. 1637(i)(2).
New TILA Section 127(i)(3) also establishes an additional content
requirement for notices of interest rate increases or significant
changes in terms provided pursuant to new TILA Section 127(i). 15
U.S.C. 1637(i)(3). Such notices are required to contain a brief
statement of the consumer's right to cancel the account, pursuant to
rules established by the Board, before the effective date of the rate
increase or other change disclosed in the notice. In addition, new TILA
Section 127(i)(4) states that closure or cancellation of an account
pursuant to the consumer's right to cancel does not constitute a
default under the existing cardholder agreement, and does not trigger
an obligation to immediately repay the obligation in full or through a
method less beneficial than those listed in revised TILA Section
171(c)(2). 15 U.S.C. 1637(i)(4). The disclosure associated with the
right to cancel is discussed in the section-by-section analysis to
Sec. 226.9(c) and (g), while the substantive rules regarding this new
right are discussed in the section-by-section analysis to Sec.
226.9(h).
The Board implemented TILA Section 127(i), which was effective
August 20, 2009, in the July 2009 Regulation Z Interim Final Rule.
However, the Board is now proposing to implement additional provisions
of the Credit Card Act that are effective on February 22, 2010 that
have an impact on the content of change-in-terms notices and the types
of changes that are permissible upon provision of a change-in-terms
notice pursuant to Sec. 226.9(c) or (g). For example, revised TILA
Section 171(a), which the Board proposes to implement in a new Sec.
226.55, as discussed elsewhere in this Federal Register notice
generally prohibits increases in annual percentage rates, fees, and
finance charges applicable to outstanding balances, subject to several
exceptions. In addition, revised TILA Section 171(b) requires, for
certain types of penalty rate increases, that the advance notice state
the reason for a rate increase. Finally, for penalty rate increases
applied to outstanding balances when the consumer fails to make a
minimum payment within 60 days after the due date, as permitted by
revised TILA Section 171(b)(4), a creditor will be required to disclose
in the notice of the increase that the increase will be terminated if
the consumer makes the subsequent six minimum payments on time.
January 2009 Regulation Z Rule and July 2009 Regulation Z Interim Final
Rule
As discussed in I. Background and Implementation of the Credit Card
Act, the Board is proposing to implement the changes contained in the
Credit Card Act in a manner consistent with the January 2009 Regulation
Z Rule, to the extent permitted under the statute. Accordingly, the
Board is proposing to retain those requirements of the January 2009
Regulation Z Rule that are not directly affected by the Credit Card Act
in this rulemaking, concurrently with the promulgation of regulations
implementing the provisions of the Credit Card Act effective February
22, 2010.\14\ Consistent with this approach, the Board is proposing to
use Sec. 226.9(c)(2) of the January 2009 Regulation Z Rule as the
basis for its regulations to implement the change-in-terms requirements
of the Credit Card Act. Proposed Sec. 226.9(c)(2) also is intended,
except where noted, to contain requirements that are substantively
equivalent to the requirements of the July 2009 Regulation Z Interim
Final Rule. Accordingly, the Board is proposing to adopt a revised
version of Sec. 226.9(c)(2) of the January 2009 Regulation Z Rule,
with several amendments necessary to conform to the new Credit Card
Act. While the Board is republishing revised Sec. 226.9(c)(2) and the
associated commentary in its entirety, this supplementary information
will focus on highlighting those aspects in which proposed Sec.
226.9(c)(2) differs from Sec. 226.9(c)(2) of the January 2009
Regulation Z Rule.
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\14\ However, as discussed in I. Background and Implementation
of the Credit Card Act, the Board intends to leave in place the
mandatory compliance date for certain aspects of proposed Sec.
226.9(c)(2) that are not directly required by the Credit Card Act.
These provisions would have a mandatory compliance date of July 1,
2010, consistent with the effective date that the Board adopted in
the January 2009 Regulation Z Rule. For example, the Board is not
proposing to require a tabular format for certain change-in-terms
notice requirements before the July 1, 2010 effective date.
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May 2009 Regulation Z Proposed Clarifications
On May 5, 2009, the Board published for comment in the Federal
Register proposed clarifications to the January 2009 Regulation Z Rule.
See 74 FR 20784. Several of these proposed clarifications pertain to
the advance notice requirements in Sec. 226.9(c). The Board is
republishing the May 2009 Regulation Z Proposed Clarifications that
affect proposed Sec. 226.9(c)(2), with revisions to the extent
appropriate, as discussed further in this supplementary information.
9(c)(2)(i) Changes Where Written Advance Notice Is Required
Section Sec. 226.9(c)(2) sets forth the change-in-terms notice
requirements for open-end consumer credit plans that are not home-
secured. Proposed paragraph (c)(2)(i) states that a creditor must
generally provide a written notice at least 45 days prior to the
change, when any term required to be disclosed under Sec. 226.6(b)(3),
(b)(4), or (b)(5) is changed or the required minimum periodic payment
is increased, unless an exception applies. This rule is intended to be
substantively equivalent to Sec. 226.9(c)(2) of the January 2009
Regulation Z Rule. The exceptions, as discussed below, are set forth in
proposed paragraph (c)(2)(v). In addition, paragraph (c)(2)(iii)
provides that 45 days' advance notice is not required for those changes
that the Board is not designating as ``significant changes'' in terms
using its authority under new TILA Section 127(i). Proposed Sec.
226.9(c)(2)(iii), which is discussed in more detail in this
supplementary information, also is intended to be equivalent in
substance to the Board's January 2009 Regulation Z Rule.
Proposed Sec. 226.9(c)(2)(i) sets forth two additional
clarifications of the scope of the change-in-terms notice requirements,
consistent with Sec. 226.9(c)(2) of the January 2009 Regulation Z Rule
and the July 2009 Regulation Z Interim Final Rule. First, the 45-day
advance notice requirement does not apply if the consumer has agreed to
the particular change; in that case, the notice need only be given
before the effective date of the change. Second, proposed Sec.
226.9(c)(2) also notes that increases in the rate applicable to a
consumer's account due to delinquency, default, or as a penalty
described in Sec. 226.9(g) that are not made by means of a change in
the contractual terms of a consumer's account must be disclosed
pursuant to that section.
The Board notes that proposed Sec. 226.9(c)(2) would apply to all
open-end (not home-secured) credit, consistent with the January 2009
Regulation Z Rule. TILA Section 127(i), as adopted by the Credit Card
Act and as implemented in the July 2009 Regulation Z Interim Final Rule
for the period between August 20, 2009 and February 22, 2010, applies
only to credit card accounts. However, the advance notice requirements
adopted by the Board in January 2009 apply to all open-end (not home-
secured) credit. For
[[Page 54147]]
consistency with the January 2009 Regulation Z Rule, the proposal
accordingly would apply Sec. 226.9(c)(2) to all open-end (not home-
secured) credit. The Board notes that while the general notice
requirements are consistent for credit card accounts and other open-end
credit that is not home-secured, there are certain content and other
requirements, such as a consumer's right to reject certain changes in
terms, that apply only to credit card accounts. As discussed in more
detail in the supplementary information to Sec. 226.9(c)(2)(iv), the
regulation would apply such requirements only to credit card accounts.
9(c)(2)(ii) Significant Changes in Account Terms
Pursuant to new TILA Section 127(i), the Board has the authority to
determine by rule what are significant changes in the terms of the
cardholder agreement between a creditor and a consumer. The Board is
proposing Sec. 226.9(c)(2)(ii) to identify which changes are
significant changes in terms. Similar to the January 2009 Regulation Z
Rule, Sec. 226.9(c)(2)(ii) would state that for the purposes of Sec.
226.9(c), a significant change in account terms means changes to terms
required to be disclosed in the table provided at account opening
pursuant to Sec. 226.6(b)(1) and (b)(2). The terms included in the
account-opening table are those that the Board determined, based on its
consumer testing, to be the most important to consumers. In the July
2009 Regulation Z Interim Final Rule, the Board had expressly listed
these terms in Sec. 226.9(c)(2)(ii). Because Sec. 226.6(b) was not in
effect as of August 20, 2009, the Board could not identify these terms
by a cross-reference to Sec. 226.6(b). However, proposed Sec.
226.9(c)(2)(ii) is intended to be substantively equivalent to the list
of terms included in Sec. 226.9(c)(2)(ii) of the July 2009 Regulation
Z Interim Final Rule. However, for clarity, the Board is proposing to
amend the text of Sec. 226.9(c)(2)(ii) to cross-reference the
requirements of Sec. 226.6(b)(1) and (b)(2).
9(c)(2)(iii) Charges Not Covered by Sec. 226.6(b)(1) and (b)(2)
Proposed Sec. 226.9(c)(2)(iii) sets forth the disclosure
requirements for changes in terms required to be disclosed under Sec.
226.6(b)(3) that are not significant changes in account terms as
described in Sec. 226.9(c)(2)(ii). Consistent with TILA Section
127(i), the Board is only proposing a 45-day notice period for changes
in the terms that are required to be disclosed as a part of the
account-opening table under proposed Sec. 226.6(b)(1) and (b)(2) or
for increases in the required minimum periodic payment. A different
disclosure requirement would apply when a creditor increases any
component of a charge, or introduces a new charge, that is imposed as
part of the plan under proposed Sec. 226.6(b)(3) but is not required
to be disclosed as part of the account-opening summary table under
proposed Sec. 226.6(b)(1) and (b)(2). Under those circumstances, the
proposal would require the creditor to either, at its option (1)
provide at least 45 days' written advance notice before the change
becomes effective, or (2) provide notice orally or in writing of the
amount of the charge to an affected consumer at a relevant time before
the consumer agrees to or becomes obligated to pay the charge. This is
consistent with the requirements of both the January 2009 Regulation Z
Rule and the July 2009 Regulation Z Interim Final Rule.
9(c)(2)(iv) Disclosure Requirements
Proposed Sec. 226.9(c)(2)(iv) contains the content and formatting
requirements for change-in-terms notices required to be given for
significant changes in account terms pursuant to proposed Sec.
226.9(c)(2)(i). Proposed Sec. 226.9(c)(2)(iv)(A) sets forth the
content that would be required in notices under Sec. 226.9(c)(2)(i)
for all open-end (not home-secured) credit and mirrors the content
required to be disclosed in change-in-terms notices pursuant to the
Board's January 2009 Regulation Z Rule. Notices provided pursuant to
Sec. 226.9(c)(2)(i) would be required to include (1) a summary of the
changes made to terms required by Sec. 226.6(b)(1) and (b)(2) or of
any increase in the required minimum periodic payment, (2) a statement
that changes are being made to the account, (3) for accounts other than
credit card accounts under an open-end consumer credit plan subject to
Sec. 226.9(c)(2)(iv)(B), a statement indicating that the consumer has
the right to opt out of these changes, if applicable, and a reference
to additional information describing the opt-out right provided in the
notice, if applicable, (4) the date the changes will become effective,
(5) if applicable, a statement that the consumer may find additional
information about the summarized changes, and other changes to the
account, in the notice, (6) if the creditor is changing a rate on the
account other than a penalty rate, a statement that if a penalty rate
currently applies to the consumer's account, the new rate referenced in
the notice does not apply to the consumer's account until the
consumer's account balances are no longer subject to the penalty rate,
and (7) if the change in terms being disclosed is an increase in an
annual percentage rate, the balances to which the increased rate will
be applied and, if applicable, a statement identifying the balances to
which the current rate will continue to apply as of the effective date
of the change in terms.
The content required by proposed Sec. 226.9(c)(2)(iv)(A) generally
mirrors the content required under Sec. 226.9(c)(2)(iii) of the
January 2009 Regulation Z Rule. Creditors would be required to disclose
information regarding the balances to which the increased rate will
apply as well as a statement, if applicable, identifying balances to
which the current rate will continue to apply as of the effective date
of the increase. This content was not included in the July 2009
Regulation Z Interim Final Rule because at that time there were no
substantive limitations regarding rate increases equivalent to those in
proposed Sec. 226.55. However, consistent with the January 2009
Regulation Z Rule, the Board believes that a statement identifying to
which balances an increased rate will apply to is an important
disclosure in light of Sec. 226.55, in order to permit consumers to
make informed decisions about their account usage.
In addition, the Board is proposing to require a disclosure
regarding any applicable right to opt out of changes under proposed
Sec. 226.9(c)(2)(iv)(A)(3) only if the change is being made to an
open-end (not home-secured) credit plan that is not a credit card
account subject to Sec. 226.9(c)(2)(iv)(B). For credit card accounts,
as discussed below and in the supplementary information to Sec. Sec.
226.9(h) and 226.55, the Credit Card Act imposes independent
substantive limitations on rate increases, and generally provides the
consumer with a right to reject other significant changes being made to
their accounts. A disclosure of this right to reject, when applicable,
is required for credit card accounts under proposed Sec.
226.9(c)(2)(iv)(B). Therefore, the Board believes a separate reference
to other applicable opt-out rights is unnecessary and may be confusing
to consumers, when the notice is given in connection with a change in
terms applicable to a credit card account.
Proposed Sec. 226.9(c)(2)(iv)(B) sets forth additional content
requirements that are applicable only to credit card accounts under an
open-end (not home-secured) consumer credit plan. In addition to the
information required to be disclosed pursuant to Sec.
226.9(c)(2)(iv)(A), credit card issuers making significant changes to
terms must also disclose certain information regarding the consumer's
right to reject the change pursuant to
[[Page 54148]]
Sec. 226.9(h). The substantive rule regarding the right to reject is
discussed in connection with proposed Sec. 226.9(h); however, the
associated disclosure requirements are set forth in Sec. 226.9(c)(2).
In particular, a card issuer must generally include in the notice (1) a
statement that the consumer has the right to reject the change or
changes prior to the effective date, unless the consumer fails to make
a required minimum periodic payment within 60 days after the due date
for that payment, (2) instructions for rejecting the change or changes,
and a toll-free telephone number that the consumer may use to notify
the creditor of the rejection, and (3) if applicable, a statement that
if the consumer rejects the change or changes, the consumer's ability
to use the account for further advances will be terminated or
suspended. Section 226.9(c)(2)(iv)(B) mirrors requirements made
applicable to credit card issuers in the July 2009 Regulation Z Interim
Final Rule, with several amendments discussed below.
As discussed in the supplementary information to Sec. 226.9(h),
the Board is proposing that a consumer's right to reject would not
extend to increases in the required minimum payment, an increase in an
annual percentage rate applicable to a consumer's account, a change in
the balance computation method applicable to a consumer's account
necessary to comply with the new prohibition on use of ``two-cycle''
balance computation methods in proposed Sec. 226.54, or changes due to
the creditor not receiving the consumer's required minimum periodic
payment within 60 days after the due date for that payment. The July
2009 Regulation Z Interim Final Rule similarly excluded increases in a
consumer's minimum payment from being subject to the right to reject.
The Board also is proposing that the right to reject not apply to rate
increases, because consumers will automatically receive the protections
against rate increases applicable to their balances under proposed
Sec. 226.55 without being required to take any action to reject the
change. The Board recognizes that it would be an anomalous result for
consumers to be able to reject a change in balance computation that is
expressly required under the Credit Card Act and implementing rules.
Finally, the Board would clarify that, as stated in proposed Sec.
226.9(h)(3), the right to reject does not apply when the account is
more than 60 days delinquent. Accordingly, for these types of changes
creditors would not be required to give the disclosures associated with
the right to reject in Sec. 226.9(c)(2)(iv)(B).
Proposed Sec. 226.9(c)(2)(iv)(C) sets forth the formatting
requirements that would apply to notices required to be given pursuant
to Sec. 226.9(c)(2)(i). The proposed formatting requirements are
generally the same as those that the Board adopted in Sec.
226.9(c)(2)(iii) of the January 2009 Regulation Z Rule, except that the
reference to the content of the notice would include, when applicable,
the information about the right to reject that credit card issuers must
disclose pursuant to Sec. 226.9(c)(2)(iv)(B). These formatting
requirements are not affected by the Credit Card Act, and therefore the
Board proposes to adopt them generally as adopted in January 2009.
Accordingly, as discussed in I. Background and Implementation of the
Credit Card Act, the Board is considering making these formatting
requirements mandatory beginning on July 1, 2010, consistent with the
effective date adopted for the January 2009 Regulation Z Rule. In
addition, the Board is proposing to publish revised model forms that
would reflect the new disclosure of the right to reject, when
applicable.
The Board is proposing to amend Sample G-20 and to add a new sample
G-21 to illustrate how a card issuer may comply with the requirements
of proposed Sec. 226.9(c)(2)(iv). The Board would amend references to
these samples in Sec. 226.9(c)(2)(iv) and comment 9(c)(2)(iv)-8
accordingly. Proposed Sample G-20 is a disclosure of a rate increase
applicable to a consumer's credit card account. The sample explains
when the new rate will apply to new transactions and to which balances
the current rate will continue to apply. Sample G-21 illustrates an
increase in the consumer's late payment and returned payment fees, and
sets forth the content required in order to disclose the consumer's
right to reject those changes.
9(c)(2)(v) Notice Not Required
The Board is proposing Sec. 226.9(c)(2)(v) to set forth the
exceptions to the general change-in-terms notice requirements for open-
end (not home-secured) credit. With several exceptions noted below,
proposed Sec. 226.9(c)(2)(v) is intended to be substantively
equivalent to Sec. 226.9(c)(2)(v) of the July 2009 Regulation Z
Interim Final Rule. Proposed Sec. 226.9(c)(2)(v)(A) would retain
several exceptions that are in current Sec. 226.9(c), including
charges for documentary evidence, reductions of finance charges,
suspension of future credit privileges (except as provided in Sec.
226.9(c)(vi), discussed below), termination of an account or plan, or
when the change results from an agreement involving a court proceeding.
The Board is not including these changes in the set of ``significant
changes'' giving rise to notice requirements pursuant to new TILA
Section 127(i)(2). The Board believes that 45 days' advance notice is
not necessary for these changes, which are not of the type that
generally result in the imposition of a fee or other charge on a
consumer's account that could come as a costly surprise. In addition,
the Board believes that for safety and soundness reasons, issuers
generally have a legitimate interest in suspending credit privileges or
terminating an account or plan when a consumer's creditworthiness
deteriorates, and that 45 days' advance notice of these types of
changes therefore would not be appropriate.
Proposed Sec. 226.9(c)(2)(v)(B) sets forth an exception contained
in the Credit Card Act for increases in annual percentage rates upon
the expiration of a specified period of time, provided that prior to
the commencement of that period, the creditor disclosed to the consumer
clearly and conspicuously in writing the length of the period and the
annual percentage rate that would apply after that period. As discussed
below, this disclosure would be required to be provided in close
proximity and equal prominence to any disclosure of the rate that
applies during that period, ensuring that it would be provided at the
same time the consumer is informed of the temporary rate. In addition,
in order to fall within this exception, the annual percentage rate that
applies after the period ends may not exceed the rate previously
disclosed.
The exception generally mirrors the statutory language, except for
two additional requirements. First, the Board's proposal expressly
provides, consistent with July 2009 Regulation Z Interim Final Rule and
the standard for Regulation Z disclosures under Subpart B that the
disclosure of the period and annual percentage rate that will apply
after the period is generally required to be in writing. See Sec.
226.5(a)(1). Second, pursuant to its authority under TILA Section
105(a) to prescribe regulations to effectuate the purposes of TILA, the
Board is proposing to require that the disclosure of the length of the
period and the annual percentage rate that would apply upon expiration
of the period be set forth in close proximity and equal prominence to
any disclosure of the rate that applies during the specified period of
time. 15 U.S.C. 1604(a). The Board believes that both of
[[Page 54149]]
these requirements are appropriate in order to ensure that consumers
receive, comprehend, and are able to retain the disclosures regarding
the rates that will apply to their transactions.
Proposed comment 9(c)(2)(v)-5 clarifies the timing of the
disclosure requirements for telephone purchases financed by a merchant
or private label credit card issuer. The Board is aware that the
general requirement in the July 2009 Regulation Z Interim Final Rule
that written disclosures be provided prior to commencement of the
period during which a temporary rate will be in effect has caused some
confusion for merchants who offer a promotional rate on the telephone
to finance the purchase of goods. In order to clarify the application
of the rule to such merchants, proposed comment 9(c)(2)(v)-5 would
state that the timing requirements of Sec. 226.9(c)(2)(v)(B) are
deemed to have been met, and written disclosures required by Sec.
226.9(c)(2)(v)(B) may be provided as soon as reasonably practicable
after the first transaction subject to a temporary rate if: (1) The
first transaction subject to the temporary rate occurs when a consumer
contacts a merchant by telephone to purchase goods and at the same time
the consumer accepts an offer to finance the purchase at the temporary
rate; (2) the merchant or third-party creditor permits consumers to
return any goods financed subject to the temporary rate and return the
goods free of cost after the merchant or third-party creditor has
provided the written disclosures required by Sec. 226.9(c)(2)(v)(B);
and (3) the disclosures required by Sec. 226.9(c)(2)(v)(B) and the
consumer's right to reject the temporary rate offer and return the
goods are disclosed to the consumer as part of the offer to finance the
purchase. This clarification mirrors a timing rule for account-opening
disclosures provided by merchants financing the purchase of goods by
telephone under Sec. 226.5(b)(1)(iii) of the January 2009 Regulation Z
Rule.
The Board is also aware of operational issues arising from
application of Sec. 226.9(c)(2)(v)(B) of the July 2009 Regulation Z
Interim Final Rule to deferred interest or other promotional rate
offers made at the time that a consumer is financing a purchase made at
point of sale. At the present time, the systems available to provide
disclosures to consumers at point of sale may not have access to the
rate currently applicable to purchases made on the consumer's account.
This could occur, for example, if the issuer offers a promotion to
consumers with existing credit card accounts, and not all consumers in
the portfolio have the same rate applicable to purchases. In addition,
some consumers' accounts may currently be at a penalty rate that
differs from the standard rates on accounts in the portfolio. The Board
is aware that such issuers are encountering difficulty, at the present
time, providing the disclosure required by Sec. 226.9(c)(2)(v)(B),
which requires that the rate that will apply after the expiration of
the promotional period be disclosed.
This proposal, consistent with section 226.9(c)(2)(v)(B) of the
July 2009 Regulation Z Interim Final Rule, requires disclosure of the
specific rate that will apply to a given consumer's account after the
expiration of a deferred interest or other promotional rate offer. The
Board believes that, in general, the statutory requirement is best
implemented by a rule stating that a single rate must be disclosed.
However, the Board is supplementing its transition guidance to the July
2009 Regulation Z Interim Final Rule to state, that for a brief period
necessary to update their systems to disclose a single rate, issuers
offering a deferred interest or other promotional rate program at point
of sale may disclose a range of rates or an ``up to'' rate rather than
a single rate. The Board notes that stating a range of rates or ``up
to'' rate is only permissible for a brief transition period and expects
that merchants and creditors will disclose a single rate that will
apply when a deferred interest or other promotional rate expires in
accordance with Sec. 226.9(c)(2)(v)(B) as soon as possible.
The Board is retaining in the proposal comment 9(c)(2)(v)-6 from
the July 2009 Regulation Z Interim Final Rule (redesignated as comment
9(c)(2)(v)-7) to clarify that an issuer offering a deferred interest or
similar program may utilize the exception in Sec. 226.9(c)(2)(v)(B).
The comment also provides examples of how the required disclosures can
be made for deferred interest or similar programs. The Board continues
to believe that the application of Sec. 226.9(c)(2)(v)(B) to deferred
interest arrangements is consistent with the Credit Card Act and that
this clarification remains necessary in order to ensure that the
proposed rule does not have unintended adverse consequences for
deferred interest promotions.
The Board is proposing to retain generally as adopted in the July
2009 Regulation Z Interim Final Rule Sec. 226.9(c)(2)(v)(C), which
also implements an exception contained in the Credit Card Act, for
increases in variable annual percentage rates in accordance with a
credit card or other account agreement that provides for a change in
the rate according to operation of an index that is not under the
control of the creditor and is available to the general public. The
Board is proposing a minor amendment to the text of Sec.
226.9(c)(2)(v)(C) to reflect the fact that this exception would apply
to all open-end (not home-secured) credit. The Board believes that even
absent this express exception, such a rate increase would not generally
be a change in the terms of the cardholder or other account agreement
that gives rise to the requirement to provide 45 days' advance notice,
because the index, margin, and frequency with which the annual
percentage rate will vary will all be specified in the cardholder or
other account agreement in advance. However, in order to clarify that
45 days' advance notice is not required for a rate increase that occurs
due to adjustments in a variable rate tied to an index beyond the
creditor's control, the Board is proposing to retain Sec.
226.9(c)(2)(v)(C) of the July 2009 Regulation Z Interim Final Rule.
Finally, the proposal retains Sec. 226.9(c)(2)(v)(D) from the July
2009 Regulation Z Interim Final Rule, with several changes. Section
226.9(c)(2)(v)(D) implements a statutory exception for increases in
rates or fees or charges due to the completion of, or a consumer's
failure to comply with the terms of, a workout or temporary hardship
arrangement provided that the annual percentage rate or fee or charge
applicable to a category of transactions following the increase does
not exceed the rate that applied prior to the commencement of the
workout or temporary hardship arrangement.
The Board notes that the exception in proposed Sec.
226.9(c)(2)(v)(D) applies both to completion of or failure to comply
with a workout arrangement. In the July 2009 Regulation Z Interim Final
Rule, the Board had implemented the exception that applies to
completion of an arrangement is implemented in Sec. 226.9(c)(2)(v)(D),
while the exception applicable to failure to comply with a workout or
temporary hardship arrangement was implemented in Sec. 226.9(g). For
clarity, the Board is proposing to implement both of these exceptions
in a single Sec. 226.9(c)(2)(v)(D). The exception is conditioned on
the creditor's having clearly and conspicuously disclosed, prior to the
commencement of the arrangement, the terms of the arrangement
(including any such increases due to such completion). The Board notes
that the statutory exception applies in the event of either completion
[[Page 54150]]
of, or failure to comply with, the terms of such a workout or temporary
hardship arrangement. This exception also generally mirrors the
statutory language, except that the Board has expressly provided that
the disclosures regarding the workout or temporary hardship arrangement
are required to be in writing.
The Board proposes to retain comment 9(c)(2)(v)-5 from the July
2009 Regulation Z Interim Final Rule (redesignated as comment
9(c)(2)(v)-6), which is applicable to the exceptions in both Sec.
226.9(c)(2)(v)(B) and (c)(2)(v)(D), and provides additional
clarification regarding the disclosure of variable annual percentage
rates. The comment provides that if the creditor is disclosing a
variable rate, the notice must also state that the rate may vary and
how the rate is determined. The comment sets forth an example of how a
creditor may make this disclosure. The Board believes that the fact
that a rate is variable is an important piece of information of which
consumers should be aware prior to commencement of a deferred interest
promotion, a promotional rate, or a stepped rate program.
Finally, the Board also proposes to retain comment 9(c)(2)(v)-7 of
the July 2009 Regulation Z Interim Final Rule (redesignated as comment
9(c)(2)(v)-8), which provides clarification as to what terms must be
disclosed in connection with a workout or temporary hardship
arrangement. The comment states that in order for the exception to
apply, the creditor must disclose to the consumer the rate that will
apply to balances subject to the workout or temporary hardship
arrangement, as well as the rate that will apply if the consumer
completes or fails to comply with the terms of, the workout or
temporary hardship arrangement. For consistency with proposed Sec.
226.55(b)(5)(i), the Board proposes to revise the comment to also state
that the creditor must disclose the amount of any reduced fee or charge
of a type required to be disclosed under Sec. 226.6(b)(2)(ii),
(b)(2)(iii), or (b)(2)(xii) that will apply to balances subject to the
arrangement, as well as the fee or charge that will apply if the
consumer completes or fails to comply with the terms of the
arrangement. The notice also must state, if applicable, that the
consumer must make timely minimum payments in order to remain eligible
for the workout or temporary hardship arrangement. The Board believes
that it is important for a consumer to be notified of his or her
payment obligations pursuant to a workout or similar arrangement, and
that the rate, fee or charge may be increased if he or she fails to
make timely payments.
9(c)(2)(vi) Reduction of the Credit Limit
Consistent with the January 2009 Regulation Z Rule and the July
2009 Regulation Z Interim Final Rule, the Board is proposing to retain
Sec. 226.9(c)(2)(vi) to address notices of changes in a consumer's
credit limit. Section 226.9(c)(2)(vi) requires an issuer to provide a
consumer with 45 days' advance notice that a credit limit is being
decreased or will be decreased prior to the imposition of any over-the-
limit fee or penalty rate imposed solely as the result of the balance
exceeding the newly decreased credit limit. The Board is not including
a decrease in a consumer's credit limit itself as a significant change
in a term that requires 45 days' advance notice, for several reasons.
First, the Board recognizes that creditors have a legitimate interest
in mitigating the risk of a loss when a consumer's creditworthiness
deteriorates, and believes there would be safety and soundness concerns
with requiring creditors to wait 45 days to reduce a credit limit.
Second, the consumer's credit limit is not a term generally required to
be disclosed under Regulation Z or TILA. Finally, the Board believes
that Sec. 226.9(c)(2)(vi) adequately protects consumers against the
two most costly surprises potentially associated with a reduction in
the credit limit, namely, fees and rate increases, while giving a
consumer adequate time to mitigate the effect of the credit line
reduction.
Furthermore, proposed Sec. 226.55 would prohibit a creditor from
applying an increased rate, fee, or charge to an existing balance as a
result of transactions that exceeded the credit limit. In addition,
proposed Sec. 226.56 would allow a creditor to charge a fee for
transactions that exceed the credit limit only when the consumer has
consented to such transactions.
Proposed Changes to Commentary to Sec. 226.9(c)(2)
The commentary to Sec. 226.9(c)(2) generally is consistent with
the commentary to Sec. 226.9(c)(2) of the January 2009 Regulation Z
Rule, except for technical changes or changes discussed below. In
addition, as discussed above, the Board is proposing to adopt new
comment 9(c)(2)(v)-5 (and to renumber comments 9(c)(2)(v)-5 through
9(c)(2)(v)-7 of the July 2009 Regulation Z Interim Final Rule
accordingly as comments 9(c)(2)(v)-6 through 9(c)(2)(v)-8).
The Board is proposing to amend comment 9(c)(2)(i)-6 to reference
examples in Sec. 226.55 that illustrate how the advance notice
requirements in Sec. 226.9(c) relate to the substantive rule regarding
rate increases in proposed Sec. 226.55. In the January 2009 Regulation
Z Rule, comment 9(c)(2)(i)-6 referred to the commentary to Sec.
226.9(g). Because, as discussed in the supplementary information to
Sec. 226.55, the Credit Card Act moved the substantive rule regarding
rate increases into Regulation Z, the Board believes that it is not
necessary to repeat the examples under Sec. 226.9.
The Board also proposes to amend comment 9(c)(2)(v)-2 (adopted in
the January 2009 Regulation Z Rule as comment 9(c)(2)(iv)-2) in order
to conform with the new substantive and notice requirements of the
Credit Card Act. This comment addresses the disclosures that must be
given when a credit program allows consumers to skip or reduce one or
more payments during the year or involves temporary reductions in
finance charges. However, new Sec. 226.9(c)(2)(v)(B) requires a
creditor to provide a notice of the period for which a temporarily
reduced rate will be in effect, as well as a disclosure of the rate
that will apply after that period, in order for a creditor to be
permitted to increase the rate at the end of the period without
providing 45 days' advance notice. Similarly, Sec. 226.55, discussed
elsewhere in this supplementary information, requires a creditor to
provide advance notice of a temporarily reduced rate if a creditor
wants to preserve the ability to raise the rate on balances subject to
that temporarily reduced rate. Accordingly, the Board is proposing
amendments to clarify that if a credit program involves temporary
reductions in an interest rate, no notice of the change in terms is
required either prior to the reduction or upon resumption of the higher
rates if these features are disclosed in advance in accordance with the
requirements of Sec. 226.9(c)(2)(v)(B). See proposed comment 55(b)-3.
The proposed comment further clarifies that if a creditor does not
provide advance notice in accordance with Sec. 226.9(c)(2)(v)(B), that
it must provide a notice that complies with the timing requirements of
Sec. 226.9(c)(2)(i) and the content and format requirements of Sec.
226.9(c)(2)(iv)(A), (B) (if applicable), and (C). The proposed comment
notes that creditors should refer to Sec. 226.55 for additional
restrictions on resuming the original rate that is applicable to credit
card accounts under an open-end (not home-secured) plan.
[[Page 54151]]
May 2009 Regulation Z Proposed Clarifications
As discussed in I. Background and Implementation of the Credit Card
Act, the Board is generally republishing the May 2009 Regulation Z
Proposed Clarifications in connection with this proposed rule.
Accordingly, the Board is republishing proposed amendments to Sec.
226.9(c)(2)(v) (proposed as Sec. 226.9(c)(2)(iv) of the May 2009
Regulation Z Proposed Clarifications) and comments 9(c)(2)-4 and
9(c)(2)(i)-3.
The Board is republishing revisions to Sec. 226.9(c)(2)(v)
(proposed in May 2009 as Sec. 226.9(c)(2)(iv)) and proposed comment
9(c)(2)-4, which clarifies the relationship between the change-in-terms
requirements of Sec. 226.9(c) and the notice provisions of Sec.
226.9(b) that apply when a creditor adds a credit feature or delivers a
credit access device for an existing open-end plan. See 74 FR 20787 for
further discussion of these proposed amendments.
Section 226.9(c)(2)(i), as proposed and under the January 2009
Regulation Z Rule, provides that the 45-day advance notice timing
requirement does not apply if the consumer has agreed to a particular
change. In this case, notice must be given before the effective date of
the change. Comment 9(c)(2)(i)-3 states that the provision is intended
for use in ``unusual instances,'' such as when a consumer substitutes
collateral or when the creditor may advance additional credit only if a
change relatively unique to that consumer is made. In May 2009, the
Board proposed to amend the comment to emphasize the limited scope of
the exception and provide that the exception applies ``solely'' to the
unique circumstances specifically identified in the comment. See 74 FR
20788. The proposed comment would also add an example of an occurrence
that would not be considered an ``agreement'' for purposes of relieving
the creditor of its responsibility to provide an advance change-in-
terms notice. This example would state that an ``agreement'' does not
include a consumer's request to reopen a closed account or to upgrade
an existing account to another account offered by the creditor with
different credit or other features. Thus, a creditor that treats an
upgrade of a consumer's account as a change in terms would be required
to provide the consumer 45 days' advance notice before increasing the
rate for new transactions or increasing the amount of any applicable
fees to the account in those circumstances.
The Board is aware that some creditors have raised concerns about
the 45-day notice requirement causing an undue delay when a consumer
requests that his or her account be changed to a different product
offered by the creditor, for example to take advantage of a rewards or
other program. The Board has sought, in part, to address these concerns
in proposed comment 5(b)(1)(i)-6, discussed above. The Board also
continues to believe that the proposed clarification to comment
9(c)(2)(i)-3 is appropriate for those circumstances in which a creditor
treats an upgrade of an account as a change-in-terms in accordance with
proposed comment 5(b)(1)(i)-6. In addition, it would be difficult to
define by regulation the circumstances under which a consumer is deemed
to have requested the account upgrade, versus circumstances in which
the upgrade is suggested by the creditor. The Board seeks further
comment on the operational and other burdens that would be associated
with the proposed revision to comment 9(c)(2)(i)-3.
9(e) Disclosures Upon Renewal of Credit or Charge Card
The Credit Card Act amended TILA Section 127(d), which sets forth
the disclosures that card issuers must provide in connection with
renewal of a consumer's credit or charge card account. 15 U.S.C.
1637(d). TILA Section 127(d) is implemented in Sec. 226.9(e), which
currently requires card issuers that assess an annual or other fee
based on inactivity or activity, on a credit card account of the type
subject to Sec. 226.5a, to provide a renewal notice before the fee is
imposed. The creditor must provide disclosures required for credit card
applications and solicitations (although not in a tabular format) and
must inform the consumer that the renewal fee can be avoided by
terminating the account by a certain date. The notice must generally be
provided at least 30 days or one billing cycle, whichever is less,
before the renewal fee is assessed on the account. Under current Sec.
226.9(e), there is an alternative delayed notice procedure where the
fee can be assessed provided the fee is reversed if the consumer is
given notice and chooses to terminate the account.
The Credit Card Act amended TILA Section 127(d) to eliminate the
provision permitting creditors to provide an alternative delayed
notice. Thus, all creditors will be required to provide the renewal
notice described in Sec. 226.9(e)(1) prior to imposition of any annual
or other periodic fee to renew a credit or charge card account of the
type subject to Sec. 226.5a, including any fee based on account
activity or inactivity. Creditors may no longer assess the fee and
provide a delayed notice offering the consumer the opportunity to
terminate the account and have the fee reversed. Accordingly, the Board
is proposing to delete Sec. 226.9(e)(2) and to renumber Sec.
226.9(e)(3) as Sec. 226.9(e)(2). The Board also proposes technical
conforming changes to comments 9(e)-7, 9(e)(2)-1 (currently comment
9(e)(3)-1), and 9(e)(2)-2 (currently comment 9(e)(3)-2).
In addition, amended TILA Section 127(d) provides that a card
issuer that has changed or amended any term of the account since the
last renewal that has not been previously disclosed must provide the
renewal disclosure, even if that card issuer does not charge a periodic
or other fee for renewal of the credit or charge card account. The
Board proposes to amend Sec. 226.9(e)(1) to provide that the renewal
notice must be provided in those circumstances. The amended language in
proposed Sec. 226.9(e)(1) would state, in part, that any card issuer
that has changed or amended any term of a cardholder's account required
to be disclosed under Sec. 226.6(b)(1) and (b)(2) that has not
previously been disclosed to the consumer, shall mail or deliver
written notice of the renewal to the cardholder. The Board proposes to
use its authority pursuant to TILA Section 105(a) to clarify that the
requirement to provide the renewal disclosures due to a change in
account terms applies only if the change has not been previously
disclosed and is a change of the type required to be disclosed in the
table provided at account opening.
The Board notes that in most cases, changes to terms required to be
disclosed pursuant to Sec. 226.6(b)(1) and (b)(2) will be required to
be disclosed 45 days in advance in accordance with Sec. 226.9(c)(2).
However, there are several types of changes to terms required to be
disclosed under Sec. 226.6(b)(1) and (b)(2) for which advance notice
is not required under Sec. 226.9(c)(2)(v)(1), including reductions in
finance and other charges and the extension of a grace period. The
Board believes that such changes are generally beneficial to the
consumer, and therefore a 45-day advance notice requirement is not
appropriate for these changes. However, the Board believes that
requiring creditors to send consumers subject to such changes a notice
prior to renewal disclosing key terms of their accounts will promote
the informed use of credit by consumers. The notice will remind
consumers of the key terms of their accounts, including any reduced
rates or extended
[[Page 54152]]
grace periods that apply, when consumers are making a decision as to
whether to renew their account and how to use the account in the
future.
The Board considered an alternative interpretation of amended TILA
Section 127(d) that would have required that the renewal disclosures be
provided for all changes in account terms that have not been previously
disclosed, even changes that are not required to be disclosed pursuant
to Sec. 226.6(b)(1) and (b)(2). Such an interpretation of the statute
would require that the renewal disclosures be given even when creditors
have made relatively minor changes to the account terms, such as by
increasing the amount of a fee to expedite delivery of a credit card.
However, the Board believes that providing a renewal notice in these
circumstances would not provide a meaningful benefit to consumers.
Amended TILA Section 127(d) requires only that the renewal disclosure
contain the information set forth in TILA Sections 127(c)(1)(A) and
(c)(4)(A), which are implemented in Sec. 226.5a(b)(1) through (b)(7).
These sections require disclosure of key terms of a credit card account
including the annual percentage rates applicable to the account, annual
or other periodic membership fees, minimum finance charges, transaction
charges on purchases, the grace period, balance computation method, and
disclosure of similar terms for charge card accounts. The Board notes
that the required disclosures all address terms required to be
disclosed pursuant to Sec. 226.6(b)(1) and (b)(2). Therefore, if the
rule required that the renewal disclosures be provided for any change
in terms, such as a change in a fee for expediting delivery of a credit
card, the renewal disclosures would not disclose the amount of the
changed fee. The Board also notes that charges imposed as part of an
open-end (not home-secured) plan that are not required to be disclosed
pursuant to Sec. 226.6(b)(1) and (b)(2) are required to be disclosed
to consumers prior to their imposition pursuant to Sec.
226.5(b)(1)(ii).
Proposed Sec. 226.9(e)(1) would further clarify the timing of the
notice requirement when a card issuer has changed a term on the account
but does not impose an annual or other periodic fee for renewal, by
stating that if the card issuer has changed or amended any term
required to be disclosed under Sec. 226.6(b)(1) and (b)(2) and such
changed or amended term has not previously been disclosed to the
consumer, the notice shall be provided at least 30 days prior to the
scheduled renewal date of the consumer's credit or charge card.
Accordingly, card issuers that do not charge periodic or other fees for
renewal of the credit or charge card account, and who have previously
disclosed any changed terms pursuant to Sec. 226.9(c)(2) are not
required to provide renewal disclosures pursuant to proposed Sec.
226.9(e).
9(g) Increase in Rates Due to Delinquency or Default or as a Penalty
9(g)(1) Increases Subject to This Section
The Board is proposing to adopt Sec. 226.9(g) substantially as
adopted in the January 2009 Regulation Z Rule, except as required to be
amended for conformity with the Credit Card Act. Proposed Sec.
226.9(g), in combination with amendments to Sec. 226.9(c), implements
the 45-day advance notice requirements for rate increases in new TILA
Section 127(i). This approach is consistent with the Board's January
2009 Regulation Z Rule and the July 2009 Regulation Z Interim Final
Rule, each of which included change-in-terms notice requirements in
Sec. 226.9(c) and increases in rates due to the consumer's default or
delinquency or as a penalty for events specified in the account
agreement in Sec. 226.9(g). The general rule is set forth in proposed
Sec. 226.9(g)(1) and provides that for open-end plans other than home-
equity plans subject to the requirements of Sec. 226.5b, a creditor
must provide a written notice to each consumer who may be affected when
a rate is increased due to a delinquency or default or as a penalty for
one or more events specified in the account agreement.
9(g)(2) Timing of Written Notice
Proposed paragraph (g)(2) sets forth the timing requirements for
the notice described in paragraph (g)(1), and states that the notice
must be provided at least 45 days prior to the effective date of the
increase. The notice must, however, be provided after the occurrence of
the event that gave rise to the rate increase. That is, a creditor must
provide the notice after the occurrence of the event or events that
trigger a specific impending rate increase and may not send a general
notice reminding the consumer of the conditions that may give rise to
penalty pricing. For example, a creditor may send a consumer a notice
pursuant to Sec. 226.9(g) if the consumer makes a payment that is one
day late disclosing a rate increase applicable to new transactions, in
accordance with Sec. 226.55. However, a more general notice reminding
a consumer who makes timely payments that paying late may trigger
imposition of a penalty rate would not be sufficient to meet the
requirements of Sec. 226.9(g) if the consumer subsequently makes a
late payment.
9(g)(3) Disclosure Requirements for Rate Increases
Proposed paragraph (g)(3) sets forth the content and formatting
requirements for notices provided pursuant to Sec. 226.9(g). Proposed
Sec. 226.9(g)(3)(i)(A) sets forth the content requirements applicable
to all open-end (not home-secured) credit plans. Similar to the
approach discussed above with regard to Sec. 226.9(c)(2)(iv), the
Board is proposing a separate Sec. 226.9(g)(3)(i)(B) that would
contain additional content requirements required under the Credit Card
Act that are applicable only to credit card accounts under an open-end
(not home-secured) consumer credit plan.
Proposed Sec. 226.9(g)(3)(i)(A) provides that the notice must
state that the delinquency, default, or penalty rate has been
triggered, and the date on which the increased rate will apply. The
notice also must state the circumstances under which the increased rate
will cease to apply to the consumer's account or, if applicable, that
the increased rate will remain in effect for a potentially indefinite
time period. In addition, the notice must include a statement
indicating to which balances the delinquency or default rate or penalty
rate will be applied, and, if applicable, a description of any balances
to which the current rate will continue to apply as of the effective
date of the rate increase, unless a consumer fails to make a minimum
periodic payment within 60 days from the due date for that payment.
Proposed Sec. 226.9(g)(3)(i)(B) sets forth additional content that
credit card issuers must disclose if the rate increase is due to the
consumer's failure to make a minimum periodic payment within 60 days
from the due date for that payment. In those circumstances, the notice
must state the reason for the increase and disclose that the increase
will cease to apply if the creditor receives six consecutive required
minimum periodic payments on or before the payment due date, beginning
with the first payment due following the effective date of the
increase. Proposed Sec. 226.9(g)(3)(i)(B) implements notice
requirements contained in amended TILA Section 171(b)(4), as adopted by
the Credit Card Act, and implemented in proposed Sec. 226.55(b)(4), as
discussed below.
Unlike Sec. 226.9(g)(3) of the July 2009 Regulation Z Interim
Final Rule, the notice proposed under Sec. 226.9(g)(3) need not
disclose the consumer's right to reject the application of the penalty
rate. For the reasons discussed in the
[[Page 54153]]
supplementary information to Sec. 226.9(h), the Board believes that a
right to reject penalty rate increases is unnecessary in light of the
new substantive rule on rate increases in proposed Sec. 226.55.
Accordingly, for penalty rate increases no disclosure of a right to
reject need be provided.
Proposed paragraph (g)(3)(ii) sets forth the formatting
requirements for a rate increase due to default, delinquency, or as a
penalty. These requirements are substantively equivalent to the
formatting rule adopted in Sec. 226.9(g)(3)(ii) of the January 2009
Regulation Z Rule and would require the disclosures required under
Sec. 226.9(g)(3)(i) to be set forth in the form of a table. As
discussed elsewhere in this Federal Register, the formatting
requirements are not directly compelled by the Credit Card Act, and
consequently the Board is considering retaining the original July 1,
2010 effective date of the January 2009 Regulation Z Rule for the
tabular formatting requirements.
The Board is proposing to amend Sample G-21 from the January 2009
Regulation Z Rule (redesignated as Sample G-22) and to add a new sample
G-23 to illustrate how a card issuer may comply with the requirements
of proposed Sec. 226.9(g)(3)(i). The Board would amend references to
these samples in comment 9(g)-8 accordingly. Proposed Sample G-22 is a
disclosure of a rate increase applicable to a consumer's credit card
account based on a late payment that is fewer than 60 days late. The
sample explains when the new rate will apply to new transactions and to
which balances the current rate will continue to apply. Sample G-23
discloses a rate increase based on a delinquency of more than 60 days,
and includes the required content regarding the consumer's ability to
cure the penalty pricing by making the next six consecutive minimum
payments on time.
9(g)(4) Exceptions
Proposed Sec. 226.9(g)(4) sets forth an exception to the advance
notice requirements of Sec. 226.9(g), which is consistent with an
analogous exception contained in the January 2009 Regulation Z Rule and
July 2009 Regulation Z Interim Final Rule. Proposed Sec. 226.9(g)(4)
clarifies the relationship between the notice requirements in Sec.
226.9(c)(vi) and (g)(1) when the creditor decreases a consumer's credit
limit and under the terms of the credit agreement a penalty rate may be
imposed for extensions of credit that exceed the newly decreased credit
limit. This exception is substantively equivalent to Sec.
226.9(g)(4)(ii) of the January 2009 Regulation Z Rule. In addition, it
is generally equivalent to Sec. 226.9(g)(4)(ii) of the July 2009
Regulation Z Interim Final Rule, except that the proposal implements
content requirements analogous to those in proposed Sec.
226.9(g)(3)(i) that pertain to whether the rate applies to outstanding
balances or only to new transactions. See 74 FR 5355 for additional
discussion of this exception.
As discussed in the supplementary information to Sec.
226.9(c)(2)(v), a second exception for an increase in an annual
percentage rate due to the failure of a consumer to comply with a
workout or temporary hardship arrangement contained in the July 2009
Regulation Z Interim Final Rule has been moved to Sec.
226.9(c)(2)(v)(D).
The Board notes that one respect in which proposed Sec.
226.9(g)(4) differs from the January 2009 Regulation Z Rule is that it
does not contain an exception to the 45-day advance notice requirement
for penalty rate increases if the consumer's account becomes more than
60 days delinquent prior to the effective date of a rate increase
applicable to new transactions, for which a notice pursuant to Sec.
226.9(g) has already been provided. As discussed in the supplementary
information to proposed Sec. 226.9(g)(3)(i), amended TILA Section
171(b)(4)(A) requires that specific content be disclosed when a
consumer's rate is increased based on a failure to make a minimum
payment within 60 days of the due date for that payment. Specifically,
TILA Section 171(b)(4)(A) requires the notice to state the reasons for
the increase and that the increase will terminate no later than six
months from the effective date of the change, provided that the
consumer makes the minimum payments on time during that period. The
Board believes that the intent of this provision is to create a right
for consumers whose rate is increased based on a payment that is more
than 60 days late to cure that penalty pricing in order to return to a
lower interest rate.
The Board believes that the disclosures associated with this
ability to cure will be the most useful to consumers if they receive
them after they have already triggered such penalty pricing based on a
delinquency of more than 60 days. Under the Board's proposed rule,
creditors will be required to provide consumers with a notice
specifically disclosing a rate increase based on a delinquency of more
than 60 days, at least 45 days prior to the effective date of that
increase. The notice will state the effective date of the rate
increase, which will give consumers certainty as to the applicable 6-
month period during which they must make timely payments in order to
return to the lower rate. If creditors were permitted to raise the rate
applicable to all of a consumer's balances without providing an
additional notice, consumers may be unsure exactly when their account
became more than 60 days delinquent and therefore may not know the
period in which they need to make timely payments in order to return to
a lower rate.
In addition, the Board notes that the Credit Card Act, as
implemented in proposed Sec. 226.55(b)(4), does not permit a creditor
to raise the interest rate applicable to a consumer's existing balances
unless that consumer fails to make a minimum payment within 60 days
from the due date. This differs from the Board's January 2009 FTC Act
Rule, which permitted such a rate increase based on a failure to make a
minimum payment within 30 days from the due date. The exception in
Sec. 226.9(g)(4)(iii) of the January 2009 Regulation Z Rule reflected
the Board's understanding that some creditors might impose penalty
pricing on new transactions based on a payment that is one or several
days late, and therefore it might be a relatively common occurrence for
consumers' accounts to become 30 days delinquent within the 45-day
notice period provided for a rate increase applicable to new
transactions. The Board believes that, given the 60-day period imposed
by the Credit Card Act and Sec. 226.55(b)(4), it will be less common
for consumers' accounts to become delinquent within the original 45-day
notice period provided for new transactions.
Proposed Changes to Commentary to Sec. 226.9(g)
The commentary to Sec. 226.9(g) generally is consistent with the
commentary to Sec. 226.9(g) of the January 2009 Regulation Z Rule,
except for technical changes. In addition, the Board is proposing to
amend comment 9(g)-1 to reference examples in Sec. 226.55 that
illustrate how the advance notice requirements in Sec. 226.9(g) relate
to the substantive rule regarding rate increases applicable to existing
balances. Because, as discussed in the supplementary information to
Sec. 226.55, the Credit Card Act placed the substantive rule regarding
rate increases into TILA and Regulation Z, the Board believes that it
is not necessary to repeat the examples under Sec. 226.9.
[[Page 54154]]
9(h) Consumer Rejection of Certain Significant Changes in Terms
In the July 2009 Regulation Z Interim Final Rule, the Board adopted
Sec. 226.9(h), which provides that, in certain circumstances, a
consumer may reject significant changes to account terms and increases
in annual percentage rates. See 74 FR 36087-36091, 36096, 36099-36101.
Section 226.9(h) implemented new TILA Section 127(i)(3) and (4),
which--like the other provisions of the Credit Card Act implemented in
the July 2009 Regulation Z Interim Final Rule--went into effect on
August 20, 2009. See Credit Card Act Sec. 101(a) (new TILA Section
127(i)(3)-(4)). However, several aspects of Sec. 226.9(h) were based
on revised TILA Section 171, which--like the other statutory provisions
addressed in this proposed rule--goes into effect on February 22, 2010.
Accordingly, because the Board is now implementing revised TILA Section
171 in proposed Sec. 226.55, the Board proposes to modify Sec.
226.9(h) for clarity and consistency.
Application of Right To Reject to Increases in Annual Percentage Rate
Because revised TILA Section 171 renders the right to reject
redundant in the context of rate increases, the Board proposes to amend
Sec. 226.9(h) to apply that right only to other significant changes to
an account term. Currently, Sec. 226.9(h) provides that, if a consumer
rejects an increase in an annual percentage rate prior to the effective
date stated in the Sec. 226.9(c) or (g) notice, the creditor cannot
apply the increased rate to transactions that occurred within fourteen
days after provision of the notice. See Sec. 226.9(h)(2)(i),
(h)(3)(ii). However, under revised TILA Section 171 (as implemented in
proposed Sec. 226.55), a creditor is generally prohibited from
applying an increased rate to transactions that occurred within
fourteen days after provision of a Sec. 226.9(c) or (g) notice
regardless of whether the consumer rejects that increase. Similarly,
although the exceptions in Sec. 226.9(h)(3)(i) and revised TILA
Section 171(b)(4) permit a creditor to apply an increased rate to an
existing balance when an account becomes more than 60 days delinquent,
revised TILA Section 171(b)(4)(B) (as implemented in proposed Sec.
226.55(b)(4)(ii)) provides that the creditor must terminate the
increase if the consumer makes the next six payments on or before the
payment due date. Thus, with respect to rate increases, the right to
reject does not provide consumers with any meaningful protections
beyond those provided by revised TILA Section 171. Accordingly, the
Board believes that, on or after February 22, 2010, the right to reject
will be unnecessary for rate increases. Indeed, once revised TILA
Section 171 becomes effective, notifying consumers that they have a
right to reject a rate increase could be misleading insofar as it could
imply that a consumer who does so will receive some additional degree
of protection (such as protection against increases in the rate that
applies to future transactions).
Accordingly, the Board proposes to remove references to rate
increases from Sec. 226.9(h) and its commentary. Similarly, because
the exception in Sec. 226.9(h)(3)(ii) for transactions that occurred
more than fourteen days after provision of the notice is based on
revised TILA Section 171(d),\15\ the Board proposes to remove that
exception from Sec. 226.9(h) and incorporate it into proposed Sec.
226.55. Finally, the Board proposes to redesignate comment 9(h)(3)-1 as
comment 9(h)-1 and amend it to clarify that Sec. 226.9(h) does not
apply to increases in an annual percentage rate.
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\15\ See 74 FR 36089-36090.
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Repayment Restrictions
Because the repayment restrictions in Sec. 226.9(h)(2)(iii) are
based on revised TILA Section 171(c), the Board believes that those
restrictions should be implemented with the rest of revised Section 171
in proposed Sec. 226.55. Section 226.9(h)(2)(iii) implemented new TILA
Section 127(i)(4), which expressly incorporated the repayment methods
in revised TILA Section 171(c)(2). Because the rest of revised Section
171 would not be effective until February 22, 2010, the July 2009
Regulation Z Interim Final Rule implemented new TILA Section 127(i)(4)
by incorporating the repayment restrictions in Section 171(c)(2) into
Sec. 226.9(h)(2)(iii). See 74 FR 36089. However, the Board believes
that--once revised TILA Section 171 becomes effective on February 22,
2010--these repayment restrictions should be moved to Sec. 226.55(c).
In addition to being duplicative, implementing revised TILA Section
171(c)'s repayment methods in both Sec. 228.9(h) and Sec. 226.55(c)
would create the risk of inconsistency. Furthermore, because these
restrictions will generally be of greater importance in the context of
rate increases than other significant changes in terms, the Board
believes they should be located in proposed Sec. 226.55. Accordingly,
the Board proposes to move the provisions and commentary regarding
repayment to proposed Sec. 226.55(c)(2) and to amend Sec.
226.9(h)(2)(iii) to include a cross-reference to Sec. 226.55(c)(2).
The Board also proposes to amend comment 9(h)(2)(iii)-1 to clarify
the application of the repayment methods listed in proposed Sec.
226.55(c)(2) in the context of a rejection of a significant change in
terms. As revised, this comment would clarify that, when applying the
methods listed in Sec. 226.55(c)(2) pursuant to Sec.
226.9(h)(2)(iii), a creditor may utilize the date on which the creditor
was notified of the rejection or a later date (such as the date on
which the change would have gone into effect but for the rejection).
For example, when a creditor increases an annual percentage rate
pursuant to Sec. 226.55(b)(3), Sec. 226.55(c)(2)(ii) permits the
creditor to establish an amortization period for a protected balance of
not less than five years, beginning no earlier than the effective date
of the increase. Accordingly, when a consumer rejects a significant
change in terms pursuant to Sec. 226.9(h)(1), Sec. 226.9(h)(2)(iii)
permits the creditor to establish an amortization period for the
balance on the account of not less than five years, beginning no
earlier than the date on which the creditor was notified of the
rejection. The comment provides an illustrative example.
In addition, comment 9(h)(2)(iii)-2 would be revised to clarify the
meaning of ``the balance on the account'' that is subject to the
repayment restrictions in proposed Sec. 226.55(c)(2). The revised
comment would clarify that, when applying the methods listed in Sec.
226.55(c)(2) pursuant to Sec. 226.9(h)(2)(iii), the provisions in
Sec. 226.55(c)(2) and the guidance in the commentary to Sec.
226.55(c)(2) regarding protected balances also apply to a balance on
the account subject to Sec. 226.9(h)(2)(iii). Furthermore, the revised
comment would clarify that, if a creditor terminates or suspends credit
availability based on a consumer's rejection of a significant change in
terms, the balance on the account for purposes of Sec.
226.9(h)(2)(iii) is the balance at the end of the day on which credit
availability was terminated or suspended. However, if a creditor does
not terminate or suspend credit availability, the balance on the
account for purposes of Sec. 226.9(h)(2)(iii) is the balance on a date
that is not earlier than the date on which the creditor was notified of
the rejection. An example is provided.
Additional Revisions to Commentary
Consistent with the proposed revisions discussed above, the Board
proposes to make non-substantive,
[[Page 54155]]
technical amendments to the commentary to Sec. 226.9(h). In addition,
for organizational reasons, the Board proposes to renumber comments
9(h)(2)(ii)-1 and -2. Finally, the Board proposes to amend comment
9(h)(2)(ii)-2 to clarify the application of the prohibition in Sec.
226.9(h)(2)(ii) on imposing a fee or charge solely as a result of the
consumer's rejection of a significant change in terms. In particular,
the revised comment would clarify that, if credit availability is
terminated or suspended as a result of the consumer's rejection, a
creditor is prohibited from imposing a periodic fee that was not
charged before the consumer rejected the change (such as a closed
account fee).
Section 226.10 Payments
Section 226.10, which implements TILA Section 164, currently
contains rules regarding the prompt crediting of payments and is
entitled ``Prompt crediting of payments.'' 15 U.S.C. 1666c. As is
discussed further in the section-by-section analysis, the Board is
proposing to implement several new provisions of the Credit Card Act
regarding payments in Sec. 226.10, such as requirements regarding the
permissibility of certain fees to make expedited payments. Several of
these rules do not pertain directly to the prompt crediting of
payments, but more generally to the conditions that may be imposed upon
payments. Accordingly, the Board is proposing to amend the title of
Sec. 226.10 to ``Payments'' to more accurately reflect the content of
amended Sec. 226.10.
226.10(b) Specific Requirements for Payments
Cut-Off Times for Payments
TILA Section 164 states that payments received by the creditor from
a consumer for an open-end consumer credit plan shall be posted
promptly to the account as specified in regulations of the Board. The
Credit Card Act amended TILA Section 164 to state that the Board's
regulations shall prevent a finance charge from being imposed on any
consumer if the creditor has received the consumer's payment in readily
identifiable form, by 5 p.m. on the date on which such payment is due,
in the amount, manner, and location indicated by the creditor to avoid
the imposition of such a finance charge. While amended TILA Section 164
generally mirrors current TILA Section 164, the Credit Card Act added
the reference to a 5 p.m. cut-off time for payments received on the due
date.
TILA Section 164 is implemented in Sec. 226.10. The Board's
January 2009 Regulation Z Rule addressed cut-off times by providing
that a creditor may specify reasonable requirements for payments that
enable most consumers to make conforming payments. Section
226.10(b)(2)(ii) of the January 2009 Regulation Z Rule stated that a
creditor may set reasonable cut-off times for payments to be received
by mail, by electronic means, by telephone, and in person. Amended
Sec. 226.10(b)(2)(ii) provided a safe harbor for the reasonable cut-
off time requirement, stating that it would be reasonable for a
creditor to set a cut-off time for payments by mail of 5 p.m. on the
payment due date at the location specified by the creditor for the
receipt of such payments. While this safe harbor referred only to
payments received by mail, the Board noted in the supplementary
information to the January 2009 Regulation Z Rule that it would
continue to monitor other methods of payment in order to determine
whether similar guidance was necessary. See 74 FR 5357.
As amended by the Credit Card Act, TILA Section 164 differs from
Sec. 226.10 of the January 2009 Regulation Z Rule in several respects.
First, amended TILA Section 164 applies the requirement that a creditor
treat a payment received by 5 p.m. on the due date as timely to all
forms of payment, not only payments received by mail. In contrast, the
safe harbor regarding cut-off times that the Board provided in Sec.
226.10(b)(2)(ii) of the January 2009 Regulation Z Rule directly
addressed only mailed payments. Second, while the Board's January 2009
Regulation Z Rule left open the possibility that in some circumstances,
cut-off times earlier than 5 p.m. might be considered reasonable,
amended TILA Section 164 prohibits cut-off times earlier than 5 p.m. on
the due date in all circumstances.
The Board proposes to implement amended TILA Section 164 in a
revised Sec. 226.10(b)(2)(ii). Proposed Sec. 226.10(b)(2)(ii) would
state that a creditor may set reasonable cut-off times for payments to
be received by mail, by electronic means, by telephone, and in person,
provided that such cut-off times must be no earlier than 5 p.m. on the
payment due date at the location specified by the creditor for the
receipt of such payments. Creditors would be free to set later cut-off
times; however, no cut-off time would be permitted to be earlier than 5
p.m. This paragraph, in accordance with amended TILA Section 164, would
apply to payments received by mail, electronic means, telephone, or in
person, not only payments received by mail.
Consistent with the January 2009 Regulation Z Rule, proposed Sec.
226.10(b)(2)(ii) refers to the time zone of the location specified by
the creditor for the receipt of payments. The Board believes that this
clarification is necessary to provide creditors with certainty
regarding how to comply with the proposed rule, given that consumers
may reside in different time zones from the creditor. The Board
believes that a rule requiring a creditor to process payments
differently based on the time zone at each consumer's billing address
could impose significant operational burdens on creditors. The Board
solicits comment on whether this clarification continues to be
appropriate for payments made by methods other than mail.
The Board notes that proposed Sec. 226.10(b)(2)(ii) would
generally apply to payments made in person. However, as discussed
below, the Credit Card Act amends TILA Section 127(b)(12) to establish
a special rule for payments on credit card accounts made in person at
branches of financial institutions, which the Board proposes to
implement in new Sec. 226.10(b)(3). Notwithstanding the general rule
in proposed Sec. 226.10(b)(2)(ii), card issuers that are financial
institutions that accept payments in person at a branch or office may
not impose a cut-off time earlier than the close of business of that
office or branch, even if the office or branch closes later than 5 p.m.
Accordingly, a financial institution that accepts payments at a branch
or office that closes at 6 p.m. would be required to treat all payments
received in person at the branch or office prior to 6 p.m. on the due
date as timely. The Board notes that this rule refers only to payments
made in person at the branch or office. Payments made by other means
such as by telephone, electronically, or by mail would be subject to
the general rule prohibiting cut-off times prior to 5 p.m., regardless
of when a financial institution's branches or offices close. The Board
notes that there may be creditors that are not financial institutions
that accept payments in person, such as at a retail location, and
believes that it is necessary for proposed Sec. 226.10(b)(2)(ii) to
refer to payments made in person in order to address cut-off times for
such creditors that are not also subject to proposed Sec.
226.10(b)(3).
The Board notes that the Credit Card Act applies the 5 p.m. cut-off
time requirement to all open-end credit plans, including open-end
(home-secured) credit. Accordingly, proposed Sec. 226.10(b)(2)(ii)
would apply to all
[[Page 54156]]
open-end credit. This is consistent with current Sec. 226.10, which
applies to all open-end credit.
Payments Made at Financial Institution Branches
The Credit Card Act amends TILA Section 127(b)(12) to provide that,
for creditors that are financial institutions which maintain branches
or offices at which payments on credit card accounts are accepted in
person, the date on which a consumer makes a payment on the account at
the branch or office is the date on which the payment is considered to
have been made for purposes of determining whether a late fee or charge
may be imposed. 15 U.S.C. 1637(b)(12). The Board is proposing to
implement the requirements of amended TILA Section 127(b)(12) that
pertain to payments made at branches or offices of a financial
institution in new Sec. 226.10(b)(3). Section 226.10(b)(3), as adopted
in the January 2009 Regulation Z Rule, would accordingly be renumbered
as Sec. 226.10(b)(4).
Proposed Sec. 226.10(b)(3)(i) states that a card issuer that is a
financial institution shall not impose a cut-off time earlier than the
close of business for payments made in person on a credit card account
under an open-end (not home-secured) consumer credit plan at any branch
or office of the card issuer at which such payments are accepted. The
proposed regulation further states that payments made in person at a
branch or office of the financial institution during the business hours
of that branch or office shall be considered received on the date on
which the consumer makes the payment. Proposed Sec. 226.10(b)(3)
interprets amended TILA Section 127(b)(12) as requiring card issuers
that are financial institutions to treat in-person payments they
receive at branches or offices during business hours as conforming
payments that must be credited as of the day the consumer makes the in-
person payment. The Board believes that this is the appropriate reading
of amended TILA Section 127(b)(12) because it is consistent with
consumer expectations that in-person payments made at a branch of the
financial institution will be credited on the same day that they are
made.
The Board notes that neither the Credit Card Act nor TILA defines
``financial institution.'' In order to give clarity to card issuers,
the Board proposes to adopt a definition of ``financial institution,''
for purposes of Sec. 226.10(b)(3), in a new Sec. 226.10(b)(3)(ii).
Proposed Sec. 226.10(b)(3)(ii) would state that ``financial
institution'' has the same meaning as ``depository institution'' as
defined in the Federal Deposit Insurance Act (12 U.S.C. 1813(c)). The
Board believes that this definition effectuates the purposes of amended
TILA Section 127(b)(12) by including all banks and savings
associations, while excluding entities such as retailers that should
not be considered ``financial institutions'' for purposes of proposed
Sec. 226.10(b)(3). The Board solicits comment on whether an
alternative definition would be appropriate. In particular, the Board
solicits comment on whether there are other credit card issuers that
should be considered ``financial institutions'' for purposes of the
rule.
The Board also is proposing a new comment 10(b)-5 to clarify the
application of proposed Sec. 226.10(b)(3) for payments made at point
of sale. Proposed comment 10(b)-5 would state that if a creditor that
is a financial institution issues a credit card that can be used only
for transactions with a particular merchant or merchants, and a
consumer is able to make a payment on that credit card account at a
retail location maintained by such a merchant, that retail location is
not considered to be a branch or office of the creditor for purposes of
Sec. 226.10(b)(3). The Board believes that the intent of TILA Section
127(b)(12) is to apply only to payments made at a branch or office of
the creditor, not to payments made at a location maintained by a third
party that is not the creditor. This comment is intended to clarify
that this rule does not apply when a retailer accepts payments at its
stores for a co-branded or private label credit card that is issued by
a separate financial institution.
Finally, the Board also is proposing a new comment 10(b)-6 to
clarify what constitutes a payment made ``in person'' at a branch or
office of a financial institution. Proposed comment 10(b)-6 would state
that for purposes of Sec. 226.10(b)(3), payments made in person at a
branch or office of a financial institution include payments made with
the direct assistance of, or to, a branch or office employee, for
example a teller at a bank branch. In contrast, the comment would
provide that a payment made at the bank branch without the direct
assistance of a branch or office employee, for example a payment placed
in a branch or office mail slot, is not a payment made in person for
purposes of Sec. 226.10(b)(3). The Board believes that this is
consistent with consumer expectations that payments made with the
assistance of a financial institution employee will be credited
immediately, while payments that are placed in a mail slot or other
receptacle at the branch or office may require additional processing
time.
10(d) Crediting of Payments When Creditor Does Not Receive or Accept
Payments on Due Date
The Credit Card Act adopted a new TILA Section 127(o) that
provides, in part, that if the payment due date for a credit card
account under an open-end consumer credit plan is a day on which the
creditor does not receive or accept payments by mail (including
weekends and holidays), the creditor may not treat a payment received
on the next business day as late for any purpose. 15 U.S.C. 1637(o).
New TILA Section 127(o) is similar to Sec. 226.10(d) of the Board's
January 2009 Regulation Z Rule, with two notable differences. Amended
Sec. 226.10(d) of the January 2009 Regulation Z Rule stated that if
the due date for payments is a day on which the creditor does not
receive or accept payments by mail, the creditor may not treat a
payment received by mail the next business day as late for any purpose.
In contrast, new TILA Section 127(o) provides that if the due date is a
day on which the creditor does not receive or accept payments by mail,
the creditor may not treat a payment received the next business day as
late for any purpose. TILA Section 127(o) applies to payments made by
any method on a due date which is a day on which the creditor does not
receive or accept mailed payments, and is not limited to payments
received the next business day by mail. Second, new TILA Section 127(o)
applies only to credit card accounts under an open-end consumer plan,
while Sec. 226.10(d) of the January 2009 rule applies to all open-end
consumer credit.
The Board is proposing to implement new TILA Section 127(o) in an
amended Sec. 226.10(d). The general rule in proposed Sec. 226.10(d)
would track the statutory language of new TILA Section 127(o) to state
that if the due date for payments is a day on which the creditor does
not receive or accept payments by mail, the creditor may generally not
treat a payment received by any method the next business day as late
for any purpose. The Board is proposing, however, to provide that if
the creditor accepts or receives payments made by a method other than
mail, such as electronic or telephone payments, a due date on which the
creditor does not receive or accept payments by mail, it is not
required to treat a payment made by that method on the next business
day as timely. The Board is proposing this clarification using its
authority under TILA Section 105(a) to make
[[Page 54157]]
adjustments necessary to effectuate the purposes of TILA. 15 U.S.C.
1604(a).
The Board believes that it is not the intent of new TILA Section
127(o) to permit consumers who can make timely payments by methods
other than mail, such as payments by phone, to have an extra day after
the due date to make payments using those methods without those
payments being treated as late. Rather, the Board believes that new
TILA Section 127(o) was intended to address those limited circumstances
in which a consumer cannot make a timely payment on the due date, for
example if it falls on a weekend or holiday and the creditor does not
accept or receive payments on that date. In those circumstances,
without the protections of new TILA Section 127(o), the consumer would
have to make a payment one or more days in advance of the due date in
order to have that payment treated as timely. The Credit Card Act
provides other protections designed to ensure that consumers have
adequate time to make payments, such as amended TILA Section 163, which
was implemented in Sec. 226.5(b) in the July 2009 Regulation Z Interim
Final Rule, which generally requires that creditors mail or deliver
periodic statements to consumers at least 21 days in advance of the due
date. Therefore, proposed Sec. 226.10(d) would provide that if a
creditor receives or accepts payments by a method other than mail on
the due date, the creditor need not treat payments made by that method
on the next business day as timely, even if the creditor does not
receive or accept mailed payments on the due date. For example, if a
creditor receives or accepts electronic payments on a Sunday due date,
that creditor need not treat as timely an electronic payment made on
the following Monday, even if it does not receive or accept payments by
mail on that Sunday due date.
Finally, the Board is proposing to apply amended Sec. 226.10(d) to
all open-end consumer credit plans, not just credit card accounts, even
though new TILA Section 127(o) applies only to credit card accounts.
The Board believes that it is appropriate to have one consistent rule
regarding the treatment of payments when the due date falls on a date
on which the creditor does not receive or accept payments by mail. The
Board believes that that Regulation Z should treat payments on an open-
end plan that is not a credit card account the same as payments on a
credit card account. Regardless of the type of open-end plan, if the
payment due date is a day on which the creditor does not accept or
receive payments by mail, a consumer should not be required to make
payments prior to the due date in order for them to be treated as
timely. This is consistent with Sec. 226.10(d) of the January 2009
Regulation Z Rule, which set forth one consistent rule for all open-end
credit.
10(e) Limitations on Fees Related to Method of Payment
The Credit Card Act adopted new TILA Section 127(l) which generally
prohibits creditors, in connection with a credit card account under an
open-end consumer credit plan, from imposing a separate fee to allow a
consumer to repay an extension of credit or pay a finance charge,
unless the payment involves an expedited service by a customer service
representative. 15 U.S.C. 1637(l). The Board is proposing to implement
TILA Section 127(l) in Sec. 226.10(e). Proposed Sec. 226.10(e) would
generally track the statutory language of new TILA Section 127(l) and
would state that, for credit card accounts under an open-end (not home-
secured) consumer credit plan, a creditor may not impose a separate fee
to allow consumers to make a payment by any method, such as mail,
electronic, or telephone payments, unless such payment method involves
an expedited service by a customer service representative of the
creditor. The text of proposed Sec. 226.10(e) differs from the text of
TILA Section 127(l), in order to clarify that a separate fee for any
payment made to an account is prohibited, with the exception of a
payment involving expedited service by a customer service
representative. See 15 U.S.C. 1604(a).
The Board believes that the intent of new TILA Section 127(l) is to
prohibit the imposition of a separate fee for making any payment,
unless the payment transaction involves expedited service by a customer
service representative. Accordingly, the Board notes that proposed
Sec. 226.10(e) would cover all methods of payment, such as mail,
electronic, and telephone payments. Under proposed Sec. 226.10(e),
consistent with TILA Section 127(i), creditors would be permitted to
charge a separate fee only for those payment transactions that involve
expedited service by a customer service representative. A creditor,
however, would not be permitted to charge a separate fee for payment
transactions that do not involve a customer service representative,
such as payments sent by mail.
The Board is proposing several comments to provide guidance to
creditors in complying with Sec. 226.10(e). Proposed comment 10(e)-1
would clarify that the term ``separate fee'' means any fee imposed on a
consumer for making a single payment to the consumer's account.
Proposed comment 10(e)-1 would clarify, however, that a fees or charge
imposed if payment is made after the due date, such as a late fee or
finance charge, is not a ``separate fee to allow consumers to make a
payment'' for purposes of Sec. 226.10(e).
The Board also proposes to adopt comment 10(e)-2, which clarifies
that the term ``expedited'' means crediting a payment to the account
the same day or, if the payment is received after the creditor's cut-
off time, the next business day.\16\ For example, if a creditor accepts
a nonconforming payment (such as a payment mailed to a branch office
when it had specified the payment be sent to a different location) and
a customer service representative credits the payment to the consumer's
account the same day, the creditor may impose a separate fee. The Board
believes that this standard for determining whether service is
expedited will promote consistent practices among different creditors
and will provide certainty as to how to comply with proposed Sec.
226.10(e). In contrast, it would be difficult to apply a standard
defining expedited service in relation to the time required for a
payment to post using standard mail service because the length of time
for delivery by mail for a given consumer or creditor may vary. In
addition, a standard for determining whether service is expedited based
on proximity to the due date would not address those circumstances in
which consumers may want to make an expedited payment to the account in
advance of the due date, such as in order to increase the amount of
available credit.
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\16\ The Board notes that any cut-off time specified by the
creditor must comply with proposed Sec. 226.10(b)(2)(ii), discussed
earlier in the supplementary information. Furthermore, the Board
notes that the creditor must also comply with Sec. 226.10(a), which
generally requires a creditor to credit payments to the consumer's
account as of the date of receipt, except when a delay in crediting
does not result in a finance or other charge.
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Proposed comment 10(e)-3 would clarify that expedited service by a
live customer service representative of the creditor would be required
in order for a creditor to charge a separate fee to allow consumers to
make a payment. Payments made on the account with the assistance of a
live representative or agent may include payments made in person, on
the telephone, or by electronic means. The Board understands that
automated systems, such as a voice response unit or an interactive
voice response system, are widely used to permit customers to
[[Page 54158]]
make a payment by telephone or other electronic means. The proposed
comment clarifies that a customer service representative does not
include automated payment systems because these transactions do not
involve a live customer service representative.
Section 226.10(f) Changes by Card Issuer
The Credit Card Act adopted new TILA Section 164(c), which provides
that a card issuer may not impose any late fee or finance charge for a
late payment on a credit card account if a card issuer makes ``a
material change in the mailing address, office, or procedures for
handling cardholder payments, and such change causes a material delay
in the crediting of a cardholder payment made during the 60-day period
following the date on which the change took effect.'' 15 U.S.C.
1666c(c). The Board proposes to implement new TILA Section 164(c) in
proposed Sec. 226.10(f).
The text of proposed Sec. 226.10(f) generally follows the language
provided in new TILA Section 164(c) with a modification to clarify the
meaning of ``office.'' With respect to a change in office, the Board
believes the intent of Section 164(c) is to apply only to changes in
the address of a branch or office at which payments on a credit card
account are accepted. See 15 U.S.C. 1604(a). Accordingly, proposed
Sec. 226.10(f) would prohibit a credit card issuer from imposing any
late fee or finance charge for a late payment on a credit card account
if a card issuer makes a material change in the address for receiving
cardholder payments or procedures for handling cardholder payments, and
such change causes a material delay in the crediting of a payment made
during the 60-day period following the date on which the change took
effect. As an initial matter, the Board notes that proposed Sec.
226.10(f) would apply only to credit card accounts under an open-end
(not home-secured) consumer credit plan, consistent with the approach
the Board has taken with regard to other provisions of the Credit Card
Act applicable to credit card accounts.
The Board proposes to adopt comment 10(f)-1 to clarify that
``address for receiving payment'' means a mailing address for receiving
payment, such as a post office box, or the address of a branch or
office at which payments on credit card accounts are accepted.
The Board is also proposing comment 10(f)-2 to provide guidance to
creditors in determining whether a change or delay is material.
Proposed comment 10(f)-2 would clarify that ``material change'' means
any change in address for receiving payment or procedures for handling
cardholder payments which causes a material delay in the crediting of a
payment. Proposed comment 10(f)-2 would further clarify that a
``material delay'' means any delay in crediting a payment to a
consumer's account which would result in a late payment and the
imposition of a late fee or finance charge. The Board understands that
it may be difficult for a card issuer to ascertain, for any given
change in the address for receiving payment or procedures for handling
payments, whether that change did in fact cause a material delay in the
crediting of a consumer's payment.
Proposed comment 10(f)-3 would provide card issuers with a safe
harbor, which the Board believes will give card issuers certainty in
how to comply with the proposed rule. The Board requests comment on
other reasonable methods that card issuers may use in complying with
proposed Sec. 226.10(f). In order to provide additional guidance to
creditors in complying with this rule, proposed comment 10(f)-4
provides illustrative examples consistent with proposed Sec.
226.10(f). For example, assume that a card issuer changes the mailing
address for receiving payments by mail from one post office box number
to another post office box number. The card issuer continues to use
both post office box numbers for the collection of payments received by
mail. The change in mailing address would not cause a material delay in
crediting a payment because payments would be received and credited at
both addresses. Therefore, a card issuer may impose a late fee or
finance charge for a late payment on the account. Furthermore, for
example, assume the same facts as above except the prior post office
box number is no longer valid and mail sent to that address would be
returned to sender. The change in mailing address is material and the
change could cause a material delay in the crediting of a payment
because a payment sent to the old address could be delayed past the due
date. If, as a result, a consumer makes a late payment on the account
during the 60-day period following the date on which the change took
effect, a card issuer may not impose any late fee or finance charge for
the late payment.
Proposed comment 10(f)-5 would clarify that when an account is not
eligible for a grace period, imposing a finance charge due to a
periodic interest rate does not constitute imposition of a finance
charge for a late payment for the purposes of Sec. 226.10(f).
Notwithstanding the proposed rule, a card issuer may impose a finance
charge due to a periodic interest rate in those circumstances.
Section 226.11 Treatment of Credit Balances; Account Termination
11(c) Timely Settlement of Estate Debts
New TILA Section 140A requires that the Board, in consultation with
the Federal Trade Commission and each other agency referred to in Sec.
108(a) of TILA, prescribe regulations requiring creditors, with respect
to credit card accounts under an open-end consumer credit plan, to
establish procedures to ensure that any administrator of an estate can
resolve the outstanding credit balance of a deceased accountholder in a
timely manner. 15 U.S.C. 1651. The Board proposes to implement TILA
Section 140A in new Sec. 226.11(c). In developing this proposal, the
Board consulted with the Federal Trade Commission and the agencies
referred to in Sec. 108(a) of TILA. Proposed Sec. 226.11(c)(1)
requires creditors to adopt reasonable procedures designed to ensure
that any administrator or executor of an estate of a deceased
accountholder can determine the amount of and pay any balance on the
decedent's credit card account in a timely manner. Proposed Sec.
226.11(c) would apply only to credit card accounts under an open-end
(not home-secured) consumer credit plan, consistent with the approach
the Board has taken with regard to other provisions of the Credit Card
Act applicable to credit card accounts.
Proposed Sec. 226.11(c) generally follows the language in TILA
Section 140A with some modification. For clarity, the Board proposes to
interpret the term ``resolve'' for purposes of Sec. 226.11(c) to mean
determine the amount of and pay any balance on a deceased consumer's
account. In addition, in order to ensure that the rule applies
consistently to any personal representative of an estate who has the
duty to settle any estate debt, the Board proposes to include
``executor'' in proposed Sec. 226.11(c). The Board notes that the
duties and responsibilities of administrators and executors are
generally the same; however, it is the Board's understanding that
administrators are distinct from executors in the manner in which they
are appointed. Specifically, an executor is designated by the
decedent's will while an administrator is typically appointed by a
court in accordance with State law. The Board believes that TILA
Section 140A is intended to apply to any deceased accountholder's
estate, regardless of whether an administrator or executor is
responsible for the estate.
[[Page 54159]]
In addition, the Board is proposing to require creditors to adopt
``reasonable procedures designed to ensure'' that administrators or
executors can determine the amount of and pay any balance in a timely
manner. The Board recognizes that some creditors may already have
established procedures for the resolution of a deceased accountholder's
balance. Thus, a ``reasonable procedures'' standard would permit
creditors to retain, to the extent appropriate, procedures which may
already be in place, in complying with proposed Sec. 226.11(c), as
well as applicable State and Federal laws governing probate. Proposed
comment 11(c)-1 provides examples of reasonable procedures consistent
with proposed Sec. 226.11(c).
In addition to the general rule, the Board is proposing Sec.
226.11(c)(2)(i), which would prohibit creditors from imposing fees and
charges on a deceased consumer's account upon receiving a request for
the amount of any balance from an administrator or executor of an
estate. The intent of new TILA Section 140A is to ensure the timely
settlement of a deceased accountholder's credit card balance. The Board
understands that establishing and administering an estate may be a
complex, time-consuming process, which is subject to various State law
requirements and can involve a probate court. Furthermore, the Board
understands that some administrators and executors currently may be
unable to obtain the amount of a deceased accountholder's balance in a
timely manner, which in turn, delays the settlement of estate debts. If
balances cannot be obtained and settled in a timely manner, fees and
other charges, such as a late fee or finance charge, may continue to
accrue on the account balance. Under these circumstances, the Board
believes that the estate and its assets may be disadvantaged if fees
and charges continue to accrue on the account. Accordingly, proposed
Sec. 226.11(c)(2)(i) would prohibit a creditor from imposing fees and
charges on the deceased consumer's account upon receiving a request for
the amount of the balance on the account from an administrator or
executor of an estate. The Board believes that this prohibition is
necessary to provide certainty for all parties as to the balance amount
and to ensure the timely settlement of estate debts. Proposed comment
11(c)-2 would clarify that a creditor may impose finance charges based
on balances for days that precede the date on which the creditor
receives a request pursuant to proposed Sec. 226.11(c)(3). The Board
solicits comment on whether a creditor should be permitted to resume
the imposition of fees and charges if the administrator or executor of
an estate has not paid the account balance within a specified period of
time.
Proposed Sec. 226.11(c)(2)(ii) would provide that a creditor may
impose fees and charges on a deceased consumer's account if a joint
accountholder remains on the account. For joint accounts, a joint
accountholder remains liable for the account. In contrast, because an
authorized user is not liable for the account, proposed Sec.
226.11(c)(2)(ii) would not extend to such users. Accordingly, a
creditor may not impose fees and charges on the account if only an
authorized user remains on the account. Proposed comment 11(c)-3 would
clarify that a creditor may impose fees and charges on a deceased
consumer's account if a joint accountholder remains on the account. The
proposed comment would further clarify that a creditor may not impose
fees and charges on a deceased consumer's account if an authorized user
remains on the account.
The Board is also proposing comment 11(c)-4 to clarify that a
creditor may receive a request for the amount of the balance on the
account in writing or by telephone call from the administrator or
executor of an estate. If a request is made in writing, such as by
mail, the request is received when the creditor receives the
correspondence.
Under proposed Sec. 226.11(c)(3)(i), a creditor would be required
to disclose the amount of the balance on the account in a timely
manner, upon request by the administrator or executor of the estate.
The Board believes a timely statement reflecting the deceased
accountholder's balance is necessary to assist administrators and
executors with the settlement of estate debts. Proposed comment 11(c)-5
provides guidance to creditors in complying with Sec. 226.11(c)(3).
Creditors may provide the amount of the balance, if any, by a written
statement or by telephone. Proposed comment 11(c)-5 also clarifies that
proposed Sec. 226.11(c)(3) would not preclude a creditor from
providing the balance amount to appropriate persons, other than the
administrator or executor of an estate. For example, the Board notes
that the proposed rule would not preclude creditors, subject to
applicable Federal and State laws, from providing a spouse or family
members who indicate that they will pay the decedent's debts from
obtaining a balance amount for that purpose.
Proposed Sec. 226.11(c)(3)(ii) provides creditors with a safe
harbor for disclosing the balance amount in a timely manner, stating
that it would be reasonable for a creditor to provide the balance on
the account within 30 days of receiving a request by the administrator
or executor of an estate. The Board believes that 30 days is reasonable
to ensure that transactions and charges have been accounted for and
calculated and to provide a written statement or confirmation. The
Board seeks comment as to whether 30 days provides creditors with
sufficient time to provide a statement of the balance on the deceased
consumer's account.
Section 226.16 Advertising
16(f) Misleading Terms
See the supplementary information to Sec. 226.5(a)(2)(iii) for a
discussion of the Board's proposals regarding use of the term ``fixed''
in advertisements for open-end plans set forth in proposed Sec.
226.16(f).
16(h) Deferred Interest or Similar Offers
In May 2009, the Board proposed to use its authority under TILA
Section 143(3) to implement new advertising requirements related to
deferred interest or similar offers for open-end (not home-secured)
credit plans. 15 U.S.C. 1663(3). These requirements, which the Board
proposed to implement in a new Sec. 226.16(h), were similar to those
originally proposed by the Board in May 2009. See 73 FR 28866, 28884-
28886. The Board continues to believe that these requirements would
better inform consumers of the terms of deferred interest or similar
offers and that these advertising requirements will complement the
proposed periodic statement disclosures for such programs that are
discussed in the supplementary information to Sec. 226.7(b).
Therefore, the Board is republishing these same requirements for
additional comment in this Federal Register notice.
Specifically, these disclosure requirements would apply to
advertisements that use terms such as ``no interest,'' ``no payments,''
``deferred interest,'' ``same as cash,'' or similar terms in describing
these offers.\17\ Proposed Sec. 226.16(h)(1) would limit these
requirements to advertisements of open-end (not home-secured) credit,
and proposed Sec. 226.16(h)(2) would define terms applicable to the
section. 74 FR 20793-20794. Proposed Sec. 226.16(h)(3) would require
that the deferred interest period be disclosed in immediate proximity
to each deferred interest triggering term. Also, under
[[Page 54160]]
proposed Sec. 226.16(h)(3), for advertisements stating ``no interest''
or a similar term, the fact that the balance must be paid in full by
the end of the deferred interest period also would need to be disclosed
in immediate proximity to that term. 74 FR 20794. Proposed Sec.
226.16(h)(4) also would require that certain additional information
about the terms of the deferred interest or similar offer be disclosed
in close proximity to the first statement of a deferred interest
triggering term. 74 FR 20794. To facilitate compliance with this
provision, the Board proposed model language in Sample G-22 in Appendix
G. 74 FR 20797. Sample G-22 from the May 2009 Regulation Z Proposed
Clarifications has been renumbered as Sample G-24 in this proposal.
Proposed Sec. 226.16(h)(4) would require that advertisements of
deferred interest or similar offers use language similar to Sample G-
24. Finally, under proposed Sec. 226.16(h)(5), most of these
requirements would not apply to envelopes or other enclosures in which
an application or solicitation is mailed, or banner advertisements or
pop-up advertisements linked to an electronic application or
solicitation, bearing the triggering terms. 74 FR 20794.
---------------------------------------------------------------------------
\17\ For ease of reference, the supplementary information to
proposed Sec. 226.16(h) refers generically to these terms as
``deferred interest triggering terms.''
---------------------------------------------------------------------------
In addition, the Board proposed new commentary to provide further
guidance on the requirements under proposed Sec. 226.16(h), and also
proposed to amend comments 16-1 and 16-2 to clarify the clear and
conspicuous requirements for these disclosures. 74 FR 20800. Proposed
comment 16(h)-1 provided further clarification on what types of offers
were included as deferred interest or similar offers, while proposed
comment 16(h)-2 further clarified the meaning of ``deferred or waived
interest period.'' \18\ 74 FR 20800. Similar to guidance adopted in the
January 2009 Regulation Z Rule for advertisements of promotional rates
under Sec. 226.16(g), the Board proposed comment 16(h)-3 to further
clarify the meaning of ``immediate proximity,'' comment 16(h)-4 to
further clarify the meaning of ``prominent location closely
proximate,'' and comment 16(h)-5 to further clarify the meaning of
``first listing.'' 74 FR 20800. The Board also proposed comment 16(h)-6
to clarify that the information required under proposed Sec.
226.16(h)(4) need not be segregated from other information the
advertisement discloses about the deferred interest or similar offer.
74 FR 20800. Finally, proposed comment 16(h)-7 provided examples of
phrases that could be used to comply with proposed 226.16(h)(3). 74 FR
20801.
---------------------------------------------------------------------------
\18\ While the May 2009 Regulation Z Proposed Clarifications
referred to a ``deferred or waived interest'' offer, this proposal
refers to such promotional programs more generally as deferred
interest or similar offers.
---------------------------------------------------------------------------
Section 226.51 Ability To Pay
51(a) General Ability To Pay
Section 109 of the Credit Card Act adds new TILA Section 150
prohibiting a card issuer from opening a credit card account for a
consumer, or increasing the credit limit applicable to a credit card
account, unless the card issuer considers the consumer's ability to
make the required payments under the terms of such account. 15 U.S.C.
1665e. The Board proposes to implement TILA Section 150 in Sec.
226.51(a).
Proposed Sec. 226.51(a)(1) generally follows the language provided
in TILA Section 150 with two modifications. First, because the minimum
payment is the amount that a consumer is required to pay each billing
cycle under the terms of the contract with the card issuer, the Board
proposes to interpret the term ``required payments'' to mean the
required minimum periodic payment.
Second, the Board believes an evaluation of a consumer's current
ability to pay must include a review of the consumer's income or assets
as well as the consumer's current obligations. Therefore, proposed
Sec. 226.51(a)(1) would provide that the card issuer's consideration
of the ability of the consumer to make the required minimum periodic
payments must be based on the consumer's income or assets and the
consumer's current obligations. Proposed Sec. 226.51(a)(1) would also
require that card issuers have reasonable policies and procedures in
place to consider this information. A card issuer has not complied with
this provision if, for example, a card issuer does not review any
information about a consumer's income, assets, or current obligations,
or issues a credit card to a consumer who does not have any income or
assets. In addition, the Board believes that other factors may be
useful for card issuers to evaluate a consumer's ability to pay.
Accordingly, proposed comment 51(a)-1 would clarify that card issuers
may also consider credit reports or credit scores, and any other
factors that are consistent with the Board's Regulation B (12 CFR Part
202).
Because the minimum payments a consumer is required to pay each
billing cycle may vary depending on the amount of the balance as well
as the finance and other charges a consumer incurs during the billing
cycle, card issuers would be required to estimate the minimum payments
a consumer might be obligated to pay before the account is opened or
the credit line is increased. Proposed Sec. 226.51(a)(2)(i) would
require card issuers to use a reasonable method for estimating the
required minimum periodic payments, and proposed Sec. 226.51(a)(2)(ii)
would provide a safe harbor that card issuers could use to comply with
this requirement. Specifically, the safe harbor requires the card
issuer to assume utilization of the full credit line that the issuer is
considering offering to the consumer from the first day of the billing
cycle. The safe harbor also requires the issuer to use a minimum
payment formula employed by the issuer for the product the issuer is
considering offering to the consumer or, in the case of an existing
account, the minimum payment formula that currently applies to that
account. For example, in evaluating an application to open a new
account, if the minimum payment formula used by the card issuer for the
product is 2% of the outstanding balance, the estimated required
minimum periodic payment for a $10,000 credit line would be $200 under
the safe harbor.
However, if the applicable minimum payment formula includes
interest charges, the safe harbor requires the card issuer to estimate
those charges using an interest rate that the issuer is considering
offering to the consumer for purchases or, in the case of an existing
account, the interest rate that currently applies to purchases. For
example, if the minimum payment formula that applies to an existing
consumer's account is 3% plus interest and fees, the current purchase
rate for the account is 10%, and the card issuer is considering
increasing the consumer's credit line to $10,000, the estimated
required minimum periodic payment would be approximately $380 under the
safe harbor. Finally, if the applicable minimum payment formula
includes fees, the card issuer may assume that no fees have been
charged to the account.
In developing the proposed safe harbor, the Board considered a
number of different approaches. The Board recognizes that consumers
generally do not use the full credit line, and consequently, the
Board's proposed safe harbor approach could have the effect of
overstating the consumer's likely required payments. The Board,
however, believes that since card issuers are qualifying consumers for
a certain credit line, of which consumers presumably have full use,
card issuers should be expected to underwrite based on required
payments on the full amount under the safe harbor. Furthermore,
although estimating a
[[Page 54161]]
consumer's required minimum periodic payments may be more accurate with
the addition of some estimated fees when using a minimum payment
formula that includes the interest and fees, the Board believes that
estimating the amount of fees that a typical consumer might incur could
be speculative. As a result the Board's proposed safe harbor does not
require issuers to estimate fees. The Board seeks comment on other
reasonable methods that card issuers may use in estimating minimum
payments.
Proposed comment 51(a)-2 would clarify that in considering a
consumer's ability to pay, a card issuer must base the consideration on
facts and circumstances known to the card issuer at the time the
consumer applies to open the credit card account or when the card
issuer considers increasing the credit line on an existing account.
This guidance is similar to comment 34(a)(4)-5 addressing a creditor's
requirement to consider a consumer's repayment ability for certain
closed-end mortgage loans based on facts and circumstances known to the
creditor at loan consummation. Furthermore, since credit line increases
can occur at the request of a consumer or through a unilateral decision
by the card issuer, proposed comment 51(a)-3 would clarify that Sec.
226.51(a) applies in both situations.
Proposed comment 51(a)-4 would provide examples of assets and
income the card issuer may consider in evaluating a consumer's ability
to pay. The comment would provide similar guidance to comment 34(a)(4)-
6 regarding the requirement for creditors to consider a consumer's
repayment ability with respect to certain closed-end mortgage loans.
The Board also proposes comment 51(a)-5 to clarify that in considering
a consumer's current obligations, a card issuer may rely on information
provided by the consumer or in a consumer's credit report.
Finally, for several reasons, the proposal does not require that
card issuers verify information before the account is opened or the
credit line is increased. First, TILA Section 150 does not require
verification of a consumer's ability to make required payments. Second,
verification can be burdensome for both consumers and card issuers,
especially when accounts are opened at point of sale or by telephone.
For example, because consumers generally do not have documentation
readily available to verify their income, assets, or obligations at
point of sale, a verification requirement would restrict consumers'
ability to open a new credit card account at point of sale. As a
result, the Board believes that card issuers need flexibility to
determine instances when they need to verify information. Furthermore,
since these accounts are generally unsecured, the Board believes that
card issuers have reasons to verify the information when either the
information supplied by the applicant is inconsistent with the data the
card issuers already have or are able to gather on the consumer or when
the risk in the amount of the credit line warrants such verification.
While the Board has required creditors to verify information before
credit is extended for certain mortgage loans, the Board's decision
with respect to such loans was based on evidence that borrower income
was inflated for these types of mortgage loans and that lending
decisions based on overstated incomes contributed to the recent
substantial increase in mortgage delinquencies. In contrast, the Board
does not have evidence that this is the case in the credit card market.
As a result, the Board believes a verification requirement before a
credit card account is opened or credit line increased would not be
necessary and could burden consumers. The Board, however, seeks comment
on whether there is evidence that warrants a requirement to verify
information before a credit card account is opened or a credit line is
increased.
51(b) Rules Affecting Young Consumers
Currently, card issuers may grant credit to young consumers on the
assumption that a parent or guardian of the consumer will pay the debt,
even if the issuer does not obtain the express agreement of such parent
or guardian to assume liability. Sections 301 and 303 of the Credit
Card Act are meant to address this situation. Under new Section
127(c)(8)(A) of TILA, as adopted by Section 301 of the Credit Card Act,
no credit card may be issued to, or open-end consumer credit plan
established by, or on behalf of a consumer, who has not attained the
age of 21 unless the consumer has submitted a written application to
the card issuer that meets certain requirements. 15 U.S.C.
1637(c)(8)(A). New TILA Section 127(c)(8)(B) further provides that an
application to open a credit card account by a consumer who has not
attained the age of 21 as of the date of submission of the application
shall require either: (1) The signature of a cosigner who has attained
the age of 21 having a means to repay debts incurred by the consumer in
connection with the account, indicating joint liability for debts
incurred by the consumer in connection with the account before the
consumer has attained the age of 21; or (2) the submission by the
consumer of financial information, including through an application,
indicating an independent means of repaying any obligation arising from
the proposed extension of credit in connection with the account. 15
U.S.C. 1637(c)(8)(B).
Section 303 of the Credit Card Act adds new TILA Section 127(p). 15
U.S.C. 1637(p). TILA Section 127(p) states that no increase may be made
in the amount of credit authorized to be extended under a credit card
account for which an individual has assumed joint liability for debts
incurred by the consumer in connection with the account before the
consumer attains the age of 21, unless that individual approves in
writing, and assumes joint liability for, such increase.
The Board proposes to implement these provisions in proposed Sec.
226.51(b) and associated commentary. Proposed Sec. 226.51(b)(1) would
provide that a card issuer may not open a credit card account under an
open-end (not home-secured) consumer credit plan for a consumer less
than 21 years old, unless the consumer submits a written application
and provides either a signed agreement of a cosigner, guarantor, or
joint applicant pursuant to Sec. 226.51(b)(1)(i) or financial
information consistent with Sec. 226.51(b)(1)(ii), as further
discussed below. The language in Sec. 226.51(b)(1) has been modified
from the statutory language in TILA Section 127(c)(8)(A) for
consistency with Sec. 226.51(a) and to clarify that the provision
applies only to credit card accounts and only in connection with the
opening of the account. Furthermore, the language has been modified to
improve readability.
Although the text of TILA Section 127(c)(8)(A) references open-end
consumer credit plans other than credit cards, the Board believes that
the intent of the provision, read as a whole, is to apply only to
credit card accounts. While the provision references other open-end
consumer credit plans, the requirements under the provision apply only
to ``card issuers.'' Based on the fact that the requirements of the
provision are limited to card issuers as well as language in other
related sections of the Credit Card Act and the location of the
provision in TILA, the Board believes that the restrictions in TILA
Section 127(c)(8)(A) are meant to apply only to credit card accounts.
First, TILA Section 127(c)(8)(B), which discusses the requirements
for an application submitted by a consumer who has not attained the age
of 21, refers solely to an application to open a credit card account.
Second, TILA
[[Page 54162]]
Section 127(p), which restricts credit line increases for accounts in
which an individual assumes joint liability for debts incurred by the
consumer in connection with the account before the consumer attains the
age of 21, refers only to a credit card account. Third, these
provisions have been placed in TILA Section 127(c), a section that
deals exclusively with credit card accounts. Therefore, the Board
believes it is appropriate to apply proposed Sec. 226.51(b)(1) only to
credit card accounts.
Furthermore, proposed Sec. 226.51(b)(1) refers to the opening of a
credit card account, which differs from the statute's reference to the
issuance of a credit card. The ``issuance'' of a credit card can refer
to a card sent to the consumer as a replacement card or upon renewal of
the card. See Sec. 226.12(a). As a result, the Board believes that
limiting the scope of Sec. 226.51(b) to the opening of a credit card
account is appropriate. Otherwise, the provision could be construed to
require card issuers to evaluate a cardholder's ability or obtain the
signature of a cosigner even when a card is being sent to an existing
cardholder to replace an expired card. The Board notes that the renewal
of an existing account or change in the terms of an existing account
generally does not constitute the opening of an account for purposes of
Regulation Z.
The Board proposes to implement the specific application
requirements detailed in TILA Section 127(c)(8)(B) in Sec.
226.51(b)(1)(i) and (ii). Proposed Sec. 226.51(b)(1)(i) and (ii)
generally follow the language in TILA Section 127(c)(8)(B) with some
changes. While most of these modifications are minor and are meant to
improve the readability of the regulation without any substantive
change in meaning, the Board also proposes to clarify the meaning of
cosigner and joint liability.
The terms cosigner and joint liability can have several meanings.
For example, a cosigner can refer to a guarantor who has no credit
privileges on the account but is secondarily liable for a consumer's
debt if the consumer defaults. A cosigner can also mean a joint
accountholder who shares credit privileges with the consumer on the
account and is jointly liable on the debt incurred by either the
consumer or the joint accountholder. The Board believes it is
appropriate to modify the language used in the regulation from the
statutory language to make clear that all types of cosigners and joint
liability arrangements would be included. Accordingly, proposed Sec.
226.51(b)(1)(i) states that a consumer who is less than 21 years old
can provide the signed agreement of a cosigner, guarantor, or joint
applicant who is at least 21 years old to be either secondarily liable
for any debt on the account incurred by the consumer before the
consumer has attained the age of 21 in the event the consumer defaults
on the account or jointly liable with the consumer for any debt on the
account incurred by either party.
Furthermore, to maintain consistency, the Board proposes to
interpret the phrase ``means to repay'' or ``means of repaying'' as
equivalent to evaluating a consumer's ability to make the required
payments under TILA Section 150, which the Board proposes to implement
in Sec. 226.51(a), as discussed above. Therefore, Sec.
226.51(b)(1)(i) and (ii) both reference Sec. 226.51(a) in discussing
the ability of a cosigner, guarantor, or joint applicant to make the
minimum payments on the consumer's debts and the consumer's independent
ability to make the minimum payments on any obligations arising under
the account.
Proposed Sec. 226.51(b)(2) generally follows the language in TILA
Section 127(p), though the Board has modified some of the wording used
in the statute. These changes are meant to improve readability without
any substantive change in meaning. For example, TILA Section 127(p)
states that a parent, guardian, or spouse must approve the credit line
increase in writing; however, the statute also concedes that an
individual who is not a parent, guardian, or spouse may have assumed
liability for debts incurred by the consumer. In those cases, that
individual should be the one to approve the credit line increase, and
assume liability for that increased amount. Therefore, proposed Sec.
226.51(b)(2) eliminates the reference to parent, guardian, or spouse to
apply the provision more generally to cosigners, guarantors, or joint
accountholders.
The Board also proposes several comments to provide guidance to
card issuers in complying with Sec. 226.51(b). Proposed comment 51(b)-
1 would clarify that Sec. 226.51(b)(1) and (b)(2) apply only to a
consumer who has not attained the age of 21 as of the date of
submission of the application under Sec. 226.51(b)(1) or the date the
credit line increase is requested by the consumer under Sec.
226.51(b)(2). If no request has been made (for example, for unilateral
credit line increases by the card issuer), the provision would apply
only to a consumer who has not attained the age of 21 as of the date
the credit line increase is considered by the card issuer.
Proposed comment 51(b)-2 would address the ability of a card issuer
to require a cosigner, guarantor, or joint accountholder to assume
liability for debts incurred after the consumer has attained the age of
21. While Sec. 226.51(b)(1)(i) and (b)(2) require, at a minimum, that
a cosigner, guarantor, or joint accountholder assume liability for any
debt on the account incurred by the consumer before the consumer has
attained the age of 21, proposed comment 51(b)-2 would clarify that
Sec. 226.51(b)(1)(i) and (b)(2) do not restrict a card issuer from
extending this liability to debt incurred by the consumer after the
consumer has attained the age of 21, at the card issuer's option,
consistent with any agreement made between the parties.
The Board proposes comment 51(b)-3 to clarify that Sec.
226.51(b)(1) and (b)(2) do not apply to a consumer under the age of 21
who is being added to another person's account as an authorized user
and has no liability for debts incurred on the account. The Board
believes that the protections under TILA Sections 127(c)(8) and 127(p)
would not be necessary if the consumer under the age of 21 is not
assuming any liability, and would therefore not be legally obligated to
make any payments on the account.
Proposed comment 51(b)-4 would provide card issuers with guidance
concerning electronic applications and explain how the Electronic
Signatures in Global and National Commerce Act (E-Sign Act) (15 U.S.C.
7001 et seq.) would govern the submission of such an application. TILA
Section 127(c)(8) requires a consumer who has not attained the age of
21 to submit a written application. In addition, under TILA Section
127(p), a cosigner, guarantor, or joint accountholder must approve a
credit line increase in writing. However, in accordance with the
purposes of the E-Sign Act, contracts and other records cannot be
denied legal effect, validity or enforceability solely because they are
in electronic form. See 15 U.S.C. 7001(a). Therefore, the Board
believes that, consistent with the purposes of the E-Sign Act,
applications submitted under TILA Section 127(c)(8) and approvals under
TILA Section 127(p), which must be provided in writing, may also be
submitted electronically. Moreover, the E-Sign Act requires that before
any disclosure that is required to be in writing is provided to a
consumer electronically, the consumer must affirmatively consent to the
provision of the information electronically, among other things. Since
the submission of an application or approval by a consumer, cosigner,
guarantor, or joint accountholder is not a disclosure to a consumer,
the consumer consent and other
[[Page 54163]]
requirements necessary to provide consumer disclosures electronically
pursuant to the E-Sign Act would not apply. Furthermore, Sec.
226.5(a)(1)(iii), which was adopted in the January 2009 Regulation Z
Rule, provides that an application may be provided to a consumer in
electronic form without regard to the consumer consent or other
provisions of the E-Sign Act in the circumstances set forth in Sec.
226.5a.
Proposed comment 51(b)(1)-1 explains that when evaluating an
application to open a credit card account or credit line increase for a
consumer under the age of 21, creditors must comply with applicable
rules in Regulation B (12 CFR Part 202). Given that age is generally a
prohibited basis for any creditor to take into account in any system
evaluating the creditworthiness of applicants under Regulation B, the
Board believes that Regulation B prohibits card issuers from refusing
to consider the application of a consumer solely because the applicant
has not attained the age of 21 (assuming the consumer has the legal
ability to enter into a contract). Furthermore, because TILA Section
127(c)(8) permits card issuers to open a credit card account for a
consumer who has not attained the age of 21 if either of the conditions
under TILA Section 127(c)(8)(B) are met, the Board believes that a card
issuer may choose to evaluate an application of a consumer who is less
than 21 years old solely on the basis of the information provided under
Sec. 226.51(b)(1)(ii). Therefore, the Board believes, a card issuer is
not required to accept an application from a consumer less than 21
years old with the signature of a cosigner, guarantor, or joint
applicant pursuant to Sec. 226.51(b)(1)(i), unless refusing such
applications would violate Regulation B. For example, if the card
issuer permits other applicants of non-business credit card accounts
who have attained the age of 21 to provide the signature of a cosigner,
guarantor, or joint applicant, the card issuer must provide this option
to applicants of non-business credit card accounts who have not
attained the age of 21 (assuming the consumer has the legal ability to
enter into a contract).
Proposed comment 51(b)(2)-1 would provide that the requirement
under Sec. 226.51(b)(2) that a cosigner, guarantor, or joint
accountholder for a credit card account opened pursuant to Sec.
226.51(b)(1)(ii) must agree in writing to assume liability for a credit
line increase does not apply if the cosigner, guarantor or joint
accountholder who is at least 21 years old requests the increase.
Because the party that must approve the increase is the one that is
requesting the increase in this situation, the Board believes that
Sec. 226.51(b)(2) would be redundant.
Section 226.52 Limitations on Fees
52(a) Limitations During First Year After Account Opening
New TILA Section 127(n)(1) applies ``[i]f the terms of a credit
card account under an open end consumer credit plan require the payment
of any fees (other than any late fee, over-the-limit fee, or fee for a
payment returned for insufficient funds) by the consumer in the first
year during which the account is opened in an aggregate amount in
excess of 25 percent of the total amount of credit authorized under the
account when the account is opened.'' 15 U.S.C. 1637(n)(1). If the 25
percent threshold is met, then ``no payment of any fees (other than any
late fee, over-the-limit fee, or fee for a payment returned for
insufficient funds) may be made from the credit made available under
the terms of the account.'' However, new TILA Section 127(n)(2)
provides that Section 127(n) may not be construed as authorizing any
imposition or payment of advance fees prohibited by any other provision
of law. The Board is proposing to implement new TILA Section 127(n) in
Sec. 226.52(a).\19\
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\19\ In a subsequent rulemaking, the Board intends to implement
new TILA Section 149 in Sec. 226.52(b). New TILA Section 149, which
is effective August 22, 2010, requires that credit card penalty fees
and charges be reasonable and proportional to the consumer's
violation of the cardholder agreement.
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Subprime credit cards often charge substantial fees at account
opening and during the first year after the account is opened. For
example, these cards may impose multiple one-time fees when the
consumer opens the account (such as an application fee, a program fee,
and an annual fee) as well as a monthly maintenance fee, fees for using
the account for certain types of transactions, and fees for increasing
the credit limit. The account-opening fees are often billed to the
consumer on the first periodic statement, substantially reducing from
the outset the amount of credit that the consumer has available to make
purchases or other transactions on the account. For example, some
subprime credit card issuers assess $250 in fees at account opening on
accounts with credit limits of $300, leaving the consumer with only $50
of available credit with which to make purchases or other transactions.
In addition, the consumer may pay interest on the fees until they are
paid in full.
Because of concerns that some consumers were not aware of how fees
would affect their ability to use the card for its intended purpose of
engaging in transactions, the Board's January 2009 Regulation Z Rule
enhanced the disclosure requirements for these types of fees and
clarified the circumstances under which a consumer who has been
notified of the fees in the account-opening disclosures (but has not
yet used the account or paid a fee) may reject the plan and not be
obligated to pay the fees. See Sec. 226.5(b)(1)(iv), 74 FR 5402; Sec.
226.5a(b)(14), 74 FR 5404; Sec. 226.6(b)(1)(xiii), 74 FR 5408. In
addition, because the Board and the other Agencies were concerned that
disclosure alone was insufficient to protect consumers from unfair
practices regarding high-fee subprime credit cards, the January 2009
FTC Act Rule prohibited institutions from charging certain types of
fees during the first year after account opening that, in the
aggregate, constituted the majority of the credit limit. In addition,
these fees were limited to 25 percent of the initial credit limit in
the first billing cycle with any additional amount (up to 50 percent)
spread equally over the next five billing cycles. Finally, institutions
were prohibited from circumventing these restrictions by providing the
consumer with a separate credit account for the payment of additional
fees. See 12 CFR 227.26, 74 FR 5561, 5566; see also 74 FR 5538-
5543.\20\
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\20\ Although the Board, OTS, and NCUA adopted substantively
identical rules under the FTC Act, each agency placed its rules in
its respective part of Title 12 of the Code of Federal Regulations.
Specifically, the Board placed its rules in part 227, the OTS in
part 535, and the NCUA in part 706. For simplicity, this
supplementary information cites to the Board's rules and official
staff commentary.
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52(a)(1) General Rule
As noted above, new TILA Section 127(n)(1) applies when ``the terms
of a credit card account * * * require the payment of any fees (other
than any late fee, over-the-limit fee, or fee for a payment returned
for insufficient funds) by the consumer in the first year during which
the account is opened in an aggregate amount in excess of 25 percent of
the total amount of credit authorized under the account when the
account is opened.'' Congress's use of ``require'' could be construed
to mean that Section 127(n)(1) applies only to fees that are
unconditional requirements of the account--in other words, fees that
all consumers are required to pay regardless of how the account is used
(such as account-opening fees, annual fees, and monthly maintenance
fees). However, such a narrow reading would be inconsistent with the
words ``any
[[Page 54164]]
fees,'' which indicate that Congress intended the provision to apply to
a broader range of fees. Furthermore, categorically excluding fees that
are conditional (in other words, fees that consumers are only required
to pay in certain circumstances) would enable card issuers to
circumvent the 25 percent limit by, for example, requiring consumers to
pay fees in order to receive a particular credit limit or to use the
account for purchases or other transactions. Finally, new TILA Section
127(n)(1) specifically excludes three fees that are conditional (late
payment fees, over-the-limit fees, and fees for a payment returned for
insufficient funds), which suggests that Congress otherwise intended
Section 127(n)(1) to apply to fees that a consumer is required to pay
only in certain circumstances (such as fees for other violations of the
account terms or fees for using the account for transactions).
New TILA Section 127(n)(1) further provides that, if the 25 percent
threshold is met, ``no payment of any fees (other than any late fee,
over-the-limit fee, or fee for a payment returned for insufficient
funds) may be made from the credit made available under the terms of
the account.'' Although this language could be read to require card
issuers to determine at account opening the total amount of fees that
will be charged during the first year, the Board does not believe this
was Congress's intent because the total amount of fees charged during
the first year will depend on how the account is used. For example,
most card issuers currently require consumers who use a credit card
account for cash advances, balance transfers, or foreign transactions
to pay a fee that is equal to a percentage of the transaction. Thus,
the total amount of fees charged during the first year will depend on,
among other things, the number and amount of cash advances, balance
transfers, or foreign transactions. Although card issuers could address
this uncertainty by ceasing to charge such fees, card issuers that did
so would also likely reduce consumers' ability to use their credit
cards for these types of transactions, which could be detrimental for
some consumers. Accordingly, the Board believes Section 127(n)(1)
should be interpreted to limit the fees charged to a credit card
account during the first year to 25 percent of the initial credit limit
and to prevent card issuers from collecting additional fees by other
means (such as directly from the consumer or by providing a separate
credit account). In order to effectuate this purpose and to facilitate
compliance, the Board proposes to use its authority under TILA Section
105(a) to implement new TILA Section 127(n) as set forth below.
Proposed Sec. 226.52(a)(1)(i) provides that, if a card issuer
charges any fees to a credit card account under an open-end (not home-
secured) consumer credit plan during the first year after account
opening, those fees must not in total constitute more than 25 percent
of the credit limit in effect when the account is opened. Proposed
comment 52(a)(1)(i)-1 provides an illustrative example of the
application of the rule.
Proposed comment 52(a)(1)(i)-2 clarifies that a card issuer that
charges a fee to a credit card account that exceeds the 25 percent
limit complies with Sec. 226.52(a)(1)(i) if the card issuer waives or
removes the fee and any associated interest charges or credits the
account for an amount equal to the fee and any associated interest
charges at the end of the billing cycle during which the fee was
charged. Thus, if a card issuer's systems automatically assess a fee
based on certain account activity (such as automatically assessing a
cash advance fee when the account is used for a cash advance) and, as a
result, the total amount of fees subject to Sec. 226.52(a) that have
been charged to the account during the first year exceeds the 25
percent limit, the card issuer can comply with Sec. 226.52(a)(1)(i) by
removing the fee and any interest charged on that fee at the end of the
billing cycle.
Proposed comment 52(a)(1)(i)-3 clarifies that, because the
limitation in Sec. 226.52(a)(1)(i) is based on the credit limit in
effect when the account is opened, a subsequent increase in the credit
limit during the first year does not permit the card issuer to charge
to the account additional fees that would otherwise be prohibited (such
as a fee for increasing the credit limit). An illustrative example is
provided.
Proposed Sec. 226.52(a)(1)(ii) would prevent card issuers from
circumventing proposed Sec. 226.52(a)(1)(i) by providing that a card
issuer that charges fees to the account during the first year after
account opening must not require the consumer to pay any fees in excess
of the 25 percent limit with respect to the account during the first
year. Proposed comment 52(a)(1)(ii)-1 clarifies that Sec.
226.52(a)(1)(ii) prohibits a card issuer that charges to a credit card
account fees during the first year that total 25 percent of the initial
credit limit from requiring the consumer to pay any additional fees
through other means during the first year (such as through a payment
from the consumer to the card issuer or from another credit account
provided by the card issuer). An illustrative example is provided.
52(a)(2) Fees Not Subject to Limitations
Proposed Sec. 226.52(a)(2)(i) implements the exception in new TILA
Section 127(n)(1) for late payment fees, over-the-limit fees, and fees
for payments returned for insufficient funds. However, pursuant to the
Board's authority under TILA Section 105(a), proposed Sec.
226.52(a)(2)(i) applies to all fees for returned payments because a
payment may be returned for reasons other than insufficient funds (such
as because the account on which the payment is drawn has been closed or
because the consumer has instructed the institution holding that
account not to honor the payment).
As discussed above, new TILA Section 127(n)(1) applies to fees that
a consumer is required to pay with respect to a credit card account.
Accordingly, proposed Sec. 226.52(a)(2)(ii) would create an exception
to Sec. 226.52(a) for fees that a consumer is not required to pay with
respect to the account. The proposed commentary to Sec. 226.52(a)
illustrates the distinction between fees the consumer is required to
pay and those the consumer is not required to pay. Proposed comment
52(a)(2)-1 clarifies that, except as provided in Sec. 226.52(a)(2),
the limitations in Sec. 226.52(a)(1) apply to any fees that a card
issuer will or may require the consumer to pay with respect to a credit
card account during the first year after account opening. The comment
lists several types of fees as examples of fees covered by Sec.
226.52(a). First, fees that the consumer is required to pay for the
issuance or availability of credit described in Sec. 226.5a(b)(2),
including any fee based on account activity or inactivity and any fee
that a consumer is required to pay in order to receive a particular
credit limit. Second, fees for insurance described in Sec. 226.4(b)(7)
or debt cancellation or debt suspension coverage described in Sec.
226.4(b)(10) written in connection with a credit transaction, if the
insurance or debt cancellation or debt suspension coverage is required
by the terms of the account. Third, fees that the consumer is required
to pay in order to engage in transactions using the account (such as
cash advance fees, balance transfer fees, foreign transaction fees, and
other fees for using the account for purchases). And fourth, fees that
the consumer is required to pay for violating the terms of the account
(except to the extent specifically excluded by Sec. 226.52(a)(2)(i)).
Proposed comment 52(a)(2)-2 provides as examples of fees that
[[Page 54165]]
generally fall within the exception in Sec. 226.52(a)(2)(ii) fees for
making an expedited payment (to the extent permitted by Sec.
226.10(e)), fees for optional services (such as travel insurance), fees
for reissuing a lost or stolen card, and statement reproduction fees.
Finally, proposed comment 52(a)(2)-3 clarifies that a security
deposit that is charged to a credit card account is a fee for purposes
of Sec. 226.52(a). However, the comment also clarifies that Sec.
226.52(a) would not prohibit a creditor from providing a secured credit
card that requires a consumer to provide a cash collateral deposit that
is equal to the credit line for the account.
52(a)(3) Rule of Construction
New TILA Section 127(n)(2) states that ``[n]o provision of this
subsection may be construed as authorizing any imposition or payment of
advance fees otherwise prohibited by any provision of law.'' 15 U.S.C.
1637(n)(2). The Board proposes to implement this provision in Sec.
226.52(a)(3). As an example of a provision of law limiting the payment
of advance fees, proposed comment 52(a)(3)-1 cites 16 CFR 310.4(a)(4),
which prohibits any telemarketer or seller from ``[r]equesting or
receiving payment of any fee or consideration in advance of obtaining a
loan or other extension of credit when the seller or telemarketer has
guaranteed or represented a high likelihood of success in obtaining or
arranging a loan or other extension of credit for a person.''
Section 226.53 Allocation of Payments
As amended by the Credit Card Act, TILA Section 164(b)(1) provides
that, ``[u]pon receipt of a payment from a cardholder, the card issuer
shall apply amounts in excess of the minimum payment amount first to
the card balance bearing the highest rate of interest, and then to each
successive balance bearing the next highest rate of interest, until the
payment is exhausted.'' 15 U.S.C. 1666c(b)(1). However, amended Section
164(b)(2) provides the following exception to this general rule: ``A
creditor shall allocate the entire amount paid by the consumer in
excess of the minimum payment amount to a balance on which interest is
deferred during the last 2 billing cycles immediately preceding
expiration of the period during which interest is deferred.'' As
discussed in detail below, the Board proposes to implement amended TILA
Section 164(b) in a new Sec. 226.53.
As an initial matter, however, the Board proposes to interpret
amended TILA Section 164(b) to apply to credit card accounts under an
open-end (not home-secured) consumer credit plan rather than to all
open-end consumer credit plans. Although the requirements in amended
TILA Section 164(a) regarding the prompt crediting of payments apply to
``[p]ayments received from [a consumer] under an open end consumer
credit plan,'' the general payment allocation rule in amended TILA
Section 164(b)(1) applies ``[u]pon receipt of a payment from a
cardholder.'' Furthermore, the exception for deferred interest plans in
amended Section 164(b)(1) requires ``the card issuer [to] apply amounts
in excess of the minimum payment amount first to the card balance
bearing the highest rate of interest. * * *'' Based on this language,
it appears that Congress intended to apply the payment allocation
requirements in amended Section 164(b) only to credit card accounts.
This is consistent with the approach taken by the Board and the other
Agencies in the January 2009 FTC Act Rule. See 74 FR 5560. Furthermore,
the Board is not aware of concerns regarding payment allocation with
respect to other open-end credit products, likely because such products
generally do not apply different annual percentage rates to different
balances.
53(a) General Rule
The Board proposes to implement amended TILA Section 164(b)(1) in
Sec. 226.53(a), which would state that, except as provided in Sec.
226.53(b), when a consumer makes a payment in excess of the required
minimum periodic payment for a credit card account under an open-end
(not home-secured) consumer credit plan, the card issuer must allocate
the excess amount first to the balance with the highest annual
percentage rate and any remaining portion to the other balances in
descending order based on the applicable annual percentage rate. The
Board and the other Agencies adopted a similar provision in the January
2009 FTC Act Rule in response to concerns that card issuers were
applying consumers' payments in a manner that inappropriately maximized
interest charges on credit card accounts with balances at different
annual percentage rates. See 12 CFR 227.23, 74 FR 5512-5520, 5560.
Specifically, most card issuers currently allocate consumers' payments
first to the balance with the lowest annual percentage rate, resulting
in the accrual of interest at higher rates on other balances (unless
all balances are paid in full). Because many card issuers offer
different rates for purchases, cash advances, and balance transfers,
this practice can result in consumers who do not pay the balance in
full each month incurring higher finance charges than they would under
any other allocation method.\21\
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\21\ For example, assume that a credit card account charges
annual percentage rates of 12% on purchases and 20% on cash
advances. Assume also that, in the same billing cycle, the consumer
uses the account for purchases totaling $3,000 and cash advances
totaling $300. If the consumer makes an $800 payment, most card
issuers would apply the entire excess payment to the purchase
balance and the consumer would incur interest charges on the more
costly cash advance balance. Under these circumstances, the consumer
is effectively prevented from paying off the balance with the higher
interest rate (cash advances) unless the consumer pays the total
balance (purchases and cash advances) in full.
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The Board is also proposing comment 53-1, which would clarify that
proposed Sec. 226.53 does not limit or otherwise address the card
issuer's ability to determine, consistent with applicable law and
regulatory guidance, the amount of the required minimum periodic
payment or how that payment is allocated. It would further clarify that
a card issuer may, but is not required to, allocate the required
minimum periodic payment consistent with the requirements in proposed
Sec. 226.53 to the extent consistent with other applicable law or
regulatory guidance.
Comment 53-2 would clarify that proposed Sec. 226.53 permits a
card issuer to allocate an excess payment based on the annual
percentage rates and balances on the date the preceding billing cycle
ends, on the date the payment is credited to the account, or on any day
in between those two dates. Because the rates and balances on an
account affect how excess payments will be applied, this comment is
intended to provide flexibility regarding the point in time at which
payment allocation determinations required by proposed Sec. 226.53 can
be made. For example, it is possible that, in certain circumstances,
the annual percentage rates may have changed between the close of a
billing cycle and the date on which payment for that billing cycle is
received.
Comment 53-3 addresses the relationship between the dispute rights
in Sec. 226.12(c) and the payment allocation requirements in proposed
Sec. 226.53. This comment would clarify that, when a consumer has
asserted a claim or defense against the card issuer pursuant to Sec.
226.12(c), the card issuer must apply the consumer's payment in a
manner that avoids or minimizes any reduction in the amount of that
claim or defense. See footnote 25 to current Sec. 226.12(c)
(redesignated in January 2009 Regulation Z Rule as comment 12(c)-4, 74
FR 5488).
[[Page 54166]]
Comment 53-4 addresses circumstances in which the same annual
percentage rate applies to more than one balance on a credit card
account but a different rate applies to at least one other balance on
that account. For example, an account could have a $500 cash advance
balance at 20%, a $1,000 purchase balance at 15%, and a $2,000 balance
also at 15% that was previously at a 5% promotional rate. The comment
would clarify that, in these circumstances, proposed Sec. 226.53
generally does not require that any particular method be used when
allocating among the balances with the same rate and that the card
issuer may treat the balances with the same rate as a single balance or
separate balances.\22\
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\22\ An example of how excess payments could be applied in these
circumstances is provided in proposed comment 53(a)-1.iv.
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However, this comment would further clarify that, when a balance on
a credit card account is subject to a deferred interest or similar
program that provides that a consumer will not be obligated to pay
interest that accrues on the balance if the 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 proposed Sec. 226.53 during that period of time rather
than a balance with the rate at which interest accrues (the accrual
rate).\23\ As an initial matter, treating the rate as zero is
consistent with the nature of deferred interest and similar programs
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, treating the rate on a balance subject to a deferred interest
or similar program as zero until the program expires ensures that
excess payments will generally be applied first to balances on which
interest is being charged, which will generally result in lower
interest charges if the consumer pays the balance in full prior to
expiration. Although treating the rate on this type of balance as zero
could prevent consumers who wish to pay off that balance in
installments over the course of the program from doing so, the Board
believes that this treatment produces the best overall outcome for
consumers and is consistent with amended TILA Section 164(b)(2) (as
discussed below).
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\23\ For example, if an account has a $1,000 purchase balance
and a $2,000 balance that is subject to a deferred interest program
that expires on July 1 and a 15% annual percentage rate applies to
both, the balances must be treated as balances with different rates
for purposes of proposed Sec. 226.53 until July 1. In addition, for
purposes of allocating pursuant to proposed Sec. 226.53, 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 deferred interest period
(when it must be applied first to any remaining portion of the
$2,000 balance). See proposed comment 53(a)-1.v.
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Finally, proposed comment 53(a)-1 provides examples of allocating
excess payments consistent with proposed Sec. 226.53. The proposed
commentary discussed above is similar to commentary adopted by the
Board and the other Agencies in the January 2009 FTC Act Rule as well
as to amendments to that commentary proposed in May 2009. See 74 FR
5561-5562; 74 FR 20815-20816.
53(b) Special Rule for Balances Subject to Deferred Interest or Similar
Programs
The Board proposes to implement amended TILA Section 164(b)(2) in
Sec. 226.53(b), which would provide that, when a balance on a credit
card account under an open-end (not home-secured) consumer credit plan
is subject to a deferred interest or similar program, the card issuer
must allocate any amount 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 deferred interest period
and any remaining portion to any other balances consistent with
proposed Sec. 226.53(a). See 15 U.S.C. 1666c(b)(2).
The Board and the other Agencies proposed a similar exception to
the January 2009 FTC Act Rule's payment allocation provision in the May
2009 proposed clarifications and amendments. See proposed 12 CFR
227.23(b), 74 FR 20814. This exception was based on the Agencies'
concern that, if the deferred interest balance was not the only balance
on the account, the general payment allocation rule could prevent
consumers from paying off the deferred interest balance prior to
expiration of the deferred interest period unless they also paid off
all other balances on the account.\24\ If the consumer is unaware of
the need to pay off the entire balance, the consumer would be charged
interest on the deferred interest balance and thus would not obtain the
benefits of the deferred interest program. See 74 FR 20807-20808.
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\24\ For example, assume that a 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. If the general rule in
proposed Sec. 226.53(a) applied, the consumer would be required to
pay $3,000 in order to avoid interest charges on the $1,000 balance.
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The Board is also proposing comment 53(b)-1, which clarifies the
application of proposed Sec. 226.53(b) in circumstances where the
deferred interest or similar program expires during a billing cycle
(rather than at the end of a billing cycle). The comment would clarify
that, for purposes of Sec. 226.53(b), a billing cycle does not
constitute one of the two billing cycles immediately preceding
expiration of a deferred interest or similar program if the expiration
date for the program precedes the payment due date in that billing
cycle. An example is provided. The Board believes that this
interpretation is consistent with the purpose of amended TILA Section
164(b)(2) insofar as it ensures that, at a minimum, the consumer will
receive two complete billing cycles to avoid accrued interest charges
by paying off a balance subject to a deferred interest or similar
program.
In addition, the Board is proposing comment 53(b)-2, which
clarifies that a grace period during which any credit extended may be
repaid without incurring a finance charge due to a periodic interest
rate is not a deferred interest or similar program for purposes of
Sec. 226.53(b). The Board and the other Agencies proposed a similar
comment in May 2009. See 12 CFR 227.23 proposed comment 23(b)-1, 74 FR
20816.
Section 226.54 Limitations on the Imposition of Finance Charges
The Credit Card Act creates a new TILA Section 127(j), which
applies when a consumer loses any time period provided by the creditor
with respect to a credit card account within which the consumer may
repay any portion of the credit extended without incurring a finance
charge (i.e., a grace period). 15 U.S.C. 1637(j). In these
circumstances, new TILA Section 127(j)(1)(A) prohibits the creditor
from imposing a finance charge with respect to any balances for days in
billing cycles that precede the most recent billing cycle (a practice
that is sometimes referred to as ``two-cycle'' or ``double-cycle''
billing). Furthermore, in these circumstances, Section 127(j)(1)(B)
prohibits the creditor from imposing a finance charge with respect to
any balances or portions thereof in the current billing cycle that were
repaid within the grace period. However, Section 127(j)(2) provides
that these prohibitions do not apply to any adjustment to a finance
charge as a result of the resolution of a dispute or the return of a
payment for insufficient funds. As discussed below, the Board proposes
to implement new TILA Section 127(j) in Sec. 226.54.
[[Page 54167]]
54(a) Limitations on Imposing Finance Charges as a Result of the Loss
of a Grace Period
54(a)(1) General Rule
Prohibition on Two-Cycle Billing
As noted above, new TILA Section 127(j)(1)(A) prohibits the balance
computation method sometimes referred to as ``two-cycle billing'' or
``double-cycle billing.'' The January 2009 FTC Act Rule contained a
similar prohibition. See 12 CFR 227.25, 74 FR 5560-5561; see also 74 FR
5535-5538. The two-cycle balance computation method has several
permutations but, generally speaking, a card issuer using the two-cycle
method assesses interest not only on the balance for the current
billing cycle but also on balances on days in the preceding billing
cycle. This method generally does not result in additional finance
charges for a consumer who consistently carries a balance from month to
month (and therefore does not receive a grace period) because interest
is always accruing on the balance. Nor does the two-cycle method affect
consumers who pay their balance in full within the grace period every
month because interest is not imposed on their balances. The two-cycle
method does, however, result in greater interest charges for consumers
who pay their balance in full one month but not the next month (and
therefore lose the grace period).
The following example illustrates how the two-cycle method results
in higher costs for these consumers than other balance computation
methods: Assume that the billing cycle on a credit card account starts
on the first day of the month and ends on the last day of the month.
The payment due date for the account is the twenty-fifth day of the
month. Under the terms of the account, the consumer will not be charged
interest on purchases if the balance at the end of a billing cycle is
paid in full by the following payment due date (in other words, if the
consumer receives a grace period). The consumer uses the credit card to
make a $500 purchase on March 15. The consumer pays the balance for the
February billing cycle in full on March 25. At the end of the March
billing cycle (March 31), the consumer's balance consists only of the
$500 purchase and the consumer will not be charged interest on that
balance if it is paid in full by the following due date (April 25). The
consumer pays $400 on April 25, leaving a $100 balance. Because the
consumer did not pay the balance for the March billing cycle in full on
April 25, the consumer would lose the grace period and most card
issuers would charge interest on the $500 purchase from the start of
the April billing cycle (April 1) through April 24 and interest on the
remaining $100 from April 25 through the end of the April billing cycle
(April 30). Card issuers using the two-cycle method, however, would
also charge interest on the $500 purchase from the date of purchase
(March 15) to the end of the March billing cycle (March 31).
The Board proposes to implement new TILA Section 127(j)(1)(A)'s
prohibition on two-cycle billing in proposed Sec. 226.54(a)(1)(i),
which states that, except as provided in proposed Sec. 226.54(b), a
card issuer must not impose finance charges as a result of the loss of
a grace period on a credit card account if those finance charges are
based on balances for days in billing cycles that precede the most
recent billing cycle. The Board also proposes to adopt Sec.
226.54(a)(2), which would define ``grace period'' for purposes of Sec.
226.54(a)(1) as having the same meaning as in Sec. 226.5(b)(2)(ii).
Section 226.5(b)(2)(ii) was amended by the July 2009 Regulation Z
Interim Final Rule to define ``grace period'' as a period within which
any credit extended may be repaid without incurring a finance charge
due to a periodic interest rate. 74 FR 36094. Finally, proposed comment
54(a)(1)-4 explains that Sec. 226.54(a)(1)(i) prohibits use of the
two-cycle average daily balance computation method.
Partial Grace Period Requirement
As discussed above, many credit card issuers that provide a grace
period currently require the consumer to pay off the entire balance on
the account or the entire balance subject to the grace period before
the period expires. However, new TILA Section 127(j)(1)(B) limits this
practice. Specifically, Section 127(j)(1)(B) provides that a creditor
may not impose any finance charge on a credit card account as a result
of the loss of any time period provided by the creditor within which
the consumer may repay any portion of the credit extended without
incurring a finance charge with respect to any balances or portions
thereof in the current billing cycle that were repaid within such time
period. The Board proposes to implement this prohibition in proposed
Sec. 226.54(a)(1)(ii), which states that, except as provided in
proposed Sec. 226.54(b), a card issuer must not impose finance charges
as a result of the loss of a grace period on a credit card account if
those finance charges are based on any portion of a balance subject to
a grace period that was repaid prior to the expiration of the grace
period.
The Board also proposes to adopt comment 54(a)(1)-5, which would
clarify that card issuers are not required to use a particular method
to comply with Sec. 226.54(a)(1)(ii) but provides an example of a
method that is consistent with the requirements of Sec.
226.54(a)(1)(ii). Specifically, it states that a card issuer can comply
with the requirements of Sec. 226.54(a)(1)(ii) by applying the
consumer's payment to the balance subject to the grace period at the
end of the prior billing cycle (in a manner consistent with the payment
allocation requirements in Sec. 226.53) and then calculating interest
charges based on the amount of that balance that remains unpaid. An
example of the application of this method is provided in proposed
comment 54(a)(1)-6 along with other examples of the application of
Sec. 226.54(a)(1)(i) and (ii).
In addition to the commentary clarifying the specific prohibitions
in Sec. 226.54(a)(1)(i) and (ii), the Board is proposing to adopt
three comments clarifying the general scope and applicability of Sec.
226.54. First, proposed comment 54(a)(1)-1 would clarify that Sec.
226.54 does not require the card issuer to provide a grace period or
prohibit a card issuer from placing limitations and conditions on a
grace period to the extent consistent with Sec. 226.54. Currently,
neither TILA nor Regulation Z requires a card issuer to provide a grace
period. Nevertheless, for competitive and other reasons, many credit
card issuers choose to do so, subject to certain limitations and
conditions. For example, credit card grace periods generally apply to
purchases but not to other types of transactions (such as cash
advances). In addition, as noted above, card issuers that provide a
grace period generally require the consumer to pay off all balances on
the account or the entire balance subject to the grace period before
the period expires.
Although new TILA Section 127(j) prohibits the imposition of
finance charges as a result of the loss of a grace period in certain
circumstances, the Board does not interpret this provision to mandate
that card issuers provide such a period or to limit card issuers'
ability to place limitations and conditions on a grace period to the
extent consistent with the statute. Instead, Section 127(j)(1) refers
to ``any time provided by the creditor within which the [consumer] may
repay any portion of the credit extended without incurring a finance
charge.'' This language indicates that card issuers retain the ability
to determine when and
[[Page 54168]]
under what conditions to provide a grace period on a credit card
account so long as card issuers that choose to provide a grace period
do so consistent with the requirements of new TILA Section 127(j).
The Board also proposes to adopt comment 54(a)(1)-2, which would
clarify that proposed Sec. 226.54 does not prohibit the card issuer
from charging accrued interest at the expiration of a deferred interest
or similar promotional program. Specifically, the comment would state
that, when a card issuer offers a deferred interest or similar
promotional program, Sec. 226.54 does not prohibit the card issuer
from charging that accrued interest to the account if the balance is
not paid in full prior to expiration of the period (consistent with
Sec. 226.55 and other applicable law and regulatory guidance). A
contrary interpretation of proposed Sec. 226.54 (and new TILA Section
127(j)) would effectively eliminate deferred interest and similar
programs by prohibiting the card issuer from charging interest based on
the deferred interest balance during the deferred interest period if
that balance was not paid in full at expiration. However, as discussed
above with respect to proposed Sec. 226.53, the Credit Card Act's
revisions to TILA Section 164 specifically create an exception to the
general rule governing payment allocation for deferred interest
programs, which indicates that Congress did not intend to ban such
programs. See Credit Card Act Sec. 104(1) (revised TILA Section
164(b)(2)).
Finally, proposed comment 54(a)(1)-3 would clarify that card
issuers must comply with the payment allocation requirements in Sec.
226.53 even if doing so will result in the loss of a grace period. For
example, as illustrated in proposed comment 54(a)(1)-6.ii, a card
issuer must generally allocate a payment in excess of the required
minimum periodic payment to a cash advance balance with a 25% rate
before a purchase balance with a purchase balance with a 15% rate even
if this will result in the loss of a grace period on the purchase
balance. Although there could be a narrow set of circumstances in
which--depending on the size of the balances and the amount of the
difference between the rates--this allocation would result in higher
interest charges than if the excess payment were applied in a way that
preserved the grace period, Congress did not create an exception for
these circumstances in the provisions of the Credit Card Act
specifically addressing payment allocation.
54(b) Exceptions
New TILA Section 127(j)(2) provides that the prohibitions in
Section 127(j)(1) do not apply to any adjustment to a finance charge as
a result of resolution of a dispute or as a result of the return of a
payment for insufficient funds. The Board proposes to implement these
exceptions in proposed Sec. 226.54(b).
The Board interprets the exception for the ``resolution of a
dispute'' in new TILA Section 127(j)(2)(A) to apply when the dispute is
resolved pursuant to TILA's dispute resolution procedures. Accordingly,
proposed Sec. 226.54(b)(1) would permit adjustments to finance charges
when a dispute is resolved under Sec. 226.12 (which governs the right
of a cardholder to assert claims or defenses against the card issuer)
or Sec. 226.13 (which governs resolution of billing errors).
In addition, because a payment may be returned for reasons other
than insufficient funds (such as because the account on which the
payment is drawn has been closed or because the consumer has instructed
the institution holding that account not to honor the payment), the
Board proposes to use its authority under TILA Section 105(a) to apply
the exception in new TILA Section 127(j)(2)(B) to all circumstances in
which adjustments to finance charges are made as a result of the return
of a payment.
Section 226.55 Limitations on Increasing Annual Percentage Rates, Fees,
and Charges
As revised by the Credit Card Act, TILA Section 171(a) generally
prohibits creditors from increasing any annual percentage rate, fee, or
finance charge applicable to any outstanding balance on a credit card
account under an open-end consumer credit plan. See 15 U.S.C. 1666i-1.
Revised TILA Section 171(b), however, provides exceptions to this rule
for temporary rates that expire after a specified period of time and
rates that vary with an index. Revised TILA Section 171(b) also
provides exceptions in circumstances where the creditor has not
received the required minimum periodic payment within 60 days after the
due date and where the consumer completes or fails to comply with the
terms of a workout or temporary hardship arrangement. Revised TILA
Section 171(c) limits a creditor's ability to change the terms
governing repayment of an outstanding balance. The Credit Card Act also
creates a new TILA Section 172, which provides that a creditor
generally cannot increase a rate, fee, or finance charge during the
first year after account opening and that a promotional rate (as
defined by the Board) generally cannot expire earlier than six months
after it takes effect. As discussed in detail below, the Board proposes
to implement both revised TILA Section 171 and new TILA Section 172 in
Sec. 226.55.
55(a) General Rule
As noted above, revised TILA Section 171(a) generally prohibits
increases in annual percentage rates, fees, and finance charges on
outstanding balances. Revised TILA Section 171(d) defines ``outstanding
balance'' as the amount owed as of the end of the fourteenth day after
the date on which the creditor provides notice of an increase in the
annual percentage rate, fee, or finance charge in accordance with TILA
Section 127(i).\25\ TILA Section 127(i)(1) and (2), which went into
effect on August 20, 2009, generally require creditors to notify
consumers 45 days before an increase in an annual percentage rate or
any other significant change in the terms of a credit card account (as
determined by rule of the Board).
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\25\ As discussed in the July 2009 Regulation Z Interim Final
Rule (at 74 FR 36090), the Board believes that this fourteen-day
period is intended to balance the interests of consumers and
creditors. On the one hand, the fourteen-day period ensures that the
increased rate, fee, or charge will not apply to transactions that
occur before the consumer has received the notice and had a
reasonable amount of time to review it and decide whether to use the
account for additional transactions. On the other hand, the
fourteen-day period reduces the potential that a consumer--having
been notified of an increase for new transactions--will use the 45-
day notice period to engage in transactions to which the increased
rate, fee, or charge cannot be applied.
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In the July 2009 Regulation Z Interim Final Rule, the Board
implemented new TILA Section 127(i)(1) and (2) in Sec. 226.9(c) and
(g). In addition to increases in annual percentage rates, Sec.
226.9(c)(2)(ii) lists the fees and other charges for which an increase
constitutes a significant change to the account terms necessitating 45
days' advance notice, including annual or other periodic fees, fixed
finance charges, minimum interest charges, transaction charges, cash
advance fees, late payment fees, over-the-limit fees, balance transfer
fees, returned-payment fees, and fees for required insurance, debt
cancellation, or debt suspension coverage. As discussed above, however,
the Board is proposing to amend Sec. 226.9(c)(2)(ii) to identify these
significant account terms by a cross-reference to the account-opening
disclosure requirements in Sec. 226.6(b). Because the definition of
outstanding balance in revised TILA Section 171(d) is expressly
conditioned on the provision of the 45-day advance notice,
[[Page 54169]]
the Board believes that it is consistent with the purposes of the
Credit Card Act to limit the general prohibition in revised TILA
Section 171(a) on increasing fees and finance charges to increases in
fees and charges for which a 45-day notice is required under Sec.
226.9.
Furthermore, because revised TILA Section 171(a) prohibits the
application of increased fees and charges to outstanding balances
rather than to new transactions or to the account as a whole, the Board
believes that it is appropriate to apply that prohibition only to fees
and charges that could be applied to an outstanding balance. For
example, increased cash advance or balance transfer fees would apply
only to new cash advances or balance transfers, not to existing
balances. Similarly, increased penalty fees such as late payment fees,
over-the-limit fees, and returned-payment fees would apply to the
account as a whole rather than any specific balance.\26\ Accordingly,
the Board proposes to use its authority under TILA Section 105(a) to
limit the general prohibition in revised TILA Section 171(a) to
increases in annual percentage rates and in fees and charges required
to be disclosed under Sec. 226.6(b)(2)(ii) (fees for the issuance or
availability of credit), Sec. 226.6(b)(2)(iii) (fixed finance charges
and minimum interest charges), or Sec. 226.6(b)(2)(xii) (fees for
required insurance, debt cancellation, or debt suspension
coverage).\27\
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\26\ However, the Board notes that a consumer that does not want
to accept an increase in these types of fees may reject the increase
pursuant to Sec. 226.9(h).
\27\ As discussed below with respect to proposed Sec.
226.55(b)(3), a card issuer may still increase these types of fees
and charges so long as the increased fee or charge is not applied to
the outstanding balance.
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In addition, for clarity and organizational purposes, proposed
Sec. 226.55(a) generally prohibits increases in annual percentage
rates and fees and charges required to be disclosed under Sec.
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) with respect to all
transactions, rather than just increases on existing balances. The
Board does not intend to alter the substantive requirements in revised
TILA Section 171. Instead, the Board believes that revised TILA Section
171 can be more clearly and effectively implemented if increases in
rates, fees, and charges that apply to transactions that occur more
than fourteen days after provision of a Sec. 226.9(c) or (g) notice
are addressed in an exception to the general prohibition rather than
placed outside that prohibition. The Board and the other Agencies
adopted a similar approach in the January 2009 FTC Act Rule. See 12 CFR
227.24, 74 FR 5560. Accordingly, proposed Sec. 226.55(a) states that,
except as provided in Sec. 226.55(b), a card issuer must not increase
an annual percentage rate or a fee or charge required to be disclosed
under Sec. 226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii).
Proposed comment 55(a)-1 provides examples of the general
application of Sec. 226.55(a) and the exceptions in Sec. 226.55(b).
Additional examples illustrating specific aspects of the exceptions in
Sec. 226.55(b) are provided in the commentary to those exceptions.
Proposed comment 55(a)-2 clarifies that nothing in Sec. 226.55
prohibits a card issuer from assessing interest due to the loss of a
grace period to the extent consistent with Sec. 226.54. In addition,
the comment states that a card issuer has not reduced an annual
percentage rate on a credit account for purposes of Sec. 226.55 if the
card issuer does not charge interest on a balance or a portion thereof
based on a payment received prior to the expiration of a grace period.
For example, if the annual percentage rate for purchases on an account
is 15% but the card issuer does not charge any interest on a $500
purchase balance because that balance was paid in full prior to the
expiration of the grace period, the card issuer has not reduced the 15%
purchase rate to 0% for purposes of Sec. 226.55.
55(b) Exceptions
Revised TILA Section 171(b) lists the exceptions to the general
prohibition in revised Section 171(a). Similarly, proposed Sec.
226.55(b) lists the exceptions to the general prohibition in proposed
Sec. 226.55(a). In addition, proposed Sec. 226.55(b) clarifies that
the listed exceptions are not mutually exclusive. In other words, a
card issuer may increase an annual percentage rate or a fee or charge
required to be disclosed under Sec. 226.6(b)(2)(ii), (b)(2)(iii), or
(b)(2)(xii) pursuant to an exception set forth in Sec. 226.55(b) even
if that increase would not be permitted under a different exception.
Proposed comment 55(b)-1 clarifies that, for example, although a card
issuer cannot increase an annual percentage rate pursuant to Sec.
226.55(b)(1) unless that rate is provided for a specified period of at
least six months, the card issuer may increase an annual percentage
rate during a specified period due to an increase in an index
consistent with Sec. 226.55(b)(2). Similarly, although Sec.
226.55(b)(3) does not permit a card issuer to increase an annual
percentage rate during the first year after account opening, the card
issuer may increase the rate during the first year after account
opening pursuant to Sec. 226.55(b)(4) if the required minimum periodic
payment is not received within 60 days after the due date.
Proposed comment 55(b)-2 addresses circumstances where the date on
which a rate, fee, or charge may be increased pursuant to an exception
in Sec. 226.55(b) does not fall on the first day of a billing cycle.
Because the Board understands that it may be operationally difficult
for some card issuers to apply an increased rate, fee, or charge in the
middle of a billing cycle, the comment clarifies that, in these
circumstances, the card issuer may delay application of the increased
rate, fee, or charge until the first day of the following billing cycle
without relinquishing the ability to apply that rate, fee, or charge.
An illustrative example is provided.
Proposed comment 55(b)-3 clarifies that, although nothing in Sec.
226.55 prohibits a card issuer from lowering an annual percentage rate
or a fee or charge required to be disclosed under Sec.
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii), a card issuer that does
so cannot subsequently increase the rate, fee, or charge unless
permitted by one of the exceptions in Sec. 226.55(b). The Board
believes that this interpretation is consistent with the intent of
revised TILA Section 171 insofar as it ensures that consumers are
informed of the key terms and conditions associated with a lowered
rate, fee, or charge before relying on that rate, fee, or charge. For
example, revised Section 171(b)(1)(A) requires creditors to disclose
how long a temporary rate will apply and the rate that will apply after
the temporary rate expires before the consumer engages in transactions
in reliance on the temporary rate. Similarly, revised Section
171(b)(3)(B) requires the creditor to disclose the terms of a workout
or temporary hardship arrangement before the consumer agrees to the
arrangement. The comment provides examples illustrating the application
of Sec. 226.55 when an annual percentage rate is lowered.
As discussed below, several of the exceptions in proposed Sec.
226.55 require the creditor to determine when a transaction occurred.
For example, consistent with revised TILA Section 171(d)'s definition
of ``outstanding balance,'' proposed Sec. 226.55(b)(3)(ii) provides
that a card issuer that discloses an increased rate pursuant to Sec.
226.9(c) or (g) may not apply that increased rate to transactions that
occurred prior to or within fourteen days after provision of the
notice. Accordingly, proposed comment 55(b)-4 clarifies that when a
transaction occurred, for purposes of Sec. 226.55, is generally
determined by the
[[Page 54170]]
date of the transaction. The Board understands that, in certain
circumstances, a short delay can occur between the date of the
transaction and the date on which the merchant charges that transaction
to the account. As a general matter, the Board believes that these
delays should not affect the application of Sec. 226.55. However, to
address the operational difficulty for card issuers in the rare
circumstance where a transaction that occurred within fourteen days
after provision of a Sec. 226.9(c) or (g) notice is not charged to the
account prior to the effective date of the increase or change, this
comment would clarify that the card issuer may treat the transaction as
occurring more than fourteen days after provision of the notice for
purposes of Sec. 226.55. In addition, the comment would clarify that,
when a merchant places a ``hold'' on the available credit on an account
for an estimated transaction amount because the actual transaction
amount will not be known until a later date, the date of the
transaction for purposes of Sec. 226.55 is the date on which the card
issuer receives the actual transaction amount from the merchant.
Illustrative examples are provided in proposed comment 55(b)(3)-4.iii.
This comment is based on comment 9(h)(3)(ii)-2, which was adopted in
the July 2009 Regulation Z Interim Final Rule. See 74 FR 36101.
Proposed comment 55(b)-5 clarifies the meaning of the term
``category of transactions,'' which is used in some of the exceptions
in Sec. 226.55(b). This comment states that, for purposes of Sec.
226.55, 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.\28\ For example, purchase transactions, cash advance
transactions, and balance transfer transactions are separate categories
of transactions for purposes of Sec. 226.55 if a card issuer applies
different annual percentage rates to each. Furthermore, if, for
example, the card issuer applies different annual percentage rates to
different types of purchase transactions (such as one rate for
purchases of gasoline or purchases over $100 and a different rate for
all other purchases), each type constitutes a separate category of
transactions for purposes of Sec. 226.55.
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\28\ Similarly, a type or group of transactions is a ``category
of transactions'' for purposes of Sec. 226.55 if a fee or charge
required to be disclosed under Sec. 226.6(b)(2)(ii), (b)(2)(iii),
or (b)(2)(xii) applies to those transactions that is different than
the fee or charge that applies to other transactions.
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Proposed comment 55(b)-6 clarifies the relationship between the
exceptions in Sec. 226.55(b) and the 45-day advance notice
requirements in Sec. 226.9(c) and (g). Specifically, it states that
nothing in Sec. 226.55 alters the requirements in Sec. 226.9(c) and
(g) that creditors provide written notice at least 45 days prior to the
effective date of certain increases in annual percentage rates, fees,
and charges. For example, although proposed Sec. 226.55(b)(3)(ii)
permits a card issuer that discloses an increased rate pursuant to
Sec. 226.9(c) or (g) to apply that rate to transactions that occurred
more than fourteen days after provision of the notice, the card issuer
cannot begin to accrue interest at the increased rate until that
increase goes into effect, consistent with Sec. 226.9(c) or (g).
Illustrative examples are provided in proposed comment 55(b)(3)-4.
Similarly, the comment clarifies that, on or after the effective date,
the card issuer cannot calculate interest charges for days before the
effective date based on the increased rate.\29\
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\29\ The Board understands that, when the effective date for an
increased rate falls in the middle of a billing cycle, some card
issuers are unable to begin accruing interest at the increased rate
on the effective date without applying that increased rate for the
entire billing cycle (including to balances on days preceding the
effective date). Although neither Sec. 226.9 nor Sec. 226.55
permits a card issuer to accrue interest at the increased rate for
days that precede the effective date, proposed comment 55(b)-2
acknowledges this operational difficulty by clarifying that card
issuers may delay application of the increased rate until the first
day of the following billing cycle without relinquishing the ability
to apply that rate.
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55(b)(1) Temporary Rate Exception
Revised TILA Section 171(b)(1) provides that a creditor may
increase an annual percentage rate upon the expiration of a specified
period of time, subject to three conditions. First, prior to
commencement of the period, the creditor must have disclosed to the
consumer, in a clear and conspicuous manner, the length of the period
and the increased annual percentage rate that will apply after
expiration of the period. Second, at the end of the period, the
creditor must not apply a rate that exceeds the increased rate that was
disclosed prior to commencement of the period. Third, at the end of the
period, the creditor must not apply the previously-disclosed increased
rate to transactions that occurred prior to commencement of the period.
Thus, under this exception, a creditor that, for example, discloses at
account opening that a 5% rate will apply to purchases for six months
and that a 15% rate will apply thereafter would be permitted to
increase the rate on the purchase balance to 15% after six months.
Proposed Sec. 226.55(b)(1) implements the exception in revised
TILA Section 171(b)(1) regarding temporary rates as well as the
requirements in new TILA Section 172(b) regarding promotional rates.
New TILA Section 172(b) provides that ``[n]o increase in any * * *
promotional rate (as that term is defined by the Board) shall be
effective before the end of the 6-month period beginning on the date on
which the promotional rate takes effect, subject to such reasonable
exceptions as the Board may establish by rule.'' Pursuant to this
authority, the Board believes that promotional rates should be subject
to the same requirements and exceptions as other temporary rates that
expire after a specified period of time. In particular, the Board
believes that consumers who rely on promotional rates should receive
the disclosures and protections set forth in revised TILA Section
171(b)(1) and proposed Sec. 226.55(b)(1). This will ensure that a
consumer will receive disclosure of the terms of the promotional rate
before engaging in transactions in reliance on that rate and that, at
the expiration of the promotion, the rate will only be increased
consistent with those terms. Accordingly, the Board has incorporated
the requirement that promotional rates last at least six months into
proposed Sec. 226.55(b)(1), which would permit a card issuer to
increase a temporary annual percentage rate upon the expiration of a
specified period that is six months or longer.
Furthermore, pursuant to its authority under new TILA Section
172(b) to establish reasonable exceptions to the six-month requirement
for promotional rates, the Board believes that it is appropriate to
apply the other exceptions in revised TILA Section 171(b) and proposed
Sec. 226.55(b) to promotional rate offers. For example, the Board
believes that a card issuer should be permitted to offer a consumer a
promotional rate that varies with an index consistent with revised TILA
Section 171(b)(2) and proposed Sec. 226.55(b)(2) (such as a rate that
is one percentage point over a prime rate that is not under the card
issuer's control). Similarly, the Board believes that a card issuer
should be permitted to increase a promotional rate if the account
becomes more than 60 days delinquent during the promotional period
consistent with revised TILA Section 171(b)(4) and proposed Sec.
226.55(b)(4). Thus, the Board would apply to promotional rates the
general proposition in proposed Sec. 226.55(b) that a rate may be
increased pursuant to an exception in Sec. 226.55(b) even if that
increase would not be permitted under a different exception.
The Board proposes to implement the requirement in revised TILA
Section
[[Page 54171]]
171(b)(1)(A) that creditors disclose the length of the period and the
annual percentage rate that will apply after the expiration of that
period in proposed Sec. 226.55(b)(1)(i). This language tracks Sec.
226.9(c)(2)(v)(B)(1), which the Board adopted in the July 2009
Regulation Z Interim Final Rule as part of an exception to the general
requirement that creditors provide 45 days notice before an increase in
annual percentage rate. Because the disclosure requirements in Sec.
226.9(c)(2)(v)(B)(1) and proposed Sec. 226.55(b)(1)(i) implement the
same statutory provision (revised TILA Section 171(b)(1)(A)), the Board
believes a single set of disclosures should satisfy both requirements.
Accordingly, proposed comment 55(b)(1)-1 clarifies that a card issuer
that has complied with the disclosure requirements in Sec.
226.9(c)(2)(v)(B) has also complied with the disclosure requirements in
Sec. 226.55(b)(2)(i). In other words, the expiration of a temporary
rate cannot be used as a reason to apply an increased rate to a balance
that preceded application of the temporary rate. For example, assume
that a credit card account has a $5,000 purchase balance at a 15% rate
and that the card issuer reduces the rate that applies to all purchases
(including the $5,000 balance) to 10% for six months with a 22% rate
applying thereafter. Under proposed Sec. 226.55(b)(1)(ii)(A), the card
issuer could not apply the 22% rate to the $5,000 balance upon
expiration of the six-month period (although the card issuer could
apply the original 15% rate to that balance).
The Board proposes to implement in Sec. 226.55(b)(1)(ii) the
limitations in revised TILA Section 171(b)(1)(B) and (C) on the
application of increased rates following expiration of the specified
period. First, proposed Sec. 226.55(b)(1)(ii)(A) states that, upon
expiration of the specified period, a card issuer must not apply an
annual percentage rate to transactions that occurred prior to the
period that exceeds the rate that applied to those transactions prior
to the period.
Second, proposed Sec. 226.55(b)(1)(ii)(B) states that, if the
disclosures required by Sec. 226.55(b)(1)(i) are provided pursuant to
Sec. 226.9(c), the card issuer must not--upon expiration of the
specified period--apply an annual percentage rate to transactions that
occurred within fourteen days after provision of the notice that
exceeds the rate that applied to that category of transactions prior to
provision of the notice. The Board believes that this clarification is
necessary to ensure that card issuers do not apply an increased rate to
an outstanding balance (as defined in revised TILA Section 171(d)) upon
expiration of the specified period. Accordingly, consistent with the
purpose of revised TILA Section 171(d), proposed Sec.
226.55(b)(1)(ii)(B) would ensure that a consumer will have fourteen
days to receive the Sec. 226.9(c) notice and review the terms of the
temporary rate (including the increased rate that will apply upon
expiration of the specified period) before engaging in transactions to
which that increased rate may eventually apply.
Third, proposed Sec. 226.55(b)(1)(ii)(C) states that, upon
expiration of the specified period, the card issuer must not apply an
annual percentage rate to transactions that occurred during the
specified period that exceeds the increased rate disclosed pursuant to
Sec. 226.55(b)(1)(i). In other words, the card issuer can only
increase the rate consistent with the previously-disclosed terms.
Examples illustrating the application of proposed Sec.
226.55(b)(1)(ii)(A), (B), and (C) are provided in comments 55(a)-1 and
55(b)-3.
Proposed comment 55(b)(1)-2 clarifies when the specified period
begins for purposes of the six-month requirement in Sec. 226.55(b)(1).
As a general matter, proposed comment 55(b)(1)-1 states that the
specified period must expire no less than six months after the date on
which the creditor discloses to the consumer the length of the period
and rate that will apply thereafter (as required by Sec.
226.55(b)(1)(i)). However, if the card issuer provides these
disclosures before the consumer can use the account for transactions to
which the temporary rate will apply, the temporary rate must expire no
less than six months from the date on which it becomes available. For
example, assume that on January 1 a card issuer offers a 5% annual
percentage rate for six months on purchases (with a 15% rate applying
thereafter). If a consumer may begin making purchases at the 5% rate on
January 1, Sec. 226.55(b)(1) would permit the issuer to begin accruing
interest at the 15% rate on July 1. However, if a consumer may not
begin making purchases at the 5% rate until February 1, Sec.
226.55(b)(1) would not permit the issuer to begin accruing interest at
the 15% rate until August 1.
The Board understands that card issuers often limit the application
of a promotional rate to particular categories of transactions (such as
balance transfers or purchases over $100). The Board does not believe
that the six-month requirement in new TILA Section 172(b) was intended
to prohibit this practice so long as the consumer receives the benefit
of the promotional rate for at least six months. Accordingly, proposed
comment 55(b)(1)-2 clarifies that Sec. 226.55(b)(1) does not prohibit
these types of limitations. However, the comment also clarifies that,
in circumstances where the card issuer limits application of the
temporary rate to a particular transaction, the temporary rate must
expire no less than six months after the date on which that transaction
occurred. For example, if on January 1 a creditor offers a 0% temporary
rate on the purchase of an appliance and the consumer uses the account
to purchase a $1,000 appliance on March 1, the creditor cannot increase
the rate on that $1,000 purchase until September 1.
The Board believes that this application of the six-month
requirement is consistent with the intent of new TILA Section 172(b).
Although the six-month requirement could be interpreted as requiring a
separate six-month period for every transaction to which the temporary
rate applies, the Board believes this interpretation would create a
level of complexity that would be not only confusing for consumers but
also operationally burdensome for card issuers, potentially leading to
a reduction in promotional rate offers that provide significant
consumer benefit.
Proposed comment 55(b)(1)-3 clarifies that the general prohibition
in Sec. 226.55(a) applies to the imposition of accrued interest upon
the expiration of a deferred interest or similar promotional program
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. As discussed in the January 2009 FTC Act
Rule, the assessment of deferred interest is effectively an increase in
rate on an existing balance. See 74 FR 5527-5528. However, if properly
disclosed, deferred interest programs can provide substantial benefits
to consumers. See 74 FR 20812-20813. Furthermore, as discussed above
with respect to proposed comment 54(a)(1)-2, the Board does not believe
that the Credit Card Act was intended to ban properly-disclosed
deferred interest programs. Accordingly, proposed comment 55(b)(1)-3
further clarifies that card issuers may continue to offer such programs
consistent with the requirements of Sec. 226.55(b)(1). In particular,
prior to the commencement of the deferred interest period, Sec.
226.55(b)(1)(i) requires the card issuer to disclose the length of the
period and the rate that will apply to the balance subject to the
deferred interest program
[[Page 54172]]
if that balance is not paid in full prior to expiration of the period.
The comment provides examples illustrating the application of Sec.
226.55 to deferred interest and similar programs.
Finally, proposed comment 55(b)(1)-4 clarifies that Sec.
226.55(b)(1) does not permit a card issuer to apply an increased rate
that is contingent on a particular event or occurrence or that may be
applied at the card issuer's discretion. The comment provides examples
of rate increases that are not permitted by Sec. 226.55.
55(b)(2) Variable Rate Exception
Revised TILA Section 171(b)(2) provides that a card issuer may
increase ``a variable annual percentage rate in accordance with a
credit card agreement that provides for changes in the rate according
to operation of an index that is not under the card issuer's control
and is available to the general public.'' The Board proposes to
implement this exception in Sec. 226.55(b)(2), which states that a
creditor may increase an annual percentage rate that varies according
to an index that is not under the creditor's control and is available
to the general public when the increase in rate is due to an increase
in the index.
The proposed commentary to Sec. 226.55(b)(2) is modeled on
commentary adopted by the Board and the other Agencies in the January
2009 FTC Act Rule as well as Sec. 226.5b(f) and its commentary. See 12
CFR 227.24 comments 24(b)(2)-1 through 6, 74 FR 5531, 5564; Sec.
226.5b(f)(1), (3)(ii); comment 5b(f)(1)-1 and -2; comment 5b(f)(3)(ii)-
1. Proposed comment 55(b)(2)-1 clarifies that Sec. 226.55(b)(2) does
not permit a card issuer to increase a variable annual percentage rate
by changing the method used to determine that rate (such as by
increasing the margin), even if that change will not result in an
immediate increase. However, consistent with existing comment
5b(f)(3)(v)-2, the comment also clarifies that a card issuer may change
the day of the month on which index values are measured to determine
changes to the rate.
Proposed comment 55(b)(1)-2 further clarifies that a card issuer
may not increase a variable rate based on its own prime rate or cost of
funds. A card issuer is permitted, however, to use a published prime
rate, such as that in the Wall Street Journal, even if the card
issuer's own prime rate is one of several rates used to establish the
published rate. In addition, proposed comment 55(b)(2)-3 clarifies that
a publicly-available index need not be published in a newspaper, but it
must be one the consumer can independently obtain (by telephone, for
example) and use to verify the annual percentage rate applied to the
credit card account.
Because the conversion of a non-variable rate to a variable rate
could lead to future increases in the rate that applies to an existing
balance, proposed comment 55(b)(2)-4 clarifies that a non-variable rate
may be converted to a variable rate only when specifically permitted by
one of the exceptions in Sec. 226.55(b). For example, under Sec.
226.55(b)(1), a card issuer may convert a non-variable rate to a
variable rate at the expiration of a specified period if this change
was disclosed prior to commencement of the period.
Because Sec. 226.55 applies only to increases in annual percentage
rates, proposed comment 55(b)(2)-5 clarifies that nothing in Sec.
226.55 prohibits a card issuer from changing a variable rate to an
equal or lower non-variable rate. Whether the non-variable rate is
equal to or lower than the variable rate is determined at the time the
card issuer provides the notice required by Sec. 226.9(c). An
illustrative example is provided.
Proposed comment 55(b)(2)-6 clarifies that a card issuer may change
the index and margin used to determine a variable rate if the original
index becomes unavailable, so long as historical fluctuations in the
original and replacement indices were substantially similar and the
replacement index and margin will produce a rate similar to the rate
that was in effect at the time the original index became unavailable.
This comment further clarifies that, if the replacement index is newly
established and therefore does not have any rate history, it may be
used if it produces a rate substantially similar to the rate in effect
when the original index became unavailable.
55(b)(3) Advance Notice Exception
Proposed Sec. 226.55(a) prohibits increases in annual percentage
rates and fees and charges required to be disclosed under Sec.
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) with respect to both
existing balances and new transactions. However, as discussed above,
the prohibition on increases in rates, fees, and finance charges in
revised TILA Section 171 applies only to ``outstanding balances'' as
defined in Section 171(d). Accordingly, proposed Sec. 226.55(b)(3)
provides that a card issuer may generally increase an annual percentage
rate or a fee or charge required to be disclosed under Sec.
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) with respect to new
transactions after complying with the notice requirements in Sec.
226.9(b), (c), or (g).
Because Sec. 226.9 applies different notice requirements in
different circumstances, proposed Sec. 226.55(b)(3) clarifies that the
transactions to which an increased rate, fee, or charge may be applied
depend on the type of notice required. As a general matter, when an
annual percentage rate, fee, or charge is increased pursuant to Sec.
226.9(c) or (g), proposed Sec. 226.55(b)(3)(ii) provides that the card
issuer must not apply the increased rate, fee, or charge to
transactions that occurred within fourteen days after provision of the
notice. This is consistent with revised TILA Section 171(d), which
defines the outstanding balance to which an increased rate, fee, or
finance charge may not be applied as the amount due at the end of the
fourteenth day after notice of the increase is provided.
However, pursuant to its authority under TILA Section 105(a), the
Board proposes to establish a different approach for increased rates,
fees, and charges disclosed pursuant to Sec. 226.9(b). As discussed in
the July 2009 Regulation Z Interim Final Rule, the Board believes that
the fourteen-day period is intended, in part, to ensure that an
increased rate, fee, or charge will not apply to transactions that
occur before the consumer has received the notice of the increase and
had a reasonable amount of time to review it and decide whether to
engage in transactions to which the increased rate, fee, or charge will
apply. See 74 FR 36090. The Board does not believe that a fourteen-day
period is necessary for increases disclosed pursuant to Sec. 226.9(b),
which requires card issuers to disclose any new finance charge terms
applicable to supplemental access devices (such as convenience checks)
and additional features added to the account after account opening
before the consumer uses the device or feature for the first time. For
example, Sec. 226.9(b)(3)(i)(A) requires that card issuers providing
checks that access a credit card account 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 increased
rates, fees, and charges disclosed pursuant to a Sec. 226.9(c) and (g)
notice, the fourteen-day period is not necessary for increases
disclosed pursuant to Sec. 226.9(b) because the device or feature will
not be used before the consumer has received notice of the applicable
terms. Accordingly, proposed
[[Page 54173]]
Sec. 226.55(b)(3)(i) provides that, if a card issuer discloses an
increased annual percentage rate, fee, or charge pursuant to Sec.
226.9(b), the card issuer must not apply that rate, fee, or charge to
transactions that occurred prior to provision of the notice.
Proposed Sec. 226.55(b)(3)(iii) provides that the exception in
Sec. 226.55(b)(3) does not permit a card issuer to increase an annual
percentage rate or a fee or charge required to be disclosed under Sec.
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) during the first year
after the credit card account is opened. This provision implements new
TILA Section 172(a), which generally prohibits increases in annual
percentage rates, fees, and finance charges during the one-year period
beginning on the date the account is opened.
Proposed comment 55(b)(3)-1 clarifies that a card issuer may not
increase a fee or charge required to be disclosed under Sec.
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) pursuant to Sec.
226.55(b)(3) if the consumer has rejected the increased fee or charge
pursuant to Sec. 226.9(h). In addition, proposed comment 55(b)(3)-2
clarifies that, if an increased annual percentage rate, fee, or charge
is disclosed pursuant to both Sec. 226.9(b) and (c), the requirements
in Sec. 226.55(b)(3)(ii) control and the rate, fee, or charge may only
be applied to transactions that occur more than fourteen days after
provision of the Sec. 226.9(c) notice.
Proposed comment 55(b)(3)-3 clarifies whether certain changes to a
credit card account constitute an ``account opening'' for purposes of
the prohibition in Sec. 226.55(b)(3)(iii) on increasing annual
percentage rates and fees and charges required to be disclosed under
Sec. 226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) during the first
year after account opening. In particular, the comment would
distinguish between circumstances in which a card issuer opens multiple
accounts for the same consumer and circumstances in which a card issuer
substitutes, replaces, or consolidates one account with another. As an
initial matter, this comment would clarify that, when a consumer has a
credit card account with a card issuer and the consumer opens a new
credit card account with the same card issuer (or its affiliate or
subsidiary), the opening of the new account constitutes the opening of
a credit card account for purposes of Sec. 226.55(b)(3)(iii) if, more
than 30 days after the new account is opened, the consumer has the
option to obtain additional extensions of credit on each account. Thus,
for example, if a consumer opens a credit card account with a card
issuer on January 1 of year one and opens a second credit card account
with that card issuer on July 1 of year one, the opening of the second
account constitutes an account opening for purposes of Sec.
226.55(b)(3)(iii) so long as, on August 1, the consumer has the option
to 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 card issuer has two separate account
relationships with the consumer, the prohibition in Sec.
226.55(b)(3)(iii) on increasing annual percentage rates and fees and
charges required to be disclosed under Sec. 226.6(b)(2)(ii),
(b)(2)(iii), or (b)(2)(xii) during the first year after account opening
would apply to the opening of the second account.\30\
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\30\ This comment is based on commentary to the January 2009 FTC
Act Rule proposed by the Board and the other Agencies in May 2009.
See 12 CFR 227.24, proposed comment 24-4, 74 FR 20816; see also 74
FR 20809. In that proposal, the Board recognized that the process of
replacing one 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. For this reason, the Board sought comment on
whether 15 or 30 days was the appropriate amount of time to complete
this process. In response, industry commenters generally stated that
at least 30 days was required. Accordingly, the Board is proposing a
30-day period in comment 55(b)(3)-3.
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In contrast, the comment would clarify that an account has not been
opened for purposes of Sec. 226.55(b)(3)(iii) when a card issuer
substitutes or replaces one credit card account with another 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 a card issuer consolidates or combines a credit card
account with one or more other credit card accounts into a single
credit card account. As discussed below with respect to proposed Sec.
226.55(d)(2), the Board believes 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 substitution or replacement of an acquired credit
card account does not constitute an ``account opening'' for purposes of
Sec. 226.55(b)(3)(iii). Thus, in these circumstances, the prohibition
in Sec. 226.55(b)(3)(iii) would not apply. However, when a
substitution, replacement or consolidation occurs during the first year
after account opening, proposed comment 55(b)(3)-3.ii.B would clarify
that the card issuer may not increase an annual percentage rate, fee,
or charge in a manner otherwise prohibited by Sec. 226.55.\31\
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\31\ For example, assume that, on January 1 of year one, a
consumer opens a credit card account with a purchase rate of 15%. On
July 1 of year one, the account is replaced with a credit card
account issued by the same card issuer, which offers different
features (such as rewards on purchases). Under these circumstances,
the card issuer could not increase the annual percentage rate for
purchases to a rate that is higher than 15% pursuant to Sec.
226.55(b)(3) until January 1 of year two (which is one year after
the first account was opened).
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Proposed comment 55(b)(3)-4 provides illustrative examples of the
application of the exception in proposed Sec. 226.55(b)(3). Proposed
comment 55(b)(3)-5 contains a cross-reference to proposed comment
55(c)(1)-3, which clarifies the circumstances in which increased fees
and charges required to be disclosed under Sec. 226.6(b)(2)(ii),
(b)(2)(iii), or (b)(2)(xii) may be imposed consistent with Sec.
226.55.
55(b)(4) Delinquency Exception
Revised TILA Section 171(b)(4) permits a creditor to increase an
annual percentage rate, fee, or finance charge ``due solely to the fact
that a minimum payment by the [consumer] has not been received by the
creditor within 60 days after the due date for such payment.'' However,
this exception is subject to two conditions. First, revised Section
171(b)(4)(A) provides that the notice of the increase must include ``a
clear and conspicuous written statement of the reason for the increase
and that the increase will terminate not later than 6 months after the
date on which it is imposed, if the creditor receives the required
minimum payments on time from the [consumer] during that period.''
Second, revised Section 171(b)(4)(B) provides that the creditor must
``terminate [the] increase not later than 6 months after the date on
which it is imposed, if the creditor receives the required minimum
payments on time during that period.''
The Board proposes to implement this exception in Sec.
226.55(b)(4). The additional notice requirements in revised TILA
Section 171(b)(4)(A) are set forth in proposed Sec. 226.55(b)(4)(i).
The requirement in revised Section 171(b)(4)(B) that the increase be
terminated if the card issuer receives timely payments during the six
months following the increase is implemented in proposed Sec.
226.55(b)(4)(ii), although the Board proposes three adjustments to the
statutory requirement pursuant to its authority under TILA Section
105(a).
First, proposed Sec. 226.55(b)(4)(ii) interprets the requirement
that the
[[Page 54174]]
creditor ``terminate'' the increase as a requirement that the card
issuer reduce the annual percentage rate, fee, or charge to the rate,
fee, or charge that applied prior to the increase. The Board believes
that this interpretation is consistent with the intent of revised TILA
Section 171(b)(4)(B) insofar as the effect of the increase will be
undone. The Board does not interpret revised TILA Section 171(b)(4)(B)
to require the card issuer to refund or credit the account for amounts
charged as a result of the increase prior to the termination.
Second, for clarity, proposed Sec. 226.55(b)(4)(ii) provides that
the card issuer must reduce the annual percentage rate, fee, or charge
after receiving six consecutive required minimum periodic payments on
or before the payment due date beginning with the first payment due
following the effective date of the increase. The Board believes that
shifting the focus from months to minimum payments provides more
specificity and clarity for both consumers and card issuers as to what
is required to obtain the reduction. Furthermore, the Board believes
that limiting this requirement to the period immediately following the
increase is consistent with revised TILA Section 171(b)(4)(B), which
requires a creditor to terminate an increase ``6 months after the date
on which it is imposed, if the creditor receives the required minimum
payments on time during that period.'' Thus, as clarified in proposed
comment 55(b)(4)-3 (which is discussed below), proposed Sec.
226.55(b)(4)(ii) would not require a card issuer to terminate an
increase if, at some later point in time, the card issuer receives six
consecutive required minimum periodic payments on or before the payment
due date.
Third, proposed Sec. 226.55(b)(4)(ii) provides that the card
issuer must also reduce the annual percentage rate, fee, or charge with
respect to transactions that occurred within fourteen days after
provision of the Sec. 226.9(c) or (g) notice. This requirement is
consistent with the definition of ``outstanding balance'' in revised
TILA Section 171(d), as applied in proposed Sec. 226.55(b)(1)(ii)(B)
and proposed Sec. 226.55(b)(3)(ii).
Proposed comment 55(b)(4)-1 clarifies that, in order to satisfy the
condition in Sec. 226.55(b)(4) that the card issuer has not received
the consumer's required minimum periodic payment within 60 days after
the payment due date, a card issuer that requires monthly minimum
payments generally must not have received two consecutive minimum
payments. The comment further clarifies that whether a required minimum
periodic payment has been received for purposes of Sec. 226.55(b)(4)
depends on whether the amount received is equal to or more than the
first outstanding required minimum periodic payment. The comment
provides the following example: Assume that the required minimum
periodic payments for a credit card account are due on the fifteenth
day of the month. On May 13, the card issuer has not received the $50
required minimum periodic payment due on March 15 or the $150 required
minimum periodic payment due on April 15. If the card issuer receives a
$50 payment on May 14, Sec. 226.55(b)(4) does not apply because the
payment is equal to the required minimum periodic payment due on March
15 and therefore the account is not more than 60 days delinquent.
However, if the card issuer instead received a $40 payment on May 14,
Sec. 226.55(b)(4) would apply because the payment is less than the
required minimum periodic payment due on March 15. Furthermore, if the
card issuer received the $50 payment on May 15, Sec. 226.55(b)(4)
would apply because the card issuer did not receive the required
minimum periodic payment due on March 15 within 60 days after the due
date for that payment.
As discussed above, proposed Sec. 226.9(g)(3)(i)(B) would require
that the written notice provided to consumers 45 days before an
increase in rate due to delinquency or default or as a penalty include
the information required by revised Section 171(b)(4)(A). Accordingly,
proposed comment 55(b)(4)-2 clarifies that a card issuer that has
complied with the disclosure requirements in Sec. 226.9(g)(3)(i)(B)
has also complied with the disclosure requirements in Sec.
226.55(b)(4)(i).
Proposed comment 55(b)(4)-3 clarifies the requirements in Sec.
226.55(b)(4)(ii) regarding the reduction of annual percentage rates,
fees, or charges that have been increased pursuant to Sec.
226.55(b)(4). First, as discussed above, the comment clarifies that
Sec. 226.55(b)(4)(ii) does not apply if the card issuer does not
receive six consecutive required minimum periodic payments on or before
the payment due date beginning with the payment due immediately
following the effective date of the increase, even if, at some later
point in time, the card issuer receives six consecutive required
minimum periodic payments on or before the payment due date.
Second, the comment states that, although Sec. 226.55(b)(4)(ii)
requires the card issuer to reduce an annual percentage rate, fee, or
charge increased pursuant to Sec. 226.55(b)(4) to the annual
percentage rate, fee, or charge that applied prior to the increase,
this provision does not prohibit the card issuer from applying an
increased annual percentage rate, fee, or charge consistent with any of
the other exceptions in Sec. 226.55(b). For example, if a temporary
rate applied prior to the Sec. 226.55(b)(4) increase and the temporary
rate expired before a reduction in rate pursuant to Sec. 226.55(b)(4),
the card issuer may apply an increased rate to the extent consistent
with Sec. 226.55(b)(1). Similarly, if a variable rate applied prior to
the Sec. 226.55(b)(4) increase, the card issuer may apply any increase
in that variable rate to the extent consistent with Sec. 226.55(b)(2).
This is consistent with proposed Sec. 226.55(b), which provides that a
card issuer may increase an annual percentage rate or a fee or charge
required to be disclosed under Sec. 226.6(b)(2)(ii), (b)(2)(iii), or
(b)(2)(xii) pursuant to one of the exceptions in Sec. 226.55(b) even
if that increase would not be permitted under a different exception.
Third, the comment states that, if Sec. 226.55(b)(4)(ii) requires
a card issuer to reduce an annual percentage rate, fee, or charge on a
date that is not the first day of a billing cycle, the card issuer may
delay application of the reduced rate, fee, or charge until the first
day of the following billing cycle. This is consistent with proposed
comment 55(b)-2, which clarifies that a card issuer may delay
application of an increase in a rate, fee, or charge until the start of
the next billing cycle without relinquishing its ability to apply that
rate, fee, or charge. Finally, the comment provides examples
illustrating the application of Sec. 226.55(b)(4)(ii).
55(b)(5) Workout and Temporary Hardship Arrangement Exception
Revised TILA Section 171(b)(3) permits a creditor to increase an
annual percentage rate, fee, or finance charge ``due to the completion
of a workout or temporary hardship arrangement by the [consumer] or the
failure of a [consumer] to comply with the terms of a workout or
temporary hardship arrangement.'' However, like the exception for
delinquencies of more than 60 days in revised TILA Section 171(b)(4),
this exception is subject to two conditions. First, revised Section
171(b)(3)(A) provides that ``the annual percentage rate, fee, or
finance charge applicable to a category of transactions following any
such increase does not exceed the rate, fee, or finance charge that
applied to that category of transactions prior to commencement of the
arrangement.'' Second, revised Section 171(b)(3)(B) provides that the
creditor must have ``provided the
[[Page 54175]]
[consumer], prior to the commencement of such arrangement, with clear
and conspicuous disclosure of the terms of the arrangement (including
any increases due to such completion or failure).''
The Board proposes to implement this exception in Sec.
226.55(b)(5). The notice requirements in revised Section 171(b)(3)(B)
are set forth in proposed Sec. 226.55(b)(5)(i). The limitation on
increases following completion or failure of a workout or temporary
hardship arrangement is set forth in proposed Sec. 226.55(b)(5)(ii).
Proposed comment 55(b)(5)-1 clarifies that nothing in Sec.
226.55(b)(5) permits a card issuer to alter the requirements of Sec.
226.55 pursuant to a workout or temporary hardship arrangement. For
example, a card issuer cannot increase an annual percentage rate or a
fee or charge required to be disclosed under Sec. 226.6(b)(2)(ii),
(b)(2)(iii), or (b)(2)(xii) pursuant to a workout or temporary hardship
arrangement unless otherwise permitted by Sec. 226.55. In addition, a
card issuer cannot require the consumer to make payments with respect
to a protected balance that exceed the payments permitted under Sec.
226.55(c).\32\
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\32\ The definition of ``protected balance'' and the permissible
repayment methods for such a balance are discussed in detail below
with respect to proposed Sec. 226.55(c).
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Proposed comment 55(b)(5)-2 clarifies that a card issuer that has
complied with the disclosure requirements in Sec. 226.9(c)(2)(v)(D)
has also complied with the disclosure requirements in Sec.
226.55(b)(5)(i). The comment also contains a cross-reference to
proposed comment 9(c)(2)(v)-8, which the Board adopted in the July 2009
Regulation Z Interim Final Rule to clarify the terms a creditor is
required to disclose prior to commencement of a workout or temporary
hardship arrangement for purposes of Sec. 226.9(c)(2)(v)(D), which is
an exception to the general requirement that a creditor provide 45 days
advance notice of an increase in annual percentage rate. See 74 FR
36099. Because the disclosure requirements in Sec. 226.9(c)(2)(v)(D)
and proposed Sec. 226.55(b)(5)(i) implement the same statutory
provision (revised TILA Section 171(b)(3)(B)), the Board believes a
single set of disclosures should satisfy the requirements of all three
provisions.
Similar to the commentary to proposed Sec. 226.55(b)(4), proposed
comment 55(b)(5)-3 states that, although the card issuer may not apply
an annual percentage rate, fee, or charge to transactions that occurred
prior to commencement of the arrangement that exceeds the rate, fee, or
charge that applied to those transactions prior to commencement of the
arrangement, Sec. 226.55(b)(5)(ii) does not prohibit the card issuer
from applying an increased rate, fee, or charge upon completion or
failure of the arrangement to the extent consistent with any of the
other exceptions in Sec. 226.55(b) (such as an increase in a variable
rate consistent with proposed Sec. 226.55(b)(2)). Finally, proposed
comment 55(b)(5)-4 provides illustrative examples of the application of
this exception.
55(b)(6) Servicemembers Civil Relief Act Exception
The Board proposes to use its authority under TILA Section 105(a)
to clarify the relationship between the general prohibition on
increasing annual percentage rates in revised TILA Section 171 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 credit card accounts,
this restriction applies during the period of military service. See 50
U.S.C. app. 527(a)(1)(B).\33\
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\33\ 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 revised TILA Section 171, a creditor that complies with the
SCRA by lowering the annual percentage rate that applies to an existing
balance on a credit card account when the consumer enters military
service arguably 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. In May 2009, the Board and the other Agencies
proposed to create an exception to the general prohibition in the
January 2009 FTC Act Rule on applying increased rates to existing
balances for these circumstances, provided that the increased rate does
not exceed the rate that applied prior to the period of military
service. See 12 CFR 227.24(b)(6), 74 FR 20814; see also 74 FR 20812.
Revised TILA Section 171 does not contain a similar exception. However,
the Board does not believe that Congress intended to prohibit creditors
from returning an annual percentage rate that has been reduced by
operation of the SCRA to its pre-military service level once the SCRA
no longer applies. Accordingly, the Board proposes to create Sec.
226.55(b)(6), which states that, if an annual percentage rate has been
decreased pursuant to the SCRA, a card issuer may increase that annual
percentage rate once the SCRA no longer applies. However, the card
issuer would not be permitted to apply an annual percentage rate to any
transactions that occurred prior to the decrease that exceeds the rate
that applied to those transactions prior to the decrease. Furthermore,
because the Board believes that a consumer leaving military service
should receive 45 days advance notice of this increase in rate, the
Board has not proposed a corresponding exception to Sec. 226.9.
Proposed comment 55(b)(6)-1 clarifies that, although Sec.
226.55(b)(6) requires the card issuer to apply to any transactions that
occurred prior to a decrease in annual percentage rate pursuant to 50
U.S.C. app. 527 a rate that does not exceed the rate that applied to
those transactions prior to the decrease, the card issuer may apply an
increased rate once 50 U.S.C. app 527 no longer applies, to the extent
consistent with any of the other exceptions in Sec. 226.55(b). For
example, if the rate that applied prior to the decrease was a variable
rate, the card issuer may apply any increase in that variable rate to
the extent consistent with Sec. 226.55(b)(2). This comment mirrors
similar commentary to proposed Sec. 226.55(b)(4) and (b)(5). An
illustrative example is provided in proposed comment 26(b)(6)-2.
55(c) Treatment of Protected Balances
Revised TILA Section 171(c)(1) states that ``[t]he creditor shall
not change the terms governing the repayment of any outstanding
balance, except that the creditor may provide the [consumer] with one
of the methods described in [revised Section 171(c)(2)] * * * or a
method that is no less beneficial to the [consumer] than one of those
methods.'' Revised TILA Section 171(c)(2) lists two methods of repaying
an outstanding balance: First, an amortization period of not less than
five years, beginning on the effective date of the increase set forth
in the Section 127(i) notice; and, second, a required minimum periodic
payment that includes a percentage of the outstanding balance that is
equal to not more than twice the percentage required before the
effective date of the increase set forth in the Section 127(i) notice.
For clarity, proposed Sec. 226.55(c)(1) defines the balances
subject to the
[[Page 54176]]
protections in revised TILA Section 171(c) as ``protected balances.''
Under this definition, a ``protected balance'' is the amount owed for a
category of transactions to which an increased annual percentage rate
or an increased fee or charge required to be disclosed under Sec.
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) cannot be applied after
the annual percentage rate, fee, or charge for that category of
transactions has been increased pursuant to Sec. 226.55(b)(3). For
example, when a card issuer notifies a consumer of an increase in the
annual percentage rate that applies to new purchases pursuant to Sec.
226.9(c), the protected balance is the purchase balance at the end of
the fourteenth day after provision of the notice. See Sec.
226.55(b)(3)(ii). The Board and the other Agencies adopted a similar
definition in the January 2009 FTC Act Rule. See 12 CFR 227.24(c), 74
FR 5560; see also 74 FR 5532.
Proposed comment 55(c)(1)-1 would provide an illustrative example
of a protected balance. Proposed comment 55(c)(1)-2 would clarify that,
because Sec. 226.55(b)(3)(iii) does not permit a card issuer to
increase an annual percentage rate or a fee or charge required to be
disclosed under Sec. 226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii)
during the first year after account opening, Sec. 226.55(c) does not
apply to balances during the first year after account opening.
Proposed comment 55(c)(1)-3 clarifies that, although Sec.
226.55(b)(3) does not permit a card issuer to apply an increased fee or
charge required to be disclosed under Sec. 226.6(b)(2)(ii),
(b)(2)(iii), or (b)(2)(xii) to a protected balance, a card issuer is
not prohibited from increasing a fee or charge that applies to the
account as a whole or to balances other than the protected balance. For
example, a card issuer may add a new annual or a monthly maintenance
fee to an account or increase such a fee so long as the fee is not
based solely on the protected balance. However, if the consumer rejects
an increase in a fee or charge pursuant to Sec. 226.9(h), the card
issuer is prohibited from applying the increased fee or charge to the
account and from imposing any other fee or charge solely as a result of
the rejection. See Sec. 226.9(h)(2)(i) and (ii); comment 9(h)(2)(ii)-
2.
Proposed Sec. 226.55(c)(2) implements the restrictions on
accelerating the repayment of protected balances in revised TILA
Section 171(c). As discussed above with respect to Sec. 226.9(h), the
Board previously implemented these restrictions in the July 2009
Regulation Z Interim Final Rule as Sec. 226.9(h)(2)(iii). However, for
clarity and consistency, the Board proposes to move these restrictions
to proposed Sec. 226.55(c)(2). Proposed Sec. 226.55(c)(2) is
consistent with current Sec. 226.9(h)(2)(iii), except that the
repayment methods in Sec. 226.55(c)(2) focus on the effective date of
the increase (rather than the date on which the card issuer is notified
of the rejection pursuant to Sec. 226.9(h)).
Similarly, for the reasons discussed above with respect to Sec.
226.9(h), the Board proposes to move the commentary clarifying the
application of these repayment methods from current Sec.
226.9(h)(2)(iii) to Sec. 226.55(c) and to adjust that commentary for
consistency with Sec. 226.55(c). In addition, proposed comment
55(c)(2)(iii)-1 would clarify that, although Sec. 226.55(c)(2)(iii)
limits the extent to which the portion of the required minimum periodic
payment based on the protected balance may be increased, it does not
limit or otherwise address the creditor's ability to determine the
amount of the required minimum periodic payment based on other balances
on the account or to apply that portion of the minimum payment to the
balances on the account. Proposed comment 55(c)(2)(iii)-2 would provide
an illustrative example.
55(d) Continuing Application of Sec. 226.55
Pursuant to its authority under TILA Section 105(a), the Board
proposes to adopt Sec. 226.55(d), which provides that the limitations
in Sec. 226.55 continue to apply to a balance on a credit card account
after the account is closed or acquired by another card issuer or the
balance is transferred from a credit card account issued by a card
issuer to another credit account issued by the same card issuer or its
affiliate or subsidiary (unless the account to which the balance is
transferred is subject to Sec. 226.5b). This provision is based on
commentary to the January 2009 FTC Act Rule proposed by the Board and
the other Agencies in May 2009, primarily in response to concerns that
permitting card issuers to apply an increased rate to an existing
balance in these circumstances could lead to circumvention of the
general prohibition on such increases. See 12 CFR 227.21 comments
21(c)-1 through -3, 74 FR 20814-20815; see also 74 FR 20805-20807.
Because the protections in revised TILA Section 171 and new TILA
Section 172 cannot be waived or forfeited, proposed Sec. 226.55(d)
does not distinguish between closures or transfers initiated by the
card issuer and closures or transfers initiated by the consumer.
Although there may be circumstances in which individual consumers could
make informed choices about the benefits and costs of waiving the
protections in revised Section 171 and new Section 172, an exception
for those circumstances would create a significant loophole that could
be used to deny the protections to other consumers. For example, if a
card issuer offered to transfer its cardholder's existing 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 Regulation Z Rule and the
January 2009 FTC Act Rule, the Board believes that it would be very
difficult to ensure that card issuers disclosed 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 card issuers. Furthermore, consumers might be presented
with choices that are not meaningful (such as a choice between
accepting a higher rate on an existing balance or losing credit
privileges on the account).
Proposed 226.55(d)(1) provides that Sec. 226.55 continues to apply
to a balance on a credit card account after the account is closed or
acquired by another card issuer. In some cases, the acquiring
institution may elect to close the acquired account and replace it with
its own credit card account. See comment 12(a)(2)-3. The acquisition of
an account does not involve any choice on the part of the consumer, and
the Board believes that consumers whose accounts are acquired should
receive the same level of protection against increases in annual
percentage rates after acquisition as they did beforehand.\34\ Proposed
[[Page 54177]]
comment 55(d)-1 clarifies that Sec. 226.55 continues to apply
regardless of whether the account is closed by the consumer or the card
issuer and provides illustrative examples of the application of Sec.
226.55(d)(1). Proposed comment 55(d)-2 clarifies the application of
Sec. 226.55(d)(1) to circumstances in which a card issuer acquires a
credit card account with a balance by, for example, merging with or
acquiring another institution or by purchasing another institution's
credit card portfolio.
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\34\ Thus, as discussed in the proposed commentary to Sec.
226.55(b)(2), a card issuer that acquires a credit card account with
a balance to which a variable rate applies would not be permitted to
substitute a new index for the index used to determine the variable
rate if the change could result in an increase in the annual
percentage rate. However, the proposed commentary to Sec.
226.55(b)(2) does clarify that a card issuer that does not utilize
the index used to determine the variable rate for an acquired
balance may convert that rate to an equal or lower non-variable
rate, subject to the notice requirements of Sec. 226.9(c).
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Proposed 226.55(d)(2) provides that Sec. 226.55 continues to apply
to a balance on a credit card account after the balance is transferred
from a credit card account issued by a card issuer to another credit
account issued by the same card issuer or its affiliate or subsidiary
(unless the account to which the balance is transferred is subject to
Sec. 226.5b). Proposed comment 55(d)-3.i provides examples of
circumstances in which balances may be transferred from one credit card
account issued by a card issuer to another credit card account issued
by the same card issuer (or its affiliate or subsidiary), such as when
the consumer's account is converted from a retail credit card that may
only be used at a single retailer or an 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 Sec. 226.12(a)(2), the
Board believes--and proposed Sec. 226.55(d)(2) provides--that these
transfers should be treated as a continuation of the existing account
relationship rather than the creation of a new account relationship.
See comment 12(a)(2)-2.
Proposed Sec. 226.55(d)(2) does not apply to balances transferred
from a credit card account issued by a card issuer to a credit account
issued by the same card issuer (or its affiliate or subsidiary) that is
subject to Sec. 226.5b (which applies to open-end credit plans secured
by the consumer's dwelling). The Board believes that excluding
transfers to such accounts is appropriate because Sec. 226.5b provides
protections that are similar to--and, in some cases, more stringent
than--the protections in Sec. 226.55. For example, a card issuer 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 card issuer's control
and is available to the general public. See 12 CFR 226.5b(f)(1).
Proposed comment 55(d)-3.ii clarifies that, when a consumer chooses
to transfer a balance to a credit card account issued by a different
card issuer, Sec. 226.55 does not prohibit the card issuer to which
the balance is transferred from applying its account terms to that
balance, provided those terms comply with 12 CFR part 226. For example,
if a credit card account issued by card issuer A has a $1,000 purchase
balance at an annual percentage rate of 15% and the consumer transfers
that balance to a credit card account with a purchase rate of 17%
issued by card issuer B, card issuer B may apply the 17% rate to the
$1,000 balance. However, card issuer B may not subsequently increase
the rate that applies to that balance unless permitted by one of the
exceptions in Sec. 226.55(b).
Although balance transfers from one card issuer to another raise
some of the same concerns as balance transfers involving the same card
issuer, the Board believes that transfers between card issuers are not
contrary to the intent of revised TILA Section 171 and proposed Sec.
226.55 because the card issuer to which the balance is transferred is
not increasing the cost of credit it previously extended to the
consumer. For example, assume that card issuer A has extended a
consumer $1,000 of credit at a rate of 15%. Because proposed Sec.
226.55 generally prohibits card issuer A from increasing the rate that
applies to that balance, it would be inconsistent with Sec. 226.55 to
allow card issuer A to reprice that balance simply by transferring it
to another of its accounts. In contrast, in order for the $1,000
balance to be transferred to card issuer B, card issuer 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
card issuer A to card issuer B does not appear to raise concerns about
circumvention of proposed Sec. 226.55 because card issuer B is not
increasing the cost of credit it previously extended.
The Board understands from comments on the May 2009 proposal that
drawing this distinction between balance transfers involving the same
card issuer and balance transfers involving different card issuers may
limit a card issuer's ability to offer its existing cardholders the
same terms that it would offer another issuer's cardholders. As noted
in that proposal, however, the Board understands that currently card
issuers generally do not make promotional balance transfer offers
available to their existing cardholders for balances held by the issuer
because it is not cost-effective to do so. Furthermore, although many
card issuers 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 Board
understands that these offers generally are not conditioned on a
balance transfer, which indicates that it may be cost-effective for
card issuers to make these offers without repricing an existing
balance. Nevertheless, the Board again solicits comment on the extent
to which proposed Sec. 226.55(d)(2) would affect card issuers' ability
to make offers to their own cardholders.
Section 226.56 Requirements for Over-the-Limit Transactions
When a consumer seeks to engage in a credit card transaction that
may cause his or her credit limit to be exceeded, the creditor may, at
its discretion, authorize the over-the-limit transaction. If the
creditor pays an over-the-limit transaction, the consumer is typically
assessed a fee or charge for the service.\35\ In addition, the over-
the-limit transaction may also be considered a default under the terms
of the credit card agreement and trigger a rate increase, in some cases
up to the default, or penalty, rate on the account.\36\
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\35\ According to the GAO, the average over-the-limit fee
assessed by issuers in 2005 was $30.81, an increase of 138 percent
since 1995. See Credit Cards: Increased Complexity in Rates and Fees
Heightens Need for More Effective Disclosures to Consumers, GAO
Report 06-929, at 20 (September 2006) (citing data reported by
CardWeb.com). The GAO also reported that among cards issued by the
six largest issuers in 2005, most charged an over-the-limit fee
amount between $35 and $39. Id. at 21.
\36\ See id. at 25.
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The Credit Card Act adds new TILA Section 127(k) and requires a
creditor to obtain a consumer's express election, or opt-in, before the
creditor may impose any fees on a consumer's credit card account for
making an extension of credit that exceeds the consumer's credit limit.
15 U.S.C. 1637(k). TILA Section 127(k)(2) further provides that no
election shall take effect unless the consumer, before making such
election, has received a notice from the creditor of any fees that may
be assessed for an over-the-limit transaction. If the consumer opts in
to the service, the creditor is also required to provide
[[Page 54178]]
notice of the consumer's right to revoke that election on any periodic
statement that reflects the imposition of an over-the-limit fee during
the relevant billing cycle. The Board is proposing to implement the
over-the-limit consumer consent requirements in Sec. 226.56.
The Credit Card Act directs the Board to issue rules governing the
disclosures required by TILA Section 127(k), including rules regarding
(i) the form, manner and timing of the initial opt-in notice and (ii)
the form of the subsequent notice describing how an opt-in may be
revoked. See TILA Section 127(k)(2). In addition, the Board must
prescribe rules to prevent unfair or deceptive acts or practices in
connection with the manipulation of credit limits designed to increase
over-the-limit fees or other penalty fees. See TILA Section
127(k)(5)(B).
56(a) Definition
Proposed Sec. 226.56(a) defines ``over-the-limit transaction'' to
mean any extension of credit by a creditor to complete a transaction
that causes a consumer's credit card account balance to exceed the
consumer's credit limit. The proposed term is limited to extensions of
credit required to complete a transaction that has been requested by a
consumer (for example, to make a purchase at a point of sale or on-
line, or to transfer a balance from another account). The term is not
intended to cover the assessment of fees or interest charges by the
creditor that may cause the consumer to exceed the credit limit. See,
however, proposed Sec. 226.56(j)(4), discussed below.
56(b) Opt-In Requirement
General rule. Proposed Sec. 226.56(b)(1) sets forth the general
rule prohibiting a creditor from assessing a fee or charge on a
consumer's account for paying an over-the-limit transaction unless the
consumer is given notice and a reasonable opportunity to affirmatively
consent, or opt in, to the creditor's payment of over-the-limit
transactions and the consumer has opted in. If the consumer
affirmatively consents, or ``opts in,'' to the service, the creditor
must provide the consumer notice of the right to revoke that consent
after assessing an over-the-limit fee or charge on the consumer's
account.
Under the proposed rule, the creditor may provide the opt-in notice
orally, electronically, or in writing. Compliance with the consumer
consent provisions or other requirements necessary to provide consumer
disclosures electronically pursuant to the E-Sign Act would not be
required if the creditor elects to provide the opt-in notice
electronically. See also proposed Sec. 226.5(a)(1)(ii)(A). However, as
discussed below under proposed Sec. 226.56(d)(1)(ii), before the
consumer may consent orally or electronically, the creditor must also
have provided the opt-in notice immediately prior to and
contemporaneously with obtaining that consent. In addition, while the
opt-in notice may be provided orally, electronically, or in writing,
the revocation notice must be provided to the consumer in writing,
consistent with the statutory requirement that such notice appear on
the periodic statement reflecting the assessment of an over-the-limit
fee or charge on the consumer's account. See TILA Section 127(k)(2),
and proposed Sec. 226.56(d)(2), discussed below.
The proposed notice and opt-in requirements would apply only to
credit card accounts under an open-end (not home-secured) consumer
credit plan, and would therefore not apply to credit cards that access
a home equity line of credit or to debit cards linked to an overdraft
line of credit. See proposed Sec. 226.2(a)(15)(ii). Although creditors
must obtain consumer consent before any over-the-limit fees or charges
are assessed on a consumer's account, the rule would not require that
the creditor obtain the consumer's separate consent for each extension
of credit that causes the consumer to exceed his or her credit limit.
Such an approach is not compelled by the Credit Card Act. Proposed
comment 56(b)-1 also explains, however, that even if a consumer has
affirmatively consented or opted in to a creditor's over-the-limit
service, the creditor is not required or obligated to pay or authorize
any over-the-limit transactions.
Proposed comment 56(b)-2 clarifies that a creditor that has a
policy and practice of declining to pay or authorize any transactions
that the creditor reasonably believes would cause the consumer to
exceed the credit limit is not subject to the requirements of this
section and would therefore not be required to provide the consumer
notice or an opt-in right. This ``reasonable belief'' standard
recognizes that creditors generally do not have real-time information
regarding a consumer's prior transactions or credits that may have
posted to the consumer's credit card account. As discussed below in
proposed Sec. 226.56(b)(2), however, that if an over-the-limit
transaction is paid without the consumer providing affirmative consent,
the institution would not be permitted to charge a fee for paying the
transaction.
Proposed comment 56(b)-3 provides that the opt-in requirement
applies whether a creditor assesses over-the-limit fees or charges on a
per transaction basis or as a periodic account or maintenance fee that
is imposed each cycle for the creditor's payment of over-the-limit
transactions regardless of whether the consumer has exceeded the credit
limit during a particular cycle (for example, a monthly ``over-the-
limit protection'' fee).
As further discussed below, the proposal would require creditors to
obtain consumer consent for all credit card accounts, including those
opened prior to the effective date of the rule, before the creditor
could assess any fees or charges on a consumer's account for paying
over-the-limit transactions.
Reasonable opportunity to opt in. Proposed Sec. 226.56(b)(1)(ii)
requires a creditor to provide a reasonable opportunity for the
consumer to affirmatively consent to the creditor's payment of over-
the-limit transactions. TILA Section 127(k)(3) provides that the
consumer's affirmative consent (and revocation) may be completed
orally, electronically, or in writing, pursuant to regulations
prescribed by the Board. See also proposed Sec. 226.56(e), discussed
below. Proposed comment 56(b)-4 contains examples to illustrate what
would constitute providing a consumer a reasonable opportunity to
affirmatively consent using the specified methods.
The first example provides that a creditor may include the notice
on an application form that a consumer may fill out to request the
service as part of the application process. See proposed comment 56(b)-
4.i. Alternatively, after the consumer has been approved for the card,
the creditor could provide a form with the account-opening disclosures
that can be filled out separately and mailed to affirmatively request
the service. See proposed comment 56(b)-4.ii and proposed Model Form G-
25(A) in Appendix G, discussed below.
Proposed comment 56(b)-4.iii illustrates that a creditor may obtain
consumer consent through a readily available telephone line. Proposed
comment 56(b)-4.iv illustrates that a creditor may provide an
electronic means for the consumer to affirmatively consent. For
example, a creditor could provide a form on its Web site that enables
the consumer to check a box to indicate his or her agreement to the
over-the-limit service and confirm that opt-in choice by clicking on a
consent box. See also proposed Sec. 226.56(d)(1)(ii) (requiring the
opt-in notice to be provided immediately prior to and contemporaneous
with the consumer's consent).
[[Page 54179]]
Comment is requested regarding whether creditors should be required
to segregate the opt-in notice from other account disclosures. Such a
requirement may ensure that the information is not obscured within
other account documents and overlooked by the consumer, for example, in
preprinted language in the account-opening disclosures, leading the
consumer to inadvertently consent to having over-the-limit transactions
paid or authorized by the creditor.
Notwithstanding the manner in which notice of the opt-in right may
be provided, proposed comment 56(b)-5 would clarify that the consumer's
consent must be obtained separately from other consents or
acknowledgments provided by the consumer. For example, a consumer's
signature on an application for a credit card alone would not
sufficiently evidence the consumer's consent to the creditor's payment
of over-the-limit transactions. Under the proposal, the consumer must
initial, sign, or otherwise make a separate request for the over-the-
limit service. However, the proposed comment would not preclude a
creditor from including a separate check box or signature line for
requesting the over-the-limit service in the signature block on a
credit application, provided that the check box or signature is used
solely to indicate the consumer's opt-in decision and not for any other
purpose, such as to also obtain consumer consents for other account
services or features. Under Regulation Z's record retention rules,
creditors would be required to retain evidence of the consumer's
consent or opt-in for a period of at least two years, regardless of the
means by which consent is obtained. See Sec. 226.25.
The Board also solicits comment on whether creditors should be
required to provide the consumer with written confirmation once the
consumer has opted in under proposed Sec. 226.56(b)(1)(iii) to verify
that the consumer intended to make the election. In the case of
telephone or in person requests in particular, written confirmation may
be appropriate to evidence the consumer's intent to opt in to the
service. A creditor could comply with such a requirement, for example,
by sending a letter to the consumer acknowledging that the consumer has
elected to opt in to the creditor's service, or, in the case of a
mailed request, the creditor could provide a copy of the consumer's
completed opt-in form.
Payment of over-the-limit transactions where consumer has not opted
in. Proposed Sec. 226.56(b)(2) provides that a creditor may pay an
over-the-limit transaction even if the consumer has not provided
affirmative consent, so long as the creditor does not impose a fee or
charge for paying the transaction. Proposed comment 56(b)(2)-1 contains
further guidance stating that the prohibition on imposing fees for
paying an over-the-limit transaction where the consumer has not opted
in applies even in circumstances where the creditor is unable to avoid
paying a transaction that exceeds the consumer's credit limit. Nothing
in the statute suggests that Congress intended to permit an exception
to allow any over-the-limit fees to be charged in these circumstances
absent consumer consent. Proposed comment 56(b)(2)-1 contains
illustrative examples of this provision.
For example, in some cases, a merchant may not submit a credit card
transaction to the creditor for authorization. Such an event may occur,
for instance, because the transaction is below the floor limits
established by the card network rules requiring authorization or
because the small dollar amount of the transaction does not pose
significant payment risk to the merchant. If the transaction exceeds
the consumer's credit limit, the creditor would not be permitted to
assess an over-the-limit fee if the consumer has not consented to the
creditor's payment of over-the-limit transactions.
Similarly, the proposed rule does not permit the creditor to assess
a fee for an over-the-limit transaction that occurs because the final
transaction amount exceeds the amount submitted for authorization. For
example, a consumer may use his or her credit card at a pay-at-the-pump
fuel dispenser to purchase $50 of fuel. At the time of authorization,
the gas station may request an authorization hold of $1 to verify the
validity of the card. Even if the subsequent $50 transaction amount
exceeds the consumer's credit limit, Sec. 226.56(b)(2) would prohibit
the creditor from assessing an over-the-limit fee if the consumer has
not opted in to the creditor's over-the-limit service.
Proposed comment 56(b)(2)-2 clarifies that a creditor is not
precluded from assessing other fees and charges unrelated to the
payment of the over-the-limit transaction itself even where the
consumer has not provided consent to the creditor's over-the-limit
service, to the extent permitted under applicable law. For example, if
a consumer has not opted in, a creditor could permissibly assess a
balance transfer fee for a balance transfer, provided that such a fee
is assessed whether or not the transfer exceeds the credit limit. The
creditor could also continue to assess interest charges for the over-
the-limit transaction.\37\
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\37\ The proposed rule does not prohibit a creditor from
increasing the consumer's interest rate as a result of an over-the-
limit transaction, subject to the creditor's compliance with the 45-
day advance notice requirement in Sec. 226.9(g), the limitations on
applying an increased rate to an existing balance in Sec. 226.55,
and other provisions of the Credit Card Act.
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56(c) Method of Election
TILA Section 127(k)(2) provides that a consumer may make or revoke
consent to permit over-the-limit transactions orally, electronically,
or in writing, and directs the Board to prescribe rules to ensure that
the same options are available for both making and revoking such
election. Proposed Sec. 226.56(c) implements this requirement.
Proposed comment 56(c)-1 clarifies that the creditor may determine the
means by which consumers may provide affirmative consent. The creditor
could decide, for example, whether to obtain consumer consents in
writing, electronically, by telephone, or to offer some or all of these
options. The proposed rule recognizes that creditors have a strong
interest in facilitating a consumer's ability to opt in, and thus would
permit them to determine the most effective means in obtaining such
consent.
Notwithstanding the creditor's choice(s), however, proposed Sec.
226.56(c) requires that whatever method a creditor provides for
obtaining consent, such method must be equally available to the
consumer to revoke the prior consent. See TILA Section 127(k)(3).
Proposed comment 56(c)-2 provides guidance that because consumer
consent or revocation requests are not consumer disclosures for
purposes of the E-Sign Act, creditors would not be required to comply
with the consumer consent or other requirements for providing
disclosures electronically pursuant to the E-Sign Act for consumer
requests submitted electronically. Comment is requested whether the
Board should require creditors to allow consumers to opt in and to
revoke that consent using each of the three methods (that is, orally,
electronically, and in writing).
56(d) Timing
Proposed Sec. 226.56(d)(1)(i) establishes a general requirement
that a creditor provide an opt-in notice before the creditor assesses
any fee or charge on the consumer's account for paying an over-the-
limit transaction. For example, a creditor could include the notice as
part of the credit card application. See proposed comment 56(b)-4.i.
[[Page 54180]]
Alternatively, the creditor could include the notice with other
account-opening documents, either within the account-opening
disclosures under Sec. 226.6 or in a stand-alone document. See
proposed comment 56(b)-4.ii.
The proposed rule would require that all consumers, including
existing account holders, receive notice regarding the opt-in right if
the creditor imposes a fee or charge for paying an over-the-limit
transaction. The Board believes that had Congress intended to permit
existing customers to continue to have over-the-limit transactions paid
or authorized without their prior consent, it would have so specified.
Nothing in the statute or the legislative history suggests that
Congress intended that existing account holders should not have the
same rights regarding consumer choice for over-the-limit transactions
as those afforded to new customers. As a result, the proposal would
apply the over-the-limit consumer consent requirements to credit card
accounts opened prior to February 22, 2010.
For credit card accounts opened prior to the effective date of the
final rule, a creditor may elect to provide an opt-in notice to all of
its account holders on or with the first periodic statement sent after
the effective date of the final rule. Creditors that choose to do so
would be prohibited from assessing any over-the-limit fees or charges
after the effective date of the rule and prior to providing the opt-in
notice, and subsequently could not assess any such fees or charges
unless and until the consumer opts in.
Comment is requested regarding whether a creditor should be
permitted to obtain consumer consent for the payment of over-the-limit
transactions prior to the effective date of the final rule and, if so,
under what circumstances. Such an approach could allow creditors to
phase in their processing of consumer opt-ins and alleviate the
compliance burden that may otherwise occur if notices could not be
sent, and opt-ins obtained until February 22, 2010.
In addition to the general requirement that the creditor provide an
opt-in notice prior to imposing any fee or charge for an over-the-limit
transaction, proposed Sec. 226.56(d)(1)(ii) states that if the
consumer decides to consent orally or electronically, the opt-in notice
must be given by the creditor immediately before and contemporaneously
with a consumer's election. For example, if a consumer calls the
creditor to consent to the creditor's payment of over-the-limit
transactions, the creditor must provide the opt-in notice immediately
prior to obtaining the consumer's consent. This proposed requirement is
intended to ensure that a consumer has full information regarding the
opt-in right at a time that is most likely to be meaningful to the
consumer, that is, when the opt-in decision is made.
Proposed Sec. 226.56(d)(2) provides that notice of the consumer's
right to revoke a prior election for the creditor's over-the-limit
service must appear on each periodic statement that reflects the
assessment of an over-the-limit fee or charge on a consumer's account.
See TILA Section 127(k)(2). A revocation notice would be required
regardless of whether the fee was imposed due to an over-the-limit
transaction initiated by the consumer in the prior cycle or because the
consumer failed to reduce the account balance below the credit limit in
the next cycle. To ensure that the revocation notice is clear and
conspicuous to the consumer, the proposed rule requires that the notice
appear on the front of any page of the periodic statement. Proposed
comment 56(d)-1 clarifies that creditors have flexibility regarding how
often a revocation notice must be provided. At the creditor's option,
it may, but is not required to, include the revocation notice on every
periodic statement sent to the consumer, even if the consumer has not
incurred an over-the-limit fee or charge during a particular billing
cycle.
56(e) Content and Format
TILA Section 127(k)(2) provides that a consumer's election to
permit a creditor to extend credit that would exceed the credit limit
may not take effect unless the consumer receives notice from the
creditor of any over-the-limit fee ``in the form and manner, and at the
time, determined by the Board.'' TILA Section 127(k)(2) also requires
that the creditor provide notice to the consumer of the right to revoke
the election, ``in the form prescribed by the Board,'' in any periodic
statement reflecting the imposition of an over-the-limit fee. Proposed
Sec. 226.56(e) sets forth the content requirements for both notices.
See also proposed Model Forms G-25(A) and G-25(B) in Appendix G.
Initial notice content. Proposed Sec. 226.56(e)(1) sets forth the
information that must be included in the opt-in notice provided to
consumers before a creditor may assess any fees or charges for paying
an over-the-limit transaction. To ensure that consumers can make an
informed decision regarding whether and how to affirmatively consent to
a creditor's payment of over-the-limit transactions, creditors would be
required to provide in the opt-in notice certain information in
addition to the amount of the over-the-limit fee. The additional
information would be prescribed pursuant to the Board's authority under
TILA Section 105(a) to make adjustments that are necessary to
effectuate the purposes of TILA. 15 U.S.C. 1604(a).
Proposed Sec. 226.56(e)(1)(i) would require the opt-in notice to
include information about the dollar amount of any fees or charges
assessed on a consumer's credit card account for an over-the-limit
transaction. The proposed requirement to state the fee amount on the
opt-in notice itself is separate from other required disclosures
regarding the amount of the over-the-limit fee. See, e.g., Sec.
226.5a(b)(10). Because a creditor could comply with the opt-in notice
requirement in several forms, such as providing the notice in the
application or solicitation, in the account-opening disclosures, or as
a stand-alone document, the Board believes that including the fee
disclosure in the opt-in notice itself is necessary to ensure that
consumers can easily determine the amounts they could be charged for an
over-the-limit transaction.
Some creditors may wish to vary the fee amount that may be imposed
based upon the number of times the consumer has gone over the limit,
the amount the consumer has exceeded the credit limit, or due to other
factors. Under these circumstances, the creditor may disclose the
maximum fee that may be imposed or a range of fees. Proposed comment
56(e)-1 provides that the creditor may indicate that the consumer may
be assessed a fee ``up to'' the maximum fee or provide the range of
fees. Comment is requested whether additional guidance is necessary if
an over-the-limit fee is determined by other means, such as a
percentage of the over-the-limit transaction.
In addition to disclosing the amount of the fee or charge that may
be imposed for an over-the-limit transaction, proposed Sec.
226.56(e)(1)(ii) would require creditors to disclose any increased rate
that may apply if consumers exceed their credit limit. The Board
believes the additional requirement is necessary to ensure consumers
fully understand the potential consequences of exceeding their credit
limit, particularly as a rate increase can be more costly than the
imposition of a fee. This requirement is consistent with the content
required to be disclosed regarding the consequences of a late payment.
See TILA Section 127(b)(12); Sec. 226.7(b)(11) of the January 2009
Regulation Z Rule. Accordingly, if, under the terms of the account
agreement, an over-the-limit transaction could result in the loss of a
promotional
[[Page 54181]]
rate, the imposition of a penalty rate, or both, this fact must be
included in the opt-in notice.
Proposed Sec. 226.56(e)(1)(iii) requires creditors to explain the
consumer's right to affirmatively consent to the creditor's payment of
over-the-limit transactions, including the methods that the consumer
may use to exercise the right to opt in.
In addition to providing the required content, some creditors may
wish to include more information about the effects of opting in,
including potential benefits. Proposed comment 56(e)-2 provides that
creditors may briefly describe these benefits. For example, the
creditor may state that if the consumer consents, or opts in, to the
payment of over-the-limit transactions, the consumer may avoid having
transactions declined if a transaction may exceed the credit limit.
Creditors may also wish to disclose that over-the-limit transactions
may be paid at the creditor's discretion or that the payment of over-
the-limit transactions is not guaranteed. Comment is requested
regarding whether the rule should permit or require any other
information to be included in the opt-in notice.
The Board notes that permitting creditors to include additional
content in the opt-in notice could lead to the potential consequence
that the additional information may overwhelm the required content in
the notice. Thus, comment is also requested regarding whether creditors
should be permitted to include any information in the opt-in notice
beyond the content specified in the rule.
Revocation notice. Proposed Sec. 226.56(e)(2) would implement the
requirement in TILA Section 127(k)(2) that a creditor must provide
notice of the right to revoke consent that was previously granted for
paying over-the-limit transactions. The proposed rule states that the
notice must describe the consumer's right to revoke any consent
previously granted, including the methods by which the consumer may
revoke the service. As discussed above, creditors may include this
notice on every periodic statement after the consumer has opted in to
the creditor's payment of over-the-limit transactions or only on
statements that reflect the imposition of an over-the-limit fee. See
proposed comment 56(d)-1.
Model forms. Proposed Model Forms G-25(A) and (B) include sample
language that creditors may use to comply with the proposed notice
content requirement. Use of the model forms, or substantially similar
notices, would provide creditors a safe harbor for compliance under
proposed Sec. 226.56(e)(3).
56(f)-(i) Additional Provisions Addressing Consumer Opt-in Right
Joint accounts. Proposed Sec. 226.56(f) requires a creditor to
treat affirmative consent provided by any joint consumer of a credit
card account as affirmative consent for the account from all of the
joint consumers. This provision recognizes the operational difficulties
that would otherwise arise if a creditor had to determine which account
holder was responsible for a particular transaction and then decide
whether to authorize or pay an over-the-limit transaction based on that
account-holder's opt-in choice. Moreover, because the same credit limit
presumably applies to a joint account, one joint account holder's
decision to opt in to the payment of over-the-limit transactions would
also necessarily impact the other account holder. Accordingly, if one
joint consumer opts in to the creditor's payment of over-the-limit
transactions, the creditor must treat the consent as applying to all
over-the-limit transactions for that account. The proposed rule also
provides that a creditor shall treat a revocation of consent by any of
the joint consumers as revocation of consent for the joint account.
Proposed Sec. 226.56(f) applies only to consumer consent and
revocation requests from consumers that are jointly liable on a credit
card account. Accordingly, creditors would not be required or permitted
to honor a request by an authorized user on an account to opt in or
revoke a prior consent with respect to the creditor's over-the-limit
transaction. Proposed comment 56(f)-1 provides this guidance.
Continuing right to opt in or revoke opt-in. Proposed Sec.
226.56(g) provides that a consumer may affirmatively consent to a
creditor's payment of over-the-limit transactions at any time in the
manner described in the opt-in notice. Similarly, a consumer may revoke
a prior consent at any time in the manner described in the revocation
notice provided under Sec. 226.56(b)(1)(iv). See TILA Section
127(k)(4).
Proposed comment 56(g)-1 clarifies that a consumer's decision to
revoke a prior consent would not require the creditor to waiver or
reverse any over-the-limit fee or charges assessed to the consumer's
account prior to the creditor's implementation of the consumer's
revocation request. In addition, the proposed rule does not prevent the
creditor from assessing over-the-limit fees in a subsequent cycle if
the consumer's account balance continues to exceed the credit limit as
a result of an over-the-limit transaction that was completed prior to
the consumer's revocation of consent.
Duration of opt-in. Proposed Sec. 226.56(h) provides that a
consumer's affirmative consent is generally effective until revoked by
the consumer. Proposed comment 56(h)-1 clarifies, however, that a
creditor may cease paying over-the-limit transactions at any time and
for any reason even if the consumer has consented to the service. For
example, a creditor may wish to stop providing the service in response
to changes in the credit risk presented by the consumer.
Time to implement consumer revocation. Proposed Sec. 226.56(i)
requires that a creditor must implement a consumer's revocation request
as soon as reasonably practicable after the creditor receives the
request. The proposed requirement recognizes that while creditors will
presumably want to implement a consumer's consent request as soon as
possible, the same incentives may not apply if the consumer
subsequently decides to revoke that request. The Board is not proposing
to prescribe a specific period of time within which the creditor must
honor the consumer's revocation request, however, because the
appropriate time period may depend on a number of variables, including
the method used by the consumer to communicate the revocation request
(for example, in writing or orally) and the channel in which the
request is received (for example, if a consumer sends a written request
to the creditor's general address for receiving correspondence or to an
address specifically designated to receive consumer opt-in and
revocation requests). Comment is requested whether a safe harbor for
implementing revocation requests, such as five business days from the
date of the request, may be helpful to facilitate compliance with the
proposed rule.
The Board also solicits comment on the merits of an alternative
approach which would require creditors to implement revocation requests
within the same time period that a creditor generally takes to
implement opt-in requests. Such a timing rule could be dependent upon
the method of the consumer's request. For example under the alternative
approach, if the creditor typically takes three business days to
implement a consumer's written opt-in request, it should take no more
than three business days to implement the consumer's later written
request to revoke that consent. However, if a creditor typically
implements written consent requests within three business
[[Page 54182]]
days and telephone requests within one business day, the alternative
approach would provide that the creditor could implement a written
revocation request within three business days, even if the consumer had
previously opted into the service by telephone.
56(j) Prohibited Practices
Proposed Sec. 226.56(j) prohibits certain creditor practices in
connection with the assessment of over-the-limit fees or charges. These
prohibitions implement separate requirements set forth in TILA Sections
127(k)(5) and 127(k)(7), and apply even if the consumer has
affirmatively consented to the creditor's payment of over-the-limit
transactions.
56(j)(1) Fees Imposed per Billing Cycle
New TILA Section 127(k)(7) provides that a creditor may not impose
more than one over-the-limit fee during a billing cycle. In addition,
Section 127(k)(7) generally provides that an over-the-limit fee may be
imposed ``only once in each of the 2 subsequent billing cycles'' for
the same over-the-limit transaction. Proposed Sec. 226.56(j)(1)
implements these restrictions.
Proposed Sec. 226.56(j)(1)(i) would prohibit a creditor from
imposing more than one over-the-limit fee or charge on a consumer's
credit card account in any billing cycle. In addition, a creditor must
not impose an over-the-limit fee or charge on the account for the same
over-the-limit transaction or transactions in more than three billing
cycles. As a further limitation, however, fees may not be imposed for
the second or third cycle unless the consumer has failed to reduce the
account balance below the credit limit by the payment due date of
either cycle. The Board believes that this interpretation of TILA
Section 127(k)(7) is consistent with Congress's general intent to limit
a creditor's ability to impose multiple over-the-limit fees for the
same transaction as well as the requirement in TILA Section 106(b) that
consumers be given a sufficient amount of time to make payments.
Moreover, as discussed below, a creditor's failure to provide a
consumer sufficient time to reduce his or her balance below the credit
limit would appear to be an unfair or deceptive act or practice. See
TILA Section 127(k)(5) and discussion below.
As discussed above, the proposed rule would give a consumer until
the payment due date to reduce the account balance below the credit
limit to avoid over-the-limit fees during the second and third billing
cycles. Although new TILA Section 127(k)(7) could be construed as
providing until the end of the billing cycle to make a payment that
reduces the account balance below the credit limit, the Board believes
that using the payment due date as the relevant date will facilitate
compliance.
Under current billing practices, the end of the billing cycle
serves as the statement cut-off date and occurs a certain number of
days after the due date for payment on the prior cycle's activity. The
time period between the payment due date and the end of the billing
cycle allows the creditor sufficient time to reflect timely payments on
the subsequent periodic statement and to determine the fees and
interest charges for the statement period. If the rule were to give
consumers until the end of the billing cycle to reduce the account
balance below the credit limit, creditors would have difficulty
determining whether or not they could impose another over-the-limit fee
for the statement cycle, which could delay the generation and mailing
of the periodic statement and impede their ability to comply with the
21-day requirement for mailing statements in advance of the payment due
date.
Moreover, tying the time in which a consumer could make payment to
reduce the account balance below the credit limit to the payment due
date would cause minimal if any adverse harm to consumers. Because a
consumer is likely to make payment by the due date to avoid other
adverse financial consequences (such as a late payment fee or increased
APRs for new transactions), the additional time to make payment to
avoid successive over-the-limit fees would appear to be unnecessary
from a consumer protection perspective. Such a date also could confuse
consumers by providing two distinct dates, each with different
consequences (that is, penalties for late payment or the assessment of
over-the-limit fees). For these reasons, the Board is proposing to
exercise its TILA Section 105(a) authority to provide that a creditor
may not impose an over-the-limit fee or charge on the account for a
consumer's failure to reduce the account balance below the credit limit
during the second or third billing cycle unless the consumer has not
done so by the payment due date.
To illustrate the proposed limitation, assume that a consumer has
exceeded the credit limit and is assessed an over-the-limit fee on the
January billing statement for a transaction in the December billing
cycle. Under this circumstance, the creditor must not assess additional
over-the-limit fees on the consumer's credit card account for the
February or March billing statements for the same over-the-limit
transaction unless the consumer has not made sufficient payment by the
January or February payment due dates to reduce the account balance
below the credit limit.
Proposed Sec. 226.56(j)(1)(ii) provides that the limitation on
imposing over-the-limit fees for more than three billing cycles does
not apply if a consumer engages in an additional over-the-limit
transaction in either of the two billing cycles following the cycle in
which the consumer is first assessed a fee for exceeding the credit
limit. The assessment of fees or interest charges by the creditor would
not constitute an additional over-the-limit transaction for purposes of
this exception, consistent with the definition of ``over-the-limit
transaction'' under proposed Sec. 226.56(a). In addition, the proposed
exception would not permit a creditor to impose fees for both the
initial over-the-limit transaction as well as the additional over-the-
limit transaction(s), as the general restriction on assessing more than
one over-the-limit fee in the same billing cycle would continue to
apply. Proposed comment 56(j)-1 contains examples illustrating the
general rule and the exception.
Proposed Prohibitions on Unfair or Deceptive Over-the-Limit Acts or
Practices
Proposed Sec. 226.56(j) includes additional substantive
limitations and restrictions on certain creditor acts or practices
regarding the imposition of over-the-limit fees. These proposed
limitations and restrictions are based on the Board's authority under
TILA Section 127(k)(5)(B) which directs the Board to prescribe
regulations that prevent unfair or deceptive acts or practices in
connection with the manipulation of credit limits designed to increase
over-the-limit fees or other penalty fees.
Legal Authority
The Credit Card Act does not set forth a standard for what is an
``unfair or deceptive act or practice'' and the legislative history for
the Credit Card Act is similarly silent. Congress has elsewhere
codified standards developed by the Federal Trade Commission for
determining whether acts or practices are unfair under Section 5(a) of
the Federal Trade Commission Act, 15 U.S.C. 45(a).\38\ Specifically,
the FTC Act provides that an act or practice is unfair when it causes
or is likely to cause
[[Page 54183]]
substantial injury to consumers which is not reasonably avoidable by
consumers themselves and not outweighed by countervailing benefits to
consumers or to competition. In addition, in determining whether an act
or practice is unfair, the FTC may consider established public policy,
but public policy considerations may not serve as the primary basis for
its determination that an act or practice is unfair. 15 U.S.C. 45(a).
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\38\ See 15 U.S.C. 45(n); Letter from FTC to the Hon. Wendell H.
Ford and the Hon. John C. Danforth, S. Comm. On Commerce, Science &
Transp. (Dec. 17, 1980) (FTC Policy Statement on Unfairness)
(available at http://www.ftc.gov/bcp/policystmt/ad-unfair.htm).
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According to the FTC, an unfair act or practice will almost always
represent a market failure or market imperfection that prevents the
forces of supply and demand from maximizing benefits and minimizing
costs.\39\ Not all market failures or imperfections constitute unfair
acts or practices, however. Instead, the central focus of the FTC's
unfairness analysis is whether the act or practice causes substantial
consumer injury.\40\
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\39\ Statement of Basis and Purpose and Regulatory Analysis for
Federal Trade Commission Credit Practices Rule (Statement for FTC
Credit Practices Rule), 49 FR 7740, 7744 (Mar. 1, 1984).
\40\ Id. at 7743.
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The FTC has also adopted standards for determining whether an act
or practice is deceptive, although these standards, unlike unfairness
standards, have not been incorporated in to the FTC Act.\41\ Under the
FTC's standards, an act or practice is deceptive where: (1) There is a
representation or omission of information that is likely to mislead
consumers acting reasonably under the circumstances; and (2) that
information is material to consumers.\42\
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\41\ Letter from the FTC to the Hon. John H. Dingell, H. Comm.
on Energy & Commerce (Oct. 14, 1983) (FTC Policy Statement on
Deception) (available at http://www.ftc.gov/bcp/policystmt/ad-decept.html).
\42\ Id. at 1-2. The FTC views deception as a subset of
unfairness but does not apply the full unfairness analysis because
deception is very unlikely to benefit consumers or competition and
consumers cannot reasonably avoid being harmed by deception.
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Many states also have adopted statutes prohibiting unfair or
deceptive acts or practices, and these statutes may employ standards
that are different from the standards currently applied to the FTC
Act.\43\ In proposing rules under TILA Section 127(k)(5), the Board has
considered the standards currently applied to the FTC Act's prohibition
against unfair or deceptive acts or practices, as well as the standards
applied to similar state statutes. These proposals should not, however,
be construed as a definitive conclusion by the Board that a particular
practice is unfair or deceptive.
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\43\ For example, a number of states follow an unfairness
standard formerly used by the FTC. Under this standard, an act or
practice is unfair where it offends public policy; or is immoral,
unethical, oppressive, or unscrupulous; and causes substantial
injury to consumers. See, e.g., Kenai Chrysler Ctr., Inc. v.
Denison, 167 P.3d 1240, 1255 (Alaska 2007) (quoting FTC v. Sperry &
Hutchinson Co., 405 U.S. 233, 244-45 n.5 (1972)); State v. Moran,
151 N.H. 450, 452, 861 A.2d 763, 755-56 (N.H. 2004); Robinson v.
Toyota Motor Credit Corp., 201 Ill. 2d 403, 417-418, 775, N.E.2d
951, 961-62 (2002).
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Insufficient Time To Reduce Excess Credit
As discussed above, proposed Sec. 226.56(j)(1) would generally
prohibit a creditor from assessing an over-the-limit fee on a
consumer's credit card account in a subsequent billing cycle unless the
consumer has not reduced the account balance below the credit limit by
the payment due date. This provision, which implements a statutory
restriction set forth in TILA Section 127(k)(7), is intended to ensure
that a consumer who has been assessed an over-the-limit fee or charge
in one billing cycle does not incur a second over-the-limit fee or
charge in the next billing cycle solely because the consumer has not
made payment on or before the due date. For example, a creditor would
be prohibited from assessing a second over-the-limit fee or charge on
the first day of the next billing cycle before the consumer has had an
opportunity to reduce the account balance. Assessing an over-the-limit
fee in a subsequent billing cycle without providing the consumer
sufficient time to reduce the account balance would also appear to be
an unfair or deceptive act or practice.
Legal Analysis
Potential injury that is not reasonably avoidable. Consumers may
incur substantial monetary injury due to the fees assessed in
connection with the payment of over-the-limit transactions. In addition
to costly per transaction fees, consumers may also trigger rate
increases if the over-the-limit transaction is deemed to be a violation
of the credit card contract. A 2006 Government Accountability Office
(GAO) report on credit cards indicates that the average cost to
consumers resulting from over-the-limit transactions exceeded $30 in
2005.\44\ The GAO also reported that in the majority of credit card
agreements that it surveyed, default rates could apply if a consumer
exceeded the credit limit on the card.\45\
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\44\ See U.S. Gov't Accountability Office, Credit Cards:
Increased Complexity in Rates and Fees Heightens Need for More
Effective Disclosures to Consumers at 20-21 (Sept. 2006) (GAO Credit
Card Report) (available at http://www.gao.gov/new.items/d06929.pdf).
\45\ See id. at 25.
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Although consumers can reduce the risk of exceeding their credit
limit by carefully tracking their credit card transactions and payments
made, consumers often lack sufficient information about key aspects of
their credit card accounts. For example, a consumer cannot know with
any degree of certainty when a payment will be credited to his or her
account and the credit limit replenished or when a credit for a
returned purchase will be made available. Equally, given the lack of
real-time information available to the authorization system, even the
creditor's decision to authorize a transaction does not necessarily
indicate at the time of the authorization that the creditor has
knowingly authorized an over-the-limit transaction.\46\
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\46\ See Household Credit Servs. v. Pfennig, 541 U.S. 232, 244
(2004) (recognizing that a creditor's ``authorization'' of a point
of sale transaction ``does not represent a final determination that
a particular transaction is within a consumer's credit limit because
the authorization system is not suited to identify instantaneously
and accurately over-limit transactions'').
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Potential costs and benefits. There appears to be little if any
direct benefit to consumers from receiving insufficient time to bring
their account balances below their credit limit. While requiring
creditors to wait an additional period of time before assessing over-
the-limit fees or charges may reduce revenue for some institutions and
those institutions may replace that revenue by charging consumers
higher annual percentage rates or fees, it appears that consumers will
benefit overall from having a reasonable period of time in which to
reduce their account balances below the credit limit and avoiding
additional penalties such as the assessment of an over-the-limit fee or
application of a rate increase.
56(j)(2) Failure to Promptly Replenish
Section 226.10 generally requires creditors to credit consumer
payments as of the date of receipt, except when a delay in crediting
does not result in a finance or other charge. This provision does not
address, however, when a creditor must replenish the consumer's credit
limit after receiving payment. Thus, a consumer may submit payment
sufficient to reduce his or her account balance below the credit limit
and make additional purchases during the next cycle on the assumption
that the credit line will be replenished once the payment is credited.
If the creditor does not promptly replenish the credit line, the
additional transactions may cause the consumer to exceed the credit
limit and incur fees. Proposed Sec. 226.56(j)(2) would prohibit a
creditor from assessing
[[Page 54184]]
an over-the-limit fee or charge that is caused by the creditor's
failure to promptly replenish the consumer's available credit.
Legal Analysis
Potential injury that is not reasonably avoidable. In most cases,
creditors replenish the available credit on a credit card account
shortly after the payment has been credited to the account to enable
the cardholder to make new transactions on the account. As a result, a
consumer that has used all or most of the available credit during one
billing cycle would again be able to make transactions using the credit
card once the consumer has made payments on the account balance and the
available credit is restored to the account. If, however, the creditor
delays replenishment on the account after crediting the payment to the
consumer's account, the consumer could inadvertently exceed the credit
limit if the cardholder uses the credit card account for new
transactions and such transactions are authorized by the creditor. In
addition to the potential assessment of over-the-limit fees, the
resulting over-the-limit transaction may also cause the consumer to
trigger increased rates due to default on the credit agreement. In
those circumstances, it appears that consumers cannot reasonably avoid
the injury caused by the over-the-limit fee and rate increase because
they will be unaware of the creditor's delay in restoring the
consumer's credit line particularly if the payment has been credited to
the consumer's account.
Potential costs and benefits. The prohibited practice would not
appear to create benefits for consumers and competition that outweigh
the injury. While a creditor may reasonably decide to delay
replenishing a consumer's available credit, for example, in the case of
potential fraud on the account, there does not appear to be any benefit
to the consumer from permitting the creditor to assess over-the-limit
fees that may be incurred as a result of the delay in replenishment.
Proposal
Proposed Sec. 226.56(j)(2) prohibits a creditor from imposing any
over-the-limit fee or charge solely because of the creditor's failure
to promptly replenish the consumer's available credit after the
creditor has credited the consumer's payment under Sec. 226.10.
Proposed comment 56(j)(2)-1 clarifies that the proposed prohibition is
not intended to require creditors to immediately replenish the
available credit upon crediting a consumer's payment, or to prevent
creditors from delaying replenishment where appropriate, for example,
in cases of suspected fraud. Nor does the proposed prohibition require
creditors to decline all transactions for consumers who have opted in
to the creditor's payment of over-the-limit transactions until the
available credit has been restored. Rather, the creditor would only be
prohibited from assessing any over-the-limit fees or charges caused by
the creditor's decision not to replenish the available credit after
posting the consumer's payment to the account. Comment is requested
regarding whether the rule should provide a safe harbor specifying the
number of days following crediting of a consumer's payment by which a
creditor must replenish a consumer's available credit.
56(j)(3) Conditioning
Proposed Sec. 226.56(j)(3) would prohibit a creditor from
conditioning the amount of available credit provided on the consumer's
affirmative consent to the creditor's payment of over-the-limit
transactions. The proposed provision addresses concerns that a creditor
may seek to tie the amount of credit provided to the consumer
affirmatively consenting to the creditor's payment of over-the-limit
transactions.
Legal Analysis
Potential injury that is not reasonably avoidable. As the Board has
previously stated elsewhere, consumers receive considerable benefits
from receiving credit cards that provide a meaningful amount of
available credit. For example, credit cards enable consumers to engage
in certain types of transactions, such as making purchases by telephone
or on-line, or renting a car or hotel room. Given these benefits, some
consumers might be compelled to opt in to a creditor's payment of over-
the-limit transactions if not doing so may result in the consumer
otherwise obtaining a minimal amount of credit or failing to qualify
for credit altogether. Thus, it would appear that such consumers would
be prevented from exercising a meaningful choice regarding the
creditor's payment of over-the-limit transactions. Moreover, the
practice of conditioning the amount of credit provided based on whether
the consumer opts in to the creditor's payment of over-the-limit
transactions would also appear to raise significant concerns under the
Equal Credit Opportunity Act. See 15 U.S.C. 1691(a)(3).
Potential costs and benefits. There do not appear to be any
significant benefits to consumers or competition from conditioning or
linking the amount of credit available to the consumer based on the
consumer consenting to the creditor's payment of over-the-limit
transactions. While some creditors may seek to replace the revenue from
over-the-limit fees by charging consumers higher annual percentage
rates or fees, overall, consumers will benefit from having a meaningful
choice regarding whether to have over-the-limit transactions approved
by the creditor.
Proposal
Proposed Sec. 226.56(j)(3) is intended to prevent creditors from
effectively circumventing the consumer choice requirement by
prohibiting a creditor from conditioning or otherwise linking the
amount of credit granted on the consumer opting in to the creditor's
payment of over-the-limit transactions. Under the proposed rule, a
creditor could not, for example, require a consumer to opt in to the
creditor's fee-based over-the-limit service in order to receive a
higher credit limit for the account. Similarly, a creditor would be
prohibited from denying a consumer's credit card application solely
because the consumer did not opt in to the creditor's over-the-limit
service. The proposed rule is illustrated by way of example in proposed
comment 56(j)-1.
56(j)(4) Over-the-Limit Fees Attributed to Fees or Interest
Proposed Sec. 226.56(j)(4) would prohibit the imposition of any
over-the-limit fees or charges if the credit limit is exceeded solely
because of the creditor's assessment of accrued interest charges or
fees on the consumer's credit card account.
Legal Analysis
Potential injury that is not reasonably avoidable. As discussed
above, consumers may incur substantial monetary injury due to the fees
assessed in connection with the payment of over-the-limit transactions.
In addition to per transaction fees, consumers may also trigger rate
increases if the over-the-limit transaction is deemed to be a violation
of the credit card contract.
The injury from over-the-limit fees and potential rate increases
would not appear to be reasonably avoidable in these circumstances
because consumers are, as a general matter, unlikely to be aware of the
amount of interest charges or fees that may be added to their account
balance when deciding whether or not to engage in a credit card
transaction. With respect to accrued interest charges, these additional
amounts are typically added to a consumer's account balance at the end
[[Page 54185]]
of the billing cycle after the consumer has completed his or her
transactions for the cycle and thus are unlikely to have been taken
into account when the consumer engages in the transactions.
Potential costs and benefits. Although prohibition of the
assessment of over-the-limit fees caused by accrued finance charges and
fees may reduce creditor revenues and lead creditors to replace lost
revenue by charging consumers higher rates or fees, it appears that the
proposal will result in a net benefit to consumers because some
consumers are likely to benefit substantially while the adverse effects
on others are likely to be small. Because permitting fees and interest
charges to trigger over-the-limit fees may have the effect of
retroactively reducing a consumer's available credit for prior
transactions, prohibiting such a practice would protect consumers
against unexpected over-the-limit fees and rate increases which could
substantially add to their cost of credit. Moreover, consumers will be
able to more accurately manage their credit lines without having to
factor additional costs that cannot be easily determined. While some
consumers may pay higher fees and initial rates, consumers are likely
to benefit overall through more transparent pricing.
Proposal
Proposed Sec. 226.56(j)(4) would prohibit creditors from imposing
an over-the-limit fee or charge if a consumer exceeds a credit limit
solely because of fees or interest charged by the creditor to the
consumer's account during the billing cycle. The proposed prohibition
is generally intended to prohibit creditors from assessing over-the-
limit fees or charges on consumer credit card accounts unless the
credit limit was exceeded solely by transactions or charges that were
not initiated by the consumer during the billing cycle.
For purposes of this prohibition, the fees or interest charges that
may not trigger the imposition of an over-the-limit fee would be
considered charges imposed as part of the plan under Sec.
226.6(b)(3)(i). Thus, the proposed rule would also prohibit the
assessment of an over-the-limit fee or charge even if the credit limit
was exceeded due to fees for services requested by the consumer if such
fees would constitute charges imposed as part of the plan (for example,
fees for voluntary debt cancellation or suspension coverage).
The proposed prohibition would not restrict creditors from
assessing over-the-limit fees due to accrued finance charges or fees
from prior cycles that have subsequently been added to the account
balance. Comment is requested regarding the operational issues that may
arise from the proposed prohibition.
Notice of Reduction of the Credit Limit
In the July 2009 Regulation Z Interim Final Rule, the Board adopted
a provision applicable to credit card accounts under an open-end (not
home-secured) plan that addresses notices of changes in a consumer's
credit limit. As set forth in the interim final rule, Sec.
226.9(c)(2)(vi) requires a creditor to provide a consumer with 45 days'
advance notice that a credit limit is being decreased or will be
decreased prior to the imposition of any over-the-limit fee or penalty
rate imposed solely as the result of the balance exceeding the newly
decreased credit limit.\47\ The new provision is intended to protect
consumers against costly surprises potentially associated with a
reduction in the credit limit, specifically, fees and rate increases,
while giving a consumer adequate time to mitigate the effect of the
credit line reduction. See 74 FR 36077.
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\47\ A substantively similar provision was adopted in the
January 2009 Regulation Z Rule. See Sec. 226.9(c)(2)(v).
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Neither Sec. 226.9(c)(2)(vi) nor the restrictions proposed
pursuant to the Board's authority under TILA Section 127(k)(5) would
limit a creditor's ability to use line reductions to address safety and
soundness concerns when a borrower's risk increases. As stated in the
July 2009 Regulation Z Interim Final Rule, the Board recognizes that
creditors have a legitimate interest in mitigating the risk of a loss
when a consumer's creditworthiness deteriorates and that it may be
appropriate in some cases for creditors to reduce the credit limit as a
risk mitigation tool.
Section 226.57 Special Rules for Marketing Open-End Credit to College
Students
Section 304 of the Credit Card Act adds new TILA Section 140(f) to
require the public disclosure of contracts or other agreements between
card issuers and institutions of higher education for the purpose of
marketing a credit card and to impose new restrictions related to
marketing open-end credit to college students. 15 U.S.C. 1650(f). The
Board proposes to implement these provisions in new Sec. 226.57.
The Board also proposes to implement provisions related to new TILA
Section 127(r) in Sec. 226.57. 15 U.S.C. 1637(r). TILA Section 127(r),
which was added by Section 305 of the Credit Card Act, requires card
issuers to submit an annual report to the Board containing the terms
and conditions of business, marketing, promotional agreements, and
college affinity card agreements with an institution of higher
education, or other related entities, with respect to any college
student credit card issued to a college student at such institution.
57(a) Definitions
New TILA Section 140(f) does not provide any definitions while new
TILA Section 127(r) provides definitions for terms that are also used
in new TILA Section 140(f). See 15 U.S.C. 1650(f). To ensure the use of
these terms is consistent throughout these sections, the Board proposes
to incorporate the definitions set forth in TILA Section 127(r) in
Sec. 226.57(a).
Proposed Sec. 226.57(a)(1) would define ``college student credit
card'' as a credit card issued under a credit card account under an
open-end (not home-secured) consumer credit plan to any college
student. This definition is similar to TILA Section 127(r)(1)(B), which
defines ``college student credit card account'' as a credit card
account under an open-end consumer credit plan established or
maintained for or on behalf of any college student. Proposed Sec.
226.57(a)(1) defines ``college student credit card'' rather than
``college student credit card account'' because the statute and
regulation use the former term but not the latter. Also, the proposed
definition uses the proposed defined term ``credit card account under
an open-end (not home-secured) consumer credit plan'' (in proposed
Sec. 226.2(a)(15)) for consistency with other sections of the proposed
regulations implementing the Credit Card Act. The term would exclude
home-equity lines of credit accessed by credit cards and overdraft
lines of credit accessed by debit cards, which the Board believes are
not typical types of college student credit cards.
TILA Section 127(r)(1)(A) defines ``college affinity card'' as a
credit card issued under an open end consumer credit plan in
conjunction with an agreement between the issuer and an institution of
higher education or an alumni organization or a foundation affiliated
with or related to an institution of higher education under which cards
are issued to college students having an affinity with the institution,
organization or foundation where at least one of three criteria also is
met. These three criteria are: (1) The creditor has agreed to donate a
portion of the proceeds of the credit card to the institution,
organization, or foundation (including a lump-sum or one-time payment
of money for access); (2) the
[[Page 54186]]
creditor has agreed to offer discounted terms to the consumer; or (3)
the credit card bears the name, emblem, mascot, or logo of such
institution, organization, or foundation, or other words, pictures or
symbols readily identified with such institution or affiliated
organization. The Board is not proposing a regulatory definition
comparable to this definition in the statute; it appears that the
definition of ``college student credit card,'' discussed above, is
broad enough to encompass any ``college affinity card'' as defined in
TILA Section 127(r)(1)(A), and therefore the definition of ``college
affinity card'' is unnecessary. However, the Board solicits comment on
whether the regulations should contain a definition of ``college
affinity card'' as well as a definition of ``college student credit
card.''
Proposed comment 57(a)(1)-1 would clarify that a college student
credit card includes a college affinity card, as discussed above, and
that, in addition, a card may fall within the scope of the definition
regardless of the fact that it is not intentionally targeted at or
marketed to college students.
Proposed Sec. 226.57(a)(2) would define ``college student'' as an
individual who is a full-time or a part-time student attending an
institution of higher education. This definition is consistent with the
definition of ``college student'' in TILA Section 127(r)(1)(C). The
definition is intended to be broad and would apply to students of any
age attending an institution of higher education. Furthermore, the term
``college student'' is not limited to students attending an
undergraduate program at an institution of higher education. The term
applies to all students, including those enrolled in graduate programs
or joint degree programs.
TILA Section 127(r)(1)(D) states that the term ``institution of
higher education'' has the same meaning as in section 101 and 102 of
the Higher Education Act of 1965. 20 U.S.C. 1001 and 1002. Meanwhile,
TILA Section 140(a)(3), as added by the Higher Education Opportunity
Act of 2008, contains a definition for ``institution of higher
education'' that differs slightly from the definition in TILA Section
127(r)(1)(D). Specifically, TILA Section 140(a)(3) states that
``institution of higher education'' has the same meaning as in section
102 of the Higher Education Act of 1965 (20 U.S.C. 1002), without
reference to section 101 of the Higher Education Act of 1965 (20 U.S.C.
1001). However, as discussed in the Board's recently adopted amendments
regarding private education loans, the Board understands that
institutions covered under section 101 of the Higher Education Act of
1965 would also be covered under section 102 of the Higher Education
Act of 1965. As a result, the definition of ``institution of higher
education'' adopted in Sec. 226.46(b)(2) to implement TILA Section
140(a)(3), as it applies to private education loans references both
sections 101 and 102 of the Higher Education Act of 1965.\48\
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\48\ 74 FR 41194 (Aug. 14, 2009).
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In order to have a consistent definition of the term for all
sections added by the Credit Card Act and to facilitate compliance, the
Board proposes to use its authority under TILA Section 105(a) to apply
the definition in TILA Section 127(r)(1)(D) to TILA Section 140(f). 15
U.S.C. 1604(a). As a result proposed Sec. 226.57(a)(3) would adopt the
definition of ``institution of higher education'' in TILA Section
127(r)(1)(D) and would be applicable not only to the provisions in TILA
Section 127(r), but also TILA Section 140(f). This definition would
also be consistent with the definition of ``institution of higher
education'' in Sec. 226.46(b)(2) for private education loans.
Proposed Sec. 226.57(a)(4) would define ``affiliated
organization'' as an alumni organization or foundation affiliated with
or related to an institution of higher education, to provide a
conveniently shorter term to be used to refer to such organizations and
foundations in various provisions of the proposed regulations.
Proposed Sec. 226.57(a)(5) would delineate the types of agreements
for which creditors must provide annual reports to the Board, under the
defined term ``college credit card agreement.'' The term would be
defined to include any business, marketing or promotional agreement
between a card issuer and an institution of higher education or an
affiliated organization in connection with which college student credit
cards are issued to college students currently enrolled at that
institution. The definition would not incorporate the concept of a
college affinity card agreement, which is used in TILA Section
127(r)(1)(A), as discussed above. The Board believes that the
definition of ``college credit card agreement'' as proposed would be
broad enough to include agreements concerning college affinity cards;
however, the Board requests comment on whether language referring to
college affinity card agreements should also be included in the
regulations.
As proposed comment 57(a)(5)-1 would clarify, business, marketing
and promotional agreements may include a broad range of arrangements
between a creditor and an institution of higher education or affiliated
organization, including arrangements that do not fall within the
concept of a college affinity card agreement as discussed in TILA
Section 127(r)(1)(A). For example, TILA Section 127(r)(1)(A) specifies
that under a college affinity card agreement, the card issuer has
agreed to make a donation to the institution or affiliated
organization, the card issuer has agreed to offer discounted terms to
the consumer, or the credit card will display pictures, symbols, or
words identified with the institution or affiliated organization; even
if these conditions are not met, an agreement may qualify as a college
credit card agreement, if the agreement is a business, marketing or
promotional agreement that contemplates the issuance of college student
credit cards to college students currently enrolled at the institution.
An agreement may qualify as a college credit card agreement even if
marketing of cards under the agreement is targeted at alumni, faculty,
staff, and other non-student consumers, as long as cards may also be
issued to students in connection with the agreement.
57(b) Public Disclosure of Agreements
The Board proposes to implement new TILA Section 140(f)(1) in Sec.
226.57(b). Consistent with the statute, proposed Sec. 226.57(b) would
state that an institution of higher education shall publicly disclose
any credit card marketing contract or other agreement made with a card
issuer or creditor. The Board also proposes commentary to provide
examples of how an institution of higher education may publicly
disclose such contracts or agreements, and to clarify that the entire
agreement must be disclosed. Proposed comment 57(b)-1 would specify
that an institution of higher education may fulfill its duty to
publicly disclose any contract or other agreement made with a card
issuer or creditor for the purposes of marketing a credit card by
posting such contract or agreement on its Web site. Alternatively, the
institution of higher education may make such contract or agreement
available upon request, provided the procedures for requesting the
documents are reasonable and free of cost to the requestor, and the
contract or agreement is provided within a reasonable time frame. The
list in proposed comment 57(b)-1 is not exhaustive, so an institution
of higher education may publicly disclose these contracts or agreements
in other ways.
In addition, proposed comment 57(b)-2 would bar institutions of
higher
[[Page 54187]]
education from redacting any contracts or agreements they are required
to publicly disclose under proposed Sec. 226.57(b). As a result, any
clauses in existing contract or agreements addressing the
confidentiality of such contracts or agreements would be invalid to the
extent they prevent institutions of higher education from publicly
disclosing such contracts or agreements in accordance with proposed
Sec. 226.57(b). The Board believes that it is important that all
provisions of these contracts or agreements be available to college
students and other interested parties. If institutions were permitted
to redact portions of these contracts or agreements, interested parties
may be deprived of a full understanding of these arrangements.
57(c) Prohibited Inducements
Under TILA Section 140(f)(2), no card issuer or creditor may offer
to a student at an institution of higher education any tangible item to
induce such student to apply for or participate in an open-end consumer
credit plan offered by such card issuer or creditor, if such offer is
made on the campus of an institution of higher education, near the
campus of an institution of higher education, or at an event sponsored
by or related to an institution of higher education. The Board proposes
to implement this provision in Sec. 226.57(c), which generally would
track the statutory language. The Board notes that unlike other
statutory provisions the Board proposes to implement in Sec. 226.57,
TILA Section 140(f)(2) applies not only to credit card accounts, but
also other open-end consumer credit plans, such as lines of credit.
To provide further guidance on the prohibition in Sec. 226.57(c),
the Board also proposes several new comments. Proposed comment 57(c)-1
would clarify that a tangible item under Sec. 226.57(c) includes any
physical item, such as a gift card, a t-shirt, or a magazine
subscription, that a card issuer or creditor offers to induce a college
student to apply for or open an open-end consumer credit plan offered
by such card issuer or creditor. The proposed comment would also
provide some examples of non-physical inducements that would not be
considered tangible items, such as discounts, rewards points, or
promotional credit terms.
Because offering tangible items to college students is prohibited
only if the items are offered to induce the student to apply for or
open an open-end consumer credit plan, proposed comment 57(c)-2 would
clarify that if a tangible item is offered to a person whether or not
that person applies for or opens an open-end consumer credit plan, the
item is not an inducement. As an example, proposed comment 57(c)-2
states that refreshments offered to a college student on campus that
are not conditioned on whether the student has applied for or agreed to
open an open-end consumer credit plan would not be considered
inducements that would cause a creditor to violate Sec. 226.57(c).
The prohibition in Sec. 226.57(c) extends to an offer that is
made, among other places, near the campus of an institution of higher
education. The Board is not aware of any standard for determining a
location near a school that is analogous to the prohibition in TILA
Section 140(f)(2), but is aware of existing standards for other types
of prohibitions. TILA Section 140(f)(2)(B) requires the Board to
determine what is considered near the campus of an institution of
higher education. Based on the distances used in State and Federal laws
for other restricted activities near a school,\49\ the Board proposes
comment 57(c)-3 to provide that a location that is within 1,000 feet of
the border of the campus of an institution of higher education, as
defined by the institution of higher education, be considered near the
campus of an institution of higher education. The Board solicits
comment on other appropriate ways to determine a location that is
considered near the campus of an institution of higher education.
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\49\ See, e.g., 18 U.S.C. 922(q)(2) (making it unlawful for an
individual to possess an unlicensed firearm in a school zone,
defined in 18 U.S.C. 921(a)(25) as within 1,000 feet of the school);
the Family Smoking Prevention and Tobacco Control Act (Pub. L. 111-
31, June 22, 2009) (requiring regulations to ban outdoor tobacco
advertisements within 1,000 feet of a school or playground); and
Mass. Gen. Laws ch. 94C, Sec. 32J (requiring mandatory minimum term
of imprisonment for drug violations committed within 1,000 feet of a
school).
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Proposed comment 57(c)-4 would clarify that offers of tangible
items mailed to a college student at an address on or near the campus
of an institution of higher education would be subject to the
restrictions in Sec. 226.57(c). The statutory language does not
distinguish between different methods of making offers of tangible
items, and proposed comment 57(c)-4 would make clear that offers of
tangible items made on or near the campus of an institution of higher
education for purposes of Sec. 226.57(c) include offers of tangible
items that are sent to those locations through the mail.
Furthermore, under proposed Sec. 226.57(c), an offer of a tangible
item to induce a college student to apply for or open an open-end
consumer credit plan may not be made at an event sponsored by or
related to an institution of higher education. In order to give card
issuers and creditors guidance on determining whether an event is
related to an institution, the Board proposes comment 57(c)-5. Proposed
comment 57(c)-5 would provide that an event is related to an
institution of higher education if the marketing of such event uses the
name, emblem, mascot, or logo of an institution of higher education, or
other words, pictures, or symbols identified with an institution of
higher education in a way that implies that the institution of higher
education endorses or otherwise sponsors the event. The proposed
comment was adapted from guidance the Board recently adopted in Sec.
226.48 regarding co-branding restrictions for certain private education
loans.
Since the prohibition in Sec. 226.57(c) applies solely to offering
a tangible item to a college student at specified locations, a card
issuer or creditor would be permitted to offer any person who is not a
college student a tangible item to induce such person to apply for or
open an open-end consumer credit plan offered by such card issuer or
creditor at such locations. The Board believes a card issuer or
creditor who opts to have a marketing program on or near the campus of
an institution of higher education, or at an event sponsored by or
related to an institution of higher education where a tangible item
will be offered to induce people to apply for or open an open-end
consumer credit plan should have reasonable procedures for determining
whether an applicant or participant is a college student before giving
the applicant or participant the tangible item.
Proposed comment 57(c)-6 illustrates one way in which a card issuer
or creditor might meet this standard. Specifically, the Board provides
that a card issuer or creditor may ask whether the applicant is a
college student as part of the application process. Proposed comment
57(c)-6 would also provide that the card issuer or creditor may rely on
the representations made by the applicant Therefore, if an applicant
misrepresents his or her status as a student, the card issuer or
creditor would not violate Sec. 226.57(c) by relying on that
representation.
57(d) Annual Report to the Board
The Board proposes to implement new TILA Section 127(r)(2) in
proposed Sec. 226.57(d). Consistent with the statute, proposed Sec.
226.57(d) would require creditors that are a party to one or more
[[Page 54188]]
college credit card agreements to register with the Board and to submit
annual reports to the Board regarding those agreements. Creditors that
were a party to one or more college credit card agreements at any time
during the 2009 calendar year would be required to register with the
Board by February 1, 2010. The initial report from creditors would be
due by February 22, 2010, as required by TILA Section 127(r)(2)(D).
Creditors would be required to submit subsequent annual reports by the
first business day on or after March 31 of the following year.
Proposed Sec. 226.57(d) would require that annual report include a
copy of each college credit card agreement to which the creditor was a
party that was in effect during the period covered by the report, as
well as certain related information including the total dollar amount
of payments pursuant to the agreement from the creditor to the
institution (or affiliated organization) during the period covered by
the report, and how such amount is determined; the number of credit
card accounts opened pursuant to the agreement during the period; and
the total number of such credit card accounts that were open at the end
of the period.
The annual report would also be required to include a copy of any
memorandum of understanding that ``directly or indirectly relates to
the college credit card agreement or that controls or directs any
obligations or distribution of benefits between any such entities.''
Proposed comment 57(d)(3)-1 would clarify what types of documents would
be considered memoranda of understanding for purposes of this
requirement, by providing that a memorandum of understanding includes
any document that amends the college credit card agreement, or that
constitutes a further agreement between the parties as to the
interpretation or administration of the agreement, and by providing of
examples of documents that would or would not be included.
The Board solicits comment on whether additional items of
information should be required to be included in the annual report. New
TILA Section 127(r)(2)(A) specifies that the required annual report
contain ``the terms and conditions'' of college credit card agreements
between the card issuer and institutions of higher education or
affiliated organizations. For example, information that may be part of
the terms and conditions of a college credit card agreement and that,
if so, could be required to be included in the report, could include
any terms that differentiate between student and non-student accounts
(for example, that provide for difference in payments based on whether
an account is a student or non-student account), or that relate to
advertising or marketing (such as provisions on mailing lists, online
advertising, or on-campus marketing). The report could also be required
to specify the terms and conditions of credit card accounts (for
example, rates and fees) that may be opened in connection with the
college credit card agreement. Inclusion of such information in
issuers' annual reports could facilitate the Board's review of the
reports and preparation of the Board's report to Congress concerning
college credit card agreements, but could also impose additional costs
on card issuers in preparing their reports to the Board. The Board
requests comment on the costs and benefits of requiring these (or any
other) items of information to be included in the annual report.
Section 226.58 Internet Posting of Credit Card Agreements
Section 204 of the Credit Card Act adds new TILA Section 122(d) to
require creditors to post agreements for open-end consumer credit card
plans on the creditors' Web sites and to submit those agreements to the
Board for posting on a publicly-available Web site established and
maintained by the Board. 15 U.S.C. 1632(d). The Board proposes to
implement these provisions in new Sec. 226.58.
58(a) Applicability
Proposed Sec. 226.58(a) would make proposed Sec. 226.58
applicable to any card issuer that issues a credit card under a credit
card account under an open-end (not home-secured) consumer credit plan,
as defined in proposed revised Sec. 226.2(a)(15). Thus, consistent
with the approach the Board is proposing in implementing other sections
of the Credit Card Act, home-equity lines of credit accessible by
credit cards and overdraft lines of credit accessed by debit cards
would not be covered by proposed Sec. 226.58.
58(b) Definitions
Proposed Sec. 226.58(b)(1) defines ``agreement'' or ``credit card
agreement'' as a written document or documents evidencing the terms of
the legal obligation or the prospective legal obligation between a card
issuer and a consumer for a credit card account under an open-end (not
home-secured) consumer credit plan. As proposed, Sec. 226.58(b)(1)
states and proposed comment 58(b)(1)-1 further clarifies that the
agreement is deemed to include certain information, such as annual
percentage rates and fees, even if the issuer does not otherwise
technically include this information in the document evidencing the
terms of the legal obligation. This information is listed under the
defined term ``pricing information'' in Sec. 226.58(b)(4). The Board
believes that, to enable consumers to shop for credit cards and compare
information about various credit card plans in an effective manner, it
is necessary that the credit card agreements posted on the Board's Web
site include information such as rates and fees, in addition to other
terms and conditions of the agreements. However, the Board solicits
comment on the definition of agreement and on whether more or less
information should be included. As proposed comment 58(b)(1)-2 would
clarify, the agreement would not include documents that may be sent to
the consumer along with the credit card or credit card agreement, such
as a cover letter, a validation sticker on the card, other information
about card security, offers for credit insurance or other optional
products, advertisements, and disclosures required under Federal or
State law that are not incorporated into the agreement itself.
Proposed Sec. 226.58(b)(2) defines ``business day'' as a day on
which the creditor's offices are open to the public for carrying on
substantially all of its business functions. This is consistent with
the definition of business day used in most other sections of
Regulation Z.
Proposed Sec. 226.58(b)(3) states that an issuer ``offers'' or
``offers to the public'' an agreement if the issuer is soliciting or
accepting applications for new accounts that would be subject to that
agreement. As proposed comment 58(b)(3)-1 would clarify, a card issuer
is deemed to offer a credit card agreement to the public even if the
issuer solicits, or accepts applications from, only a limited group of
persons. For example, an issuer may market affinity cards to students
and alumni of a particular educational institution or solicit only
high-net-worth individuals for a particular card, but the corresponding
card agreements would be considered to be offered to the public.
Proposed comment 58(b)(3)-2 would clarify that a card issuer is deemed
to offer a credit card agreement to the public even if the terms of the
agreement are changed immediately upon opening of an account to terms
not offered to the public.
Proposed Sec. 226.58(b)(4) defines the term ``pricing
information'' to include: (1) The information under Sec.
226.6(b)(2)(i) through (b)(2)(xii), (b)(3) and (b)(4) that is required
to be
[[Page 54189]]
disclosed in writing pursuant to Sec. 226.5(a)(1)(ii); (2) the credit
limit; and (3) the method used to calculate required minimum payments.
This definition makes reference to the provisions of Sec. 226.6(b) as
revised by the January 2009 Regulation Z Rule. While the effective date
of proposed Sec. 226.58 would be February 22, 2010, the Board is
soliciting comment regarding whether the July 1, 2010 mandatory
compliance date of revised Sec. 226.6 should be retained, as discussed
elsewhere in this proposal. If the July 1, 2010 mandatory compliance
date for revised Sec. 226.6(b) is retained, the Board may make
technical and conforming changes to proposed Sec. 226.58(b)(4) to
account for the difference in mandatory compliance dates. However, the
definition of pricing information for purposes of proposed Sec. 226.58
would conform to the requirements of revised Sec. 226.6(b)(2)(i)
through (b)(2)(xii), (b)(3) and (b)(4) beginning on February 22, 2010,
even if compliance with portions of revised Sec. 226.6(b) is not
mandatory until July 1, 2010.
58(c) Registration With Board
Proposed Sec. 226.58(c) would require any card issuer that offered
one or more credit card agreements as of December 31, 2009 to register
with the Board, in the form and manner prescribed by the Board, no
later than February 1, 2010. However, a card issuer that would have
qualified for the de minimis exception under proposed Sec. 226.58(e)
as of December 31, 2009, if proposed Sec. 226.58 had been in effect on
that date, would not be required to register.
The Board expects to provide additional details regarding the
registration process in a document setting forth technical
specifications for the credit card agreement posting requirements, to
be posted on the Board's public Web site. The Board anticipates that
issuers will register online through the Board's Web site and that
registration will capture basic identifying information about each
issuer, such as the issuer's name, address, and identifying number
(e.g., RSSD ID number or tax identification number), and the name,
phone number and e-mail address of a contact person at the issuer. The
Board will contact the issuer to confirm that the issuer in fact
authorized the registration.
Proposed Sec. 226.58(c)(2) would provide that any issuer that is
required to make a submission to the Board under Sec. 226.58(d) that
has not previously registered with the Board must register with the
Board at least 21 days before the quarterly submission deadline
specified in Sec. 226.58(d)(1) on which the card issuer's first
submission is due. As proposed comment 58(c)-1 would clarify, this
provision would apply, for example, if a new credit card issuer is
organized or if an existing issuer that previously qualified for the de
minimis exception under Sec. 226.58(e) ceased to qualify. For example,
a card issuer that previously qualified for the de minimis exception
ceases to qualify as of September 30. That issuers first submission to
the Board is due on October 31, the next quarterly submission deadline.
The issuer must register with the Board at least 21 days before October
31.
Proposed Sec. 226.58(c)(3) would require card issuers that have
registered with the Board under Sec. 226.58(c)(1) or (c)(2) to provide
updated registration information to the Board no later than the first
quarterly submission deadline specified in Sec. 226.58(d)(1) after the
information changes. For example, as described in proposed comment
58(c)-2, a card issuer that has already registered with the Board
changes its address on October 15. The issuer must submit revised
registration information advising the Board of the address change no
later than October 31, the next quarterly submission deadline specified
in Sec. 226.58(d)(1) after the change.
58(d) Submission of Agreements to Board
Proposed Sec. 226.58(d) would require that each card issuer
electronically submit the credit card agreements, as defined in
proposed Sec. 226.58(b)(1), that the issuer offers, as defined in
proposed Sec. 226.58(b)(2), to the Board on a quarterly basis.
Consistent with new TILA Section 122(d)(3), the Board will post the
credit card agreements it receives on its Web site.
New TILA Section 122(d)(5) provides that the Board may establish
exceptions to the requirements that credit card agreements be posted on
creditors' Web sites and submitted to the Board for posting on its Web
site in any case where the administrative burden outweighs the benefit
of increased transparency. In addition, TILA Section 105(a) gives the
Board authority to prescribe regulations containing provisions
necessary or proper to effectuate the purposes of and to facilitate
compliance with TILA. The Board believes that, with respect to credit
card agreements that are not currently offered to the public, the
administrative burden associated with submission for posting on the
Board's Web site would outweigh the benefit of increased transparency.
The Board also believes that providing an exception for agreements not
currently offered to the public is appropriate both to effectuate the
purposes of TILA and to facilitate compliance with TILA.
The Board is aware that the number of credit card agreements
currently in effect but no longer offered to the public is extremely
large, and the Board believes that requiring issuers to prepare and
submit these agreements would impose a significant burden on issuers.
The Board also believes that the primary benefit of making credit card
agreements available on the Board's Web site is to assist consumers in
comparing credit card agreements offered by various issuers when
shopping for a new credit card. Including agreements that are no longer
offered to the public would not facilitate comparison shopping by
consumers because consumers could not apply for cards subject to these
agreements. In addition, including agreements no longer offered to the
public would significantly increase the number of agreements included
on the Board's Web site, possibly to include hundreds of thousands of
agreements (or more). This volume of data would render the amount of
data provided through the Web site too large to be helpful to most
consumers. Thus, the Board is proposing that an issuer only submit to
the Board under Sec. 226.58(d) those agreements that the issuer
currently offers to the public.
58(d)(1) Quarterly Submissions
Proposed Sec. 226.58(d)(1) would require issuers to make quarterly
submissions to the Board, in the form and manner specified by the
Board, that would contain: (1) The credit card agreements, as described
in Appendix N, that the card issuer offered to the public as of the
last business day of the preceding calendar quarter that the card
issuer has not previously submitted to the Board; (2) any credit card
agreement previously submitted to the Board that was modified or
amended during the preceding calendar quarter, as described in proposed
Sec. 226.58(d)(3); and (3) notification regarding any credit card
agreement previously submitted to the Board that the issuer is
withdrawing, as described in proposed Sec. 226.58(d)(4) and (e).
Quarterly submissions to the Board would be due no later than the first
business day on or after January 31, April 30, July 31, and October 31
of each year.
Proposed comment 58(d)-1 would give the following example: a card
issuer has already submitted three credit card agreements to the Board.
On October 15, the issuer stops offering agreement A. On November 20,
the issuer makes changes to the terms of
[[Page 54190]]
agreement B. On December 1, the issuer starts offering a new agreement
D. The issuer must submit to the Board no later than the first business
day on or after January 31: (1) Notification that the issuer is
withdrawing agreement A, because it is no longer offered to the public;
(2) the revised version of agreement B; and (3) agreement D.
As proposed comment 58(d)-2 would clarify, under proposed Sec.
226.58(d)(1), an issuer is not required to make any submission to the
Board at a particular quarterly submission deadline if, during the
previous calendar quarter, the issuer did not take any of the following
actions: (1) Offering a new credit card agreement that was not
submitted to the Board previously; (2) revising or amending an
agreement previously submitted to the Board; and (3) ceasing to offer
an agreement previously submitted to the Board. For example, a card
issuer offers five agreements to the public as of September 30 and
submits these to the Board by October 31, as required by proposed Sec.
226.58(d)(1). Between September 30 and December 31, the issuer
continues to offer all five of these agreements to the public without
amending or revising them and does not begin offering any new
agreements. The issuer is not required to make any submission to the
Board by the following January 31.
The Board expects to provide additional details regarding the
electronic submission process in the technical specifications document
to be posted on the Board's public Web site.
58(d)(2) Timing of First Two Submissions
Proposed Sec. 226.58(d)(2) would specify timing requirements for
the first two submissions to the Board following the effective date. As
described above, quarterly submissions to the Board generally are due
no later than the first business day on or after January 31, April 30,
July 31, and October 31 of each year. However, Section 3 of the Credit
Card Act provides that new TILA Section 122(d) becomes effective on
February 22, 2010, nine months after the date of enactment of the
Credit Card Act. Thus, consistent with Section 3 of the Credit Card
Act, proposed Sec. 226.58(d)(2) would require issuers to send their
initial submissions, containing credit card agreements offered to the
public as of December 31, 2009, to the Board no later than February 22,
2010. Proposed Sec. 226.58(d)(2) would provide that the next
submission must be sent to the Board no later than August 2, 2010 (the
first business day on or after July 31, 2010), and must contain: (1)
Any credit card agreements that the card issuer offered to the public
as of June 30, 2010, that the card issuer has not previously submitted
to the Board; (2) any credit card agreement previously submitted to the
Board that was modified or amended after December 31, 2009, and on or
before June 30, 2010, as described in proposed Sec. 226.58(d)(3); and
(3) notification regarding any credit card agreement previously
submitted to the Board that the issuer is withdrawing as of June 30,
2010, as described in proposed Sec. 226.58(d)(4) and (e).
For example, as of December 31, 2009, a card issuer offers three
agreements. The issuer is required to submit these agreements to the
Board no later than February 22, 2010. On March 10, 2010, the issuer
begins offering a new agreement. In general, an issuer that begins
offering a new agreement on March 10 of a given year would be required
to submit that agreement to the Board no later than April 30 of that
year. However, under proposed Sec. 226.58(d)(2), no submission to the
Board would be due on April 30, 2010, and the issuer instead would be
required to submit the new agreement no later than August 2, 2010.
58(d)(3) Changes To Agreements
Under proposed Sec. 226.58(d)(3), if a credit card agreement has
been submitted to the Board, no changes have been made to the
agreement, and the card issuer continues to offer the agreement to the
public, no additional submission of that agreement is required. For
example, as described in proposed comment 58(d)-3, a credit card issuer
begins offering an agreement in October and submits the agreement to
the Board the following January 31, as required by proposed Sec.
226.58(d)(1). As of March 31, the issuer has not revised or amended the
agreement and is still offering the agreement to the public. The issuer
is not required to submit anything to the Board regarding that
agreement by April 30.
If an issuer makes changes to a credit card agreement previously
submitted to the Board (including changes to the provisions of the
agreement, the pricing information, or both), proposed Sec.
226.58(d)(3) would require the card issuer to submit the entire revised
agreement to the Board by the first quarterly submission deadline after
the last day of the calendar quarter in which the change becomes
effective. Proposed comment 58(d)-4 would give the following example:
an issuer submits an agreement to the Board on October 31. On November
15, the issuer changes the method used to calculate required minimum
payments under the agreement. Because an element of the pricing
information has changed, the issuer must submit the entire revised
agreement to the Board no later than January 31 of the following year.
As proposed, Sec. 226.58(d)(3) would require credit card issuers
to resubmit agreements following any change, regardless of whether that
change affects the substance of the agreement. The Board recognizes
that requiring issuers to resubmit agreements following nonsubstantive
changes could impose a substantial burden on issuers with no
corresponding benefit to consumers. The Board solicits comment on
whether issuers are likely to make technical changes to agreements
without simultaneously making substantive changes, whether requiring
issuers to resubmit agreements following any change (however minor)
would impose a significant burden, and what standard the Board should
use to determine what changes merit resubmission of an agreement.
As proposed comment 58(d)-5 would explain, an issuer may not
fulfill the requirement to submit the entire revised agreement to the
Board by submitting a change-in-terms or similar notice covering only
the terms that have changed. Amendments and revisions would be required
to be integrated into the text of the agreement (or the single addendum
described in proposed Appendix N, if applicable), not provided as
separate riders. For example, an issuer changes the purchase APR
associated with an agreement the issuer has previously submitted to the
Board. The purchase APR for that agreement was included in an addendum
of pricing information as described in proposed Appendix N. The issuer
may not submit a change-in-terms or similar notice reflecting the
change in APR, either alone or accompanied by the original text of the
agreement and original addendum of pricing information. Instead, the
issuer must revise the addendum of pricing information to reflect the
change in APR and submit to the Board the entire text of the agreement
and the entire revised addendum, even though no changes have been made
to the provisions of the agreement and only one item on the addendum
has changed.
The Board believes that permitting issuers to submit change-in-
terms notices or riders containing amendments and revisions would make
it difficult for consumers to determine what provisions and pricing
information are currently offered by issuers. Consumers would be
required to sift through change-in-terms notices and riders in an
attempt to assemble a
[[Page 54191]]
coherent picture of the terms currently offered. The Board believes
that issuers are better placed than consumers to assemble this
information. While the Board understands that this may somewhat
increase the burden on issuers, the Board believes that the
corresponding benefit of increased transparency for consumers outweighs
this burden.
58(d)(4) Withdrawal of Agreements
Proposed Sec. 226.58(d)(4) would require an issuer to notify the
Board if any agreement previously submitted to the Board by that issuer
is no longer offered to the public by the first quarterly submission
deadline after the last day of the calendar quarter in which the issuer
ceased to offer the agreement. For example, as described in proposed
comment 58(d)-6, on January 5 an issuer stops offering to the public an
agreement it previously submitted to the Board. The issuer must notify
the Board that the agreement is being withdrawn by April 30, the first
quarterly submission deadline after March 31, the last day of the
calendar quarter in which the issuer stopped offering the agreement.
58(e) De Minimis Exception
New TILA Section 122(d)(5) provides that the Board may establish
exceptions to the requirements that credit card agreements be posted on
creditors' Web sites and submitted to the Board for posting on the
Board's Web site in any case where the administrative burden outweighs
the benefit of increased transparency, such as where a credit card plan
has a de minimis number of consumer account holders. The Board believes
that a de minimis exception to these requirements is appropriate, but
believes that it may not be feasible to base such an exception on the
number of accounts under a credit card plan. In particular, the Board
is not aware of a way to define ``credit card plan'' that would not
divide issuer's portfolios into such small units that large numbers of
credit card agreements could fall under the de minimis exception.
The Board therefore proposes to establish a de minimis exception in
proposed Sec. 226.58(e) based on an issuer's total number of open
accounts. Under proposed Sec. 226.58(e)(1), an issuer would not be
required to submit any credit card agreements to the Board under
proposed Sec. 226.58(d) if the card issuer has fewer than 10,000 open
credit card accounts under open-end (not home-secured) consumer credit
plans, as of the last business day of the calendar quarter. For
example, as described in proposed comment 58(e)-1, an issuer offers
five credit card agreements to the public as of September 30. However,
the issuer has only 2,000 open credit card accounts under open-end (not
home-secured) consumer credit plans as of September 30. The issuer is
not required to submit any agreements to the Board by October 31
because the issuer qualifies for the de minimis exception.
Proposed comment 58(e)-2 would clarify that, for purposes of the de
minimis exception, a credit card account is considered to be open even
if the account is inactive, as long as the account has not been closed
by the cardholder or the card issuer and the cardholder can obtain
extensions of credit on the account. If an account has been closed for
new activity (for example, due to default by the cardholder), but the
cardholder is still making payments to pay off the outstanding balance,
the account need not be considered open. If an account has only
temporarily been suspended (for example, due to a report of
unauthorized use), the account is considered open.
As proposed comment 58(e)-3 would clarify, whether an issuer
qualifies for the de minimis exception would be determined as of the
last business day of each calendar quarter. For example, as of December
31, an issuer offers three agreements to the public and has 9,500 open
credit card accounts under open end (not home secured) consumer credit
plans. As of January 30, the issuer still offers three agreements, but
has 10,100 open accounts. As of March 31, the issuer still offers three
agreements, but has only 9,700 open accounts. Even though the issuer
had 10,100 open accounts at one time during the calendar quarter, the
issuer qualifies for the de minimis exception because the number of
open accounts was less than 10,000 as of March 31. The issuer therefore
is not required to submit any agreements to the Board under Sec.
226.58(d) by April 30.
The Board believes that the administrative burden on issuers of
preparing and submitting such agreements would outweigh the benefit of
increased transparency from including those agreements on the Board's
Web site, but the Board solicits comment on the 10,000 open accounts
threshold for the de minimis exception. In addition, the Board
recognizes that the proposed de minimis exception would not alleviate
the administrative burden on large issuers of submitting agreements for
credit card plans with a very small number of open accounts. The Board
solicits comments on whether the Board should create a de minimis
exception applicable to a small credit card plan offered by an issuer
of any size, and if so how the Board should define ``credit card plan''
for purposes of such an exception.
Proposed Sec. 226.58(e)(2) would specify that if an issuer that
previously qualified for the de minimis exception ceases to qualify,
the card issuer must begin making quarterly submissions to the Board
under Sec. 226.58(d) no later than the first quarterly submission
deadline after the date as of which the issuer ceased to qualify. As
proposed comment 58(e)-4 would clarify, whether an issuer has ceased to
qualify for the de minimis exception under proposed Sec. 226.58(e)(2)
would be determined as of the last business day of the calendar
quarter, as indicated in proposed Sec. 226.58(e)(1). For example, as
of June 30, an issuer offers three agreements to the public and has
9,500 credit card accounts under open-end (not home-secured) consumer
credit plans. The issuer is not required to submit any agreements to
the Board under Sec. 226.58(d) because the issuer qualifies for the de
minimis exception. As of July 15, the issuer still offers the same
three agreements, but now has 10,000 open accounts. The issuer is not
required to take any action at this time, because whether an issuer
qualifies for the de minimis exception under proposed Sec.
226.58(e)(1) is determined as of the last business day of the calendar
quarter. As of September 30, the issuer still offers the same three
agreements and still has 10,000 open accounts. Because the issuer had
10,000 open accounts as of September 30, the issuer ceased to qualify
for the de minimis exception and must submit the three agreements it
offers to the Board by October 31, the next quarterly submission
deadline.
Proposed Sec. 226.58(e)(3) would provide that if a card issuer
that did not previously qualify comes within the de minimis exception,
the card issuer may, but is not required to, notify the Board that the
card issuer is withdrawing each agreement the card issuer previously
submitted to the Board. Until the issuer notifies the Board that each
agreement it previously submitted is being withdrawn, the issuer must
continue to make quarterly submissions to the Board under Sec.
226.58(d) and to provide updated registration information under Sec.
226.58(c)(3). Proposed comment 58(e)-5 would give the following
example: an issuer has 10,001 open accounts and offers three agreements
to the public as of December 31. The issuer has registered with the
Board and submitted each of the three agreements to the Board as
required under Sec. 226.58(c) and
[[Page 54192]]
(d). As of March 31, the issuer has only 9,999 open accounts. The
issuer has two options. First, the issuer may notify the Board that the
issuer is withdrawing each of the three agreements it previously
submitted. Once the issuer has notified the Board, the issuer is no
longer required to make quarterly submissions to the Board under Sec.
226.58(d) or to provide updated registration information to the Board
under Sec. 226.58(c)(3). Alternatively, the issuer may choose not to
notify the Board that it is withdrawing its agreements. In this case,
the issuer must continue making quarterly submissions to the Board
under Sec. 226.58(d) and providing updated registration information to
the Board under Sec. 226.58(c)(3). The issuer might choose not to
withdraw its agreements if, for example, the issuer believes that it
will likely cease to qualify for the de minimis exception again in the
near future.
58(f) Agreements Posted on Card Issuer's Web Site
In addition to requiring that card issuers submit credit card
agreements to the Board for posting on the Board's Web site, new TILA
Section 122(d) requires that each issuer post the credit card
agreements to which it is a party on its own Web site. The Board
proposes to implement this requirement in proposed Sec. 226.58(f).
Proposed Sec. 226.58(f) would set out two requirements. First,
under proposed Sec. 226.58(f)(1), each issuer would be required to
post on its publicly available Web site the same agreements it is
required to submit to the Board under proposed Sec. 226.58(d) (i.e.,
the agreements the issuer offers to the public). An issuer that is not
required to submit agreements to the Board under proposed Sec.
226.58(d) because it qualifies for the de minimis exception under
proposed Sec. 226.58(e) would not be subject to this requirement.
Second, under proposed Sec. 226.58(f)(2), each issuer would be
required to provide each individual cardholder with access to his or
her specific credit card agreement, by either: (1) Posting and
maintaining the individual cardholder's agreement on the issuer's Web
site; or (2) making a copy of each cardholder's agreement available to
the cardholder upon that cardholder's request. If a card issuer chooses
to make agreements available upon request, the issuer would be required
to provide the cardholder with the ability to request a copy of the
agreement both: (1) By using the issuer's Web site (such as by clicking
on a clearly identified box to make the request); and (2) by calling a
toll free telephone number displayed on the Web site and clearly
identified as to purpose. Proposed comment 58(f)(2)-1 would clarify
that agreements provided upon request may be provided in either
electronic or paper form, regardless of the form of the cardholder's
request. Whether provided electronically or in paper form, agreements
must be provided in a typeface that is clear and legible.
As proposed comment 58(f)-2 would clarify, the requirement to
provide access to credit card agreements under proposed Sec.
226.58(f)(2) would apply to all open credit card accounts under open-
end (not home-secured) consumer credit plans, regardless of whether
such agreements are required to be submitted to the Board pursuant to
proposed Sec. 226.58(d). For example, an issuer that is not required
to submit agreements to the Board because it qualifies for the de
minimis exception under Sec. 226.58(e) would still be required to
provide cardholders with access to their specific agreements under
Sec. 226.58(f)(2). Similarly, an agreement that is no longer offered
to the public would not be required to be submitted to the Board under
Sec. 226.58(d), but would still need to be provided to the cardholder
to whom it applies under Sec. 226.58(f)(2).
As described above, the Board proposes to exercise its authority to
create exceptions from the requirements of new TILA Section 122(d) with
respect to the submission of certain agreements to the Board for
posting on the Board's Web site. However, the Board believes that it
would not be appropriate to apply these exceptions to the requirement
that issuers provide cardholders with access to their specific credit
card agreement through the issuer's Web site. In particular, the Board
believes that, for the reasons discussed above, posting credit card
agreements that are not currently offered to the public on the Board's
Web site would not be beneficial to consumers. However, the Board
believes that the benefit of increased transparency of providing an
individual cardholder access to his or her specific credit card
agreement is substantial regardless of whether the cardholder's
agreement continues to be offered by the issuer. The Board believes
that this benefit outweighs the administrative burden on issuers of
providing such access, and the Board therefore is not proposing to
exempt agreements that are not offered to the public from the
requirements of proposed Sec. 226.58(f)(2). Similarly, the proposal
provides that card issuers with fewer than 10,000 open credit card
accounts under open-end (not home-secured) consumer credit plans would
not be required to submit agreements to the Board. However, the Board
believes that the benefit of increased transparency associated with
providing an individual cardholder with access to his or her specific
credit card agreement is substantial regardless of the number of the
card issuer's open accounts. The Board believes that this benefit of
increased transparency for consumers outweighs the administrative
burden on issuers of providing such access, and the Board therefore is
not proposing to apply the de minimis exception to the requirements of
proposed Sec. 226.58(f)(2).
The Board is providing issuers with the option to make copies of
cardholder agreements available on request because the Board believes
that the benefit of increased transparency associated with immediate
access to cardholder agreements, as compared to access after a brief
waiting period, would not outweigh the administrative burden on issuers
of providing immediate access. The Board believes that the
administrative burden associated with posting each cardholder's credit
card agreement on the issuer's Web site may be substantial for some
issuers. In particular, the Board notes that some smaller institutions
with limited information technology resources could find a requirement
to post all cardholder's agreements to be a significant burden. The
Board understands that it is important that all cardholders be able to
obtain copies of their credit card agreements promptly, and proposed
Sec. 226.58(f)(2) would ensure that this occurs.
If a card issuer chooses to make agreements available upon request
under proposed Sec. 226.58(f)(2)(ii), the card issuer would be
required to send to the cardholder or otherwise make available to the
cardholder a copy of the cardholder's agreement no later than 10
business days after the issuer receives the cardholder's request. As
proposed comment 58(f)(2)-3 would clarify, if, for example, an issuer
chooses to respond to a cardholder's request by mailing a paper copy of
the cardholder's agreement, the issuer would be required to mail the
agreement no later than 10 business days after receipt of the
cardholder's request. Alternatively, if an issuer chooses to respond to
a cardholder's request by posting the cardholder's agreement on the
issuer's Web site, the issuer must post the agreement on its Web site
no later than 10 business days after receipt of the cardholder's
request. The Board believes that requiring issuers to provide
cardholder's agreements within 10 business days gives card issuers
[[Page 54193]]
adequate time to respond to requests while providing cardholders with
prompt access to their credit card agreements. The Board solicits
comments regarding whether issuers should have a shorter or longer
period in which to respond to cardholder requests.
Proposed Sec. 226.58(f)(3) would state that credit card issuers
may provide credit card agreements in electronic form under Sec.
226.58(f)(1) and (f)(2) without regard to the consumer notice and
consent requirements of Section 101(c) of the E-Sign Act. Because new
TILA Section 122(d) specifies that credit card issuers must provide
access to cardholder agreements on the issuer's Web site, the Board
believes that the requirements of the E-Sign Act do not apply.
Appendix M1--Repayment Disclosures
As discussed in the section-by-section analysis to proposed Sec.
226.7(b)(12), TILA Section 127(b)(11), as added by Section 1301(a) of
the Bankruptcy Act, required creditors, the FTC and the Board to
establish and maintain toll-free telephone numbers in certain instances
in order to provide consumers with an estimate of the time it will take
to repay the consumer's outstanding balance, assuming the consumer
makes only minimum payments on the account and the consumer does not
make any more draws on the account. 15 U.S.C. 1637(b)(11)(F). The Act
required creditors, the FTC and the Board to provide estimates that are
based on tables created by the Board that estimate repayment periods
for different minimum monthly payment amounts, interest rates, and
outstanding balances. In the January 2009 Regulation Z Rule, instead of
issuing a table, the Board issued guidance in Appendix M1 to part 226
to card issuers and the FTC for how to calculate this generic repayment
estimate. The Board would use the same guidance to calculate the
generic repayment estimates given through its toll-free telephone
number.
TILA Section 127(b)(11), as added by Section 1301(a) of the
Bankruptcy Act, provided that a creditor may use a toll-free telephone
number to provide the actual number of months that it will take
consumers to repay their outstanding balance instead of providing an
estimate based on the Board-created table (``actual repayment
disclosure''). 15 U.S.C. 1637(b)(11)(I)-(K). In the January 2009
Regulation Z Rule, the Board implemented that statutory provision and
also provided card issuers with the option to provide the actual
repayment disclosure on the periodic statement instead of through a
toll-free telephone number. In the January 2009 Regulation Z Rule, the
Board adopted new Appendix M2 to part 226 to provide guidance to
issuers on how to calculate the actual repayment disclosure.
As discussed in more detail in the section-by-section analysis to
proposed Sec. 226.7(b)(12), the Credit Card Act substantially revised
Section 127(b)(11) of TILA. Specifically, Section 201 of the Credit
Card Act amends TILA Section 127(b)(11) to provide that creditors that
extend open-end credit must provide the following disclosures on each
periodic statement: (1) A ``warning'' statement indicating that making
only the minimum payment will increase the interest the consumer pays
and the time it takes to repay the consumer's balance; (2) the number
of months that it would take to repay the outstanding balance if the
consumer pays only the required minimum monthly payments and if no
further advances are made; (3) the total cost to the consumer,
including interest and principal payments, of paying that balance in
full, if the consumer pays only the required minimum monthly payments
and if no further advances are made; (4) the monthly payment amount
that would be required for the consumer to pay off the outstanding
balance in 36 months, if no further advances are made, and the total
cost to the consumer, including interest and principal payments, of
paying that balance in full if the consumer pays the balance over 36
months; and (5) a toll-free telephone number at which the consumer may
receive information about credit counseling and debt management
services. For ease of reference, this supplementary information will
refer to the above disclosures in the Credit Card Act as ``the
repayment disclosures.''
As discussed in more detail in the section-by-section analysis to
proposed Sec. 226.7(b)(12), the Board proposes to limit the repayment
disclosure requirements to credit card accounts under open-end (not
home-secured) consumer credit plans, as that term is defined in
proposed Sec. 226.2(a)(15)(ii). The Board proposes to adopt in
proposed Appendix M1 to part 226 guidance for calculating the repayment
disclosures.
Calculating the minimum payment repayment estimate. The minimum
payment repayment estimate would be an estimate of the number of months
that it would take to pay the outstanding balance shown on the periodic
statement, if the consumer pays only the required minimum monthly
payments and if no further advances are made. The guidance in proposed
Appendix M1 to part 226 for calculating the minimum payment repayment
estimate would be similar to the guidance that the Board adopted in
Appendix M2 to part 226 in the January 2009 Regulation Z Rule for
calculating the actual repayment disclosure. The Board proposes that
credit card issuers generally calculate the minimum payment repayment
estimate for a consumer based on the minimum payment formula(s), the
APRs and the outstanding balance currently applicable to a consumer's
account. For other terms that may impact the calculation of the minimum
payment repayment estimate, the Board proposes to allow issuers to make
certain assumption about these terms.
1. Minimum payment formulas. When calculating the minimum payment
repayment estimate, the Board proposes that credit card issuers
generally must use the minimum payment formula(s) that apply to a
cardholder's account. Proposed Appendix M1 to part 226 provides that in
calculating the minimum payment repayment estimate, if more than one
minimum payment formula applies to an account, the issuer must apply
each minimum payment formula to the portion of the balance to which the
formula applies. In providing the minimum payment repayment estimate,
an issuer must disclose the longest repayment period calculated. For
example, assume that an issuer uses one minimum payment formula to
calculate the minimum payment amount for a general revolving feature,
and another minimum payment formula to calculate the minimum payment
amount for special purchases, such as a ``club plan purchase.'' Also,
assume that based on a consumer's balances in these features, the
repayment period calculated pursuant to proposed Appendix M1 to part
226 for the general revolving feature is 5 years, while the repayment
period calculated for the special purchase feature is 3 years. This
issuer must disclose 5 years as the repayment period for the entire
balance to the consumer. This proposal differs from the approach
adopted in the January 2009 Regulation Z Rule, which permitted card
issuers the option to disclose either the longest repayment period
calculated or the repayment period calculated for each minimum payment
formula, when disclosing the actual repayment disclosures through a
toll-free telephone number. The Board believes that allowing card
issuers to disclose on the periodic statement the repayment period
calculated for each minimum payment formula might create ``information
overload'' for consumers and might distract the consumer from
[[Page 54194]]
other important information that is contained on the periodic
statement.
Under proposed Appendix M1 to part 226, card issuers would be
allowed to disregard promotional terms related to payments, such as
deferred billing promotional plans and skip payment features. The Board
notes that allowing issuers to disregard promotional payment terms on
accounts where the promotional payment terms apply only for a limited
amount of time eases compliance burden on issuers, without a
significant impact on the accuracy of the repayment estimates for
consumers.
2. Annual percentage rates. Generally, when calculating the minimum
payment repayment estimate, the proposal would require credit card
issuers to use each of the APRs that currently apply to a consumer's
account, based on the portion of the balance to which that rate
applies.
TILA Section 127(b)(11), as revised by the Credit Card Act,
specifically requires that in calculating the minimum payment repayment
estimate, if the interest rate in effect on the date on which the
disclosure is made is a temporary rate that will change under a
contractual provision applying an index or formula for subsequent
interest rate adjustments, the creditor must apply the interest rate in
effect on the date on which the disclosure is made for as long as that
interest rate will apply under that contractual provision, and then
apply an interest rate based on the index or formula in effect on the
applicable billing date.
Consistent with TILA Section 127(b)(11), as revised by the Credit
Card Act, under proposed Appendix M1 to part 226, the term
``promotional terms'' would be defined as ``terms of a cardholder's
account that will expire in a fixed period of time, as set forth by the
card issuer.'' The term ``deferred interest or similar plan'' would
mean a plan where a consumer will not be obligated to pay interest that
accrues on balances or transactions if those balances or transactions
are paid in full prior to the expiration of a specified period of time.
If any promotional APRs apply to a cardholder's account, other than
deferred interest or similar plans, a credit card issuer in calculating
the minimum payment repayment estimate would be required to apply the
promotional APR(s) until it expires and then must apply the rate that
applies after the promotional rate(s) expires. If the rate that applies
after the promotional rate(s) expires is a variable rate, a card issuer
would be required to calculate that rate based on the applicable index
or formula. This variable rate would be considered accurate if it was
in effect within the last 30 days before the minimum payment repayment
estimate is provided.
For deferred interest or similar plans, if minimum payments under
the plan will repay the balances or transactions prior to the
expiration of the specified period of time, a card issuer must assume
that the consumer will not be obligated to pay the accrued interest.
This means, in calculating the minimum payment repayment estimate, the
card issuer must apply a zero percent APR to the balance subject to the
deferred interest or similar plan. If, however, minimum payments under
the deferred interest or similar plan may not repay the balances or
transactions in full prior to the expiration of the specified period of
time, a credit card issuer must assume that a consumer will not repay
the balances or transactions in full prior to the expiration of the
specified period and thus the consumer will be obligated to pay the
accrued interest. This means, in calculating the minimum payment
repayment estimate, the card issuer must apply the APR at which
interest is accruing to the balance subject to the deferred interest or
similar plan.
For example, assume under a deferred interest plan, a card issuer
will not charge interest on a certain purchase if the consumer repays
that purchase amount within 12 months. Also, assume that under the
account agreement, the minimum payments for the deferred interest plan
are calculated as \1/12\ of the purchase amount, such that if the
consumer makes timely minimum payments each month for 12 months, the
purchase amount will be paid off by the end of the deferred interest
period. In this case, the card issuer must assume that the consumer
will not be obligated to pay the deferred interest. This means, in
calculating the minimum payment repayment estimate, the card issuer
must apply a zero percent APR to the balance subject to the deferred
interest plan. On the other hand, if under the account agreement, the
minimum payments for the deferred interest plan may not necessarily
repay the purchase balance within the deferred interest period (such as
where the minimum payments are calculated as 3 percent of the
outstanding balance), a credit card issuer must assume that a consumer
will not repay the balances or transactions in full by the specified
date and thus the consumer will be obligated to pay the deferred
interest. This means, in calculating the minimum payment repayment
estimate, the card issuer must apply the APR at which deferred interest
is accruing to the balance subject to the deferred interest plan.
This proposed approach with respect to deferred interest or similar
plans is consistent with the assumption that only minimum payments are
made in repaying the balance on the account.
3. Outstanding balance. When calculating the minimum payment
repayment estimate, the Board proposes that credit card issuers must
use the outstanding balance on a consumer's account as of the closing
date of the last billing cycle. Issuers would not be required to take
into account any transactions consumers may have made since the last
billing cycle. The Board believes that this proposed approach would
make it easier for consumers to understand the minimum payment
repayment estimate, because the outstanding balance used to calculate
the minimum payment repayment estimate would be the same as the
outstanding balance shown on the periodic statement. Under the
proposal, issuers would be allowed to round the outstanding balance to
the nearest whole dollar to calculate the minimum payment repayment
estimate.
4. Other terms. As discussed above, the Board proposes in Appendix
M1 to part 226 that issuers must calculate the minimum payment
repayment estimate for a consumer based on the minimum payment
formulas(s), the APRs and the outstanding balance currently applicable
to a consumer's account. For other terms that may impact the
calculation of the minimum payment repayment estimate, the Board
proposes to allow issuers to make certain assumptions about these
terms.
a. Balance computation method. The Board proposes to allow issuers
to use the average daily balance method for purposes of calculating the
minimum payment repayment estimate. The average daily balance method is
commonly used by issuers to compute the balance on credit card
accounts. Nonetheless, requiring use of the average daily balance
method makes other assumptions necessary, including the length of the
billing cycle, and when payments are made. The Board proposes to allow
an issuer to assume a monthly or daily periodic rate applies to the
account. If a daily periodic rate is used, the issuer would be allowed
to assume either (1) a year is 365 days long, and all months are
30.41667 days long, or (2) a year is 360 days long, and all months are
30 days long. Both sets of assumptions about the length of the year and
months would yield the same repayment estimates. The Board also
proposes to allow issuers to assume that payments are credited on the
last day of the month.
[[Page 54195]]
b. Grace period. In proposed Appendix M1 to part 226, the Board
proposes to allow issuers to assume that no grace period exists. The
required disclosures about the effect of making minimum payments are
based on the assumption that the consumer will be ``revolving'' or
carrying a balance. Thus, it seems reasonable to assume that the
account is already in a revolving condition at the time the minimum
payment repayment estimate is disclosed on the periodic statement, and
that no grace period applies. This proposed assumption about the grace
period is also consistent with the proposed rule to exempt issuers from
providing the minimum payment repayment estimate to consumers that have
paid their balances in full for two consecutive months.
c. Residual interest. When the consumer's account balance at the
end of a billing cycle is less than the required minimum payment, the
Board proposes to allow an issuer to assume that no additional
transactions occurred after the end of the billing cycle, that the
account balance will be paid in full, and that no additional finance
charges will be applied to the account between the date the statement
was issued and the date of the final payment. These assumptions are
necessary to have a finite solution to the repayment period
calculation. Without these assumptions, the repayment period could be
infinite.
d. Minimum payments are made each month. In proposed Appendix M1 to
part 226, issuers would be allowed to assume that minimum payments are
made each month and any debt cancellation or suspension agreements or
skip payment features do not apply to a consumer's account. The Board
believes that this assumption will ease compliance burden on issuers,
without a significant impact on the accuracy of the repayment estimates
for consumers.
e. APR will not change. TILA Section 127(b)(11), as revised by the
Credit Card Act, provides that in calculating the minimum payment
repayment estimate, a creditor must apply the interest rate or rates in
effect on the date on which the disclosure is made until the date on
which the balance would be paid in full. Nonetheless, if the interest
rate in effect on the date on which the disclosure is made is a
temporary rate that will change under a contractual provision applying
an index or formula for subsequent interest rate adjustment, the
creditor must apply the interest rate in effect on the date on which
the disclosure is made for as long as that interest rate will apply
under that contractual provision, and then apply an interest rate based
on the index or formula in effect on the applicable billing date. As
discussed above, if any promotional APRs apply to a cardholder's
account, other than deferred interest or similar plans, a credit card
issuer in calculating the minimum payment repayment estimate would be
required to apply the promotional APR(s) until it expires and then must
apply the rate that applies after the promotional rate(s) expires. If
the rate that applies after the promotional rate(s) expires is a
variable rate, a card issuer would be required to calculate that rate
based on the applicable index or formula. This variable rate would be
considered accurate if it was in effect within the last 30 days before
the minimum payment repayment estimate is provided. For deferred
interest or similar plans, if minimum payments under the plan will
repay the balances or transactions in full prior to the expiration of
the specified period of time, a card issuer must assume that the
consumer will not be obligated to pay the accrued interest. This means,
in calculating the minimum payment repayment estimate, the card issuer
must apply a zero percent APR to the balance subject to the deferred
interest or similar plan. If, however, minimum payments under the
deferred interest or similar plan may not repay the balances or
transactions in full by the expiration of the specified period of time,
a credit card issuer must assume that a consumer will not repay the
balances or transactions in full prior to the expiration of the
specified period of time and thus the consumer will be obligated to pay
the accrued interest. This means, in calculating the minimum payment
repayment estimate, the card issuer must apply the APR at which
interest is accruing (or deferred interest is accruing) to the balance
subject to the deferred interest or interest waiver plan.
Consistent with TILA Section 127(b)(11), as revised by the Credit
Card Act, the Board proposes to allow issuers to assume that the APR on
the account will not change either through the operation of a variable
rate or the change to a rate, except with respect to promotional APRs
as discussed above. For example, if a penalty APR currently applies to
a consumer's account, an issuer would be allowed to assume that the
penalty APR will apply to the consumer's account indefinitely, even if
the consumer may potentially return to a non-penalty APR in the future
under the account agreement.
f. Payment allocation. In proposed Appendix M1 to part 226, the
Board proposes to allow issuers to assume that payments are allocated
to lower APR balances before higher APR balances when multiple APRs
apply to an account. As discussed in the section-by-section analysis to
proposed Sec. 226.53, the proposed rule would permit issuers to
allocated minimum payment amounts as they choose; however, issuers
would be restricted in how they may allocate payments above the minimum
payment amount. The Board assumes that issuers are likely to allocate
the minimum payment amount to lower APR balances before higher APR
balances, and issuers may assume that is the case in calculating the
minimum payment repayment estimate.
g. Account not past due and the account balance does not exceed the
credit limit. The proposed rule would allow issuers to assume that the
consumer's account is not past due and the account balance is not over
the credit limit. The Board believes that this assumption will ease
compliance burden on issuers, without a significant impact on the
accuracy of the repayment estimates for consumers.
h. Rounding assumed payments, current balance and interest charges
to the nearest cent. Under proposed Appendix M1 to part 226, when
calculating the minimum payment repayment estimate, an issuer would be
permitted to round to the nearest cent the assumed payments, current
balance and interest charges for each month, as shown in proposed
Appendix M2 to part 226.
5. Tolerances. The Board proposes to provide that the minimum
payment repayment estimate calculated by an issuer will be considered
accurate if it is not more than 2 months above or below the minimum
payment repayment estimate determined in accordance with the guidance
in proposed Appendix M1 to part 226, prior to rounding. This proposed
tolerance would prevent small variations in the calculation of the
minimum payment repayment estimate from causing a disclosure to be
inaccurate. Take, for example, a minimum payment formula of the greater
of 2 percent or $20 and two separate amortization calculations that, at
the end of 28 months, arrived at remaining balances of $20 and $20.01
respectively. The $20 remaining balance would be paid off in the 29th
month, resulting in the disclosure of a 2-year repayment period due to
the Board's proposed rounding rule set forth in proposed Sec.
226.7(b)(12)(i)(B). The $20.01 remaining balance would be paid off in
the 30th month, resulting in the disclosure of a 3-year repayment
period due to the Board's proposed rounding rule. Thus, in the example
above, an issuer would be in compliance with the
[[Page 54196]]
guidance in proposed Appendix M1 to part 226 by disclosing 3 years,
instead of 2 years, because the issuer's estimate is within the 2
months' tolerance, prior to rounding. In addition, the proposed rule
also provides that even if an issuer's estimate is more than 2 months
above or below the minimum payment repayment estimate calculated using
the guidance in proposed Appendix M1 to part 226, so long as the issuer
discloses the correct number of years to the consumer based on the
rounding rule set forth in proposed Sec. 226.7(b)(12)(i)(B), the
issuer would be in compliance with the guidance in proposed Appendix M1
to part 226. For example, assume the minimum payment repayment estimate
calculated using the guidance in proposed Appendix M1 to part 226 is 32
months (2 years, 8 months), and the minimum payment repayment estimate
calculated by the issuer is 38 months (3 years, 2 months). Under the
proposed rounding rule set forth in proposed Sec. 226.7(b)(12)(i)(B),
both of these estimates would be rounded and disclosed to the consumer
as 3 years. Thus, if the issuer disclosed 3 years to the consumer, the
issuer would be in compliance with the guidance in proposed Appendix M1
to part 226 even through the minimum payment repayment estimate
calculated by the issuer is outside the 2 months' tolerance amount.
The Board recognizes that the minimum payment repayment estimates,
the minimum payment total cost estimates, the estimated monthly
payments for repayment in 36 months, and the total cost estimates for
repayment in 36 months, as calculated in proposed Appendix M1 to part
226, are estimates. The Board would expect that issuers would not be
liable under Federal or State unfair or deceptive practices laws for
providing inaccurate or misleading information, when issuers provide to
consumers these disclosures calculated according to guidance provided
in proposed Appendix M1 to part 226, as required by TILA.
Calculating the minimum payment total cost estimate. Under proposed
Appendix M1 to part 226, when calculating the minimum payment total
cost estimate, a credit card issuer would be required to total the
dollar amount of the interest and principal that the consumer would pay
if he or she made minimum payments for the length of time calculated as
the minimum payment repayment estimate using the guidance in proposed
Appendix M1 to part 226. Under the proposal, the minimum payment total
cost estimate would be deemed to be accurate if it is based on a
minimum payment repayment estimate that is within the tolerance
guidance set forth in proposed Appendix M1 to part 226, as discussed
above. For example, assume the minimum payment repayment estimate
calculated using the guidance in proposed Appendix M1 to part 226 is 28
months (2 years, 4 months), and the minimum payment repayment estimate
calculated by the issuer is 30 months (2 years, 6 months). The minimum
payment total cost estimate will be deemed accurate even if it is based
on the 30 month estimate for length of repayment, because the issuer's
minimum payment repayment estimate is within the 2 months' tolerance,
prior to rounding. In addition, assume the minimum payment repayment
estimate calculated using the guidance in proposed Appendix M1 to part
226 is 32 months (2 years, 8 months), and the minimum payment repayment
estimate calculated by the issuer is 38 months (3 years, 2 months).
Under the proposed rounding rule set forth in proposed Sec.
226.7(b)(12)(i)(B), both of these estimates would be rounded and
disclosed to the consumer as 3 years. If the issuer based the minimum
payment total cost estimate on 38 months (or any other minimum payment
repayment estimate that would be rounded to 3 years), the minimum
payment total cost estimate would be deemed to be accurate.
Calculating the estimated monthly payment for repayment in 36
months. Under proposed Appendix M1 to part 226, when calculating the
estimated monthly payment for repayment in 36 months, a credit card
issuer would be required to calculate the estimated monthly payment
amount that would be required to pay off the outstanding balance shown
on the statement within 36 months, assuming the consumer paid the same
amount each month for 36 months.
In calculating the estimated monthly payment for repayment in 36
months, the Board proposes to require an issuer to use a weighted APR
that is based on the APRs that apply to a cardholder's account and the
portion of the balance to which the rate applies, as shown in proposed
Appendix M2 to part 226. The Board believes that requiring use of a
weighted APR to calculate the estimated monthly payment for repayment
in 36 month when multiple APRs apply to an account will ease compliance
burden on issuers by significantly simplifying the calculation of the
estimated monthly payment, without a significant impact on the accuracy
of the estimated monthly payments for consumers.
Proposed Appendix M1 to part 226 would provide guidance on how to
calculate the weighted APR if promotional APRs apply. If any
promotional terms related to APRs apply to a cardholder's account,
other than deferred interest or similar plans, in calculating the
weighted APR, the issuer must calculate a weighted average of the
promotional rate and the rate that will apply after the promotional
rate expires based on the percentage of 36 months each rate will apply,
as shown in proposed Appendix M2 to part 226.
Under proposed Appendix M1 to part 226, for deferred interest or
similar plans, if minimum payments under the plan will repay the
balances or transactions in full prior to the expiration of the
specified period of time, a card issuer must assume that the consumer
will not be obligated to pay the accrued interest. This means, in
calculating the weighted APR, the card issuer must apply a zero percent
APR to the balance subject to the deferred interest or similar plan.
If, however, minimum payments under the deferred interest or similar
plan may not repay the balances or transactions in full prior to the
expiration of the specified period of time, a credit card issuer in
calculating the weighted APR must assume that a consumer will not repay
the balances or transactions in full prior to the expiration of the
specified period and thus the consumer will be obligated to pay the
accrued interest. This means, in calculating the weighted APR, the card
issuer must apply the APR at which interest is accruing to the balance
subject to the deferred interest or similar plan. To simplify the
calculation of the repayment estimates, this proposed approach focuses
on whether minimum payments will repay the balances or transactions in
full prior to the expiration of the specified period of time instead of
whether the estimated monthly payment for repayment in 36 months will
repay the balances or transaction prior to the expiration of the
specified period. The Board believes that if minimum payments under the
deferred interest or similar plan will not repay the balances or
transactions in full prior to the expiration of the specified period of
time, it is not likely that the estimated monthly payment for repayment
in 36 months will repay the balances or transactions in full prior to
the expiration of the specified period, given that (1) under proposed
Sec. 226.53, card issuers generally may not allocate payments in
excess of the minimum payment to deferred interest or similar balances
before other balances on which interest is being charged except in the
last two months before a deferred interest or similar period is set to
expire,
[[Page 54197]]
and (2) deferred interest or similar periods typically are shorter than
3 years.
The Board requests comment on whether the Board should adopt
specific tolerances for calculation and disclosure of the estimated
monthly payment for repayment in 36 months, and if so, what those
tolerances should be.
Calculating the total cost estimate for repayment in 36 months.
Under proposed Appendix M1 to part 226, when calculating the total cost
estimate for repayment in 36 months, a credit card issuer would be
required to total the dollar amount of the interest and principal that
the consumer would pay if he or she made the estimated monthly payment
for repayment in 36 months calculated under proposed Appendix M1 to
part 226 each month for 36 months. The Board requests comment on
whether the Board should adopt specific tolerances for calculation and
disclosure of the total cost estimate for repayment in 36 months, and
if so, what those tolerances should be.
Calculating savings estimate for repayment in 36 months. Under
proposed Appendix M1 to part 226, when calculating the savings estimate
for repayment in 36 months, a credit card issuer would be required to
subtract the total cost estimate for repayment in 36 months calculated
under paragraph (e) of Appendix M1 (rounded to the nearest whole dollar
as set forth in proposed Sec. 226.7(b)(12)(i)(F)(3)) from the minimum
payment total cost estimate calculated under paragraph (c) of Appendix
M1 (rounded to the nearest whole dollar as set forth in proposed Sec.
226.7(b)(12)(i)(C)). The Board requests comment on whether the Board
should adopt specific tolerances for calculation and disclosure of the
savings estimate for repayment in 36 months, and if so, what those
tolerances should be.
Appendix M2--Sample Calculations of Repayment Disclosures
In proposed Appendix M2, the Board proposes to provide sample
calculations for the minimum payment repayment estimate, the total cost
repayment estimate, the estimated monthly payment for repayment in 36
months, the total cost estimate for repayment in 36 months, and the
savings estimate for repayment in 36 months discussed in proposed
Appendix M1 to part 226.
Appendix N--Specifications for Internet Posting of Credit Card
Agreements
Proposed Appendix N would provide additional details regarding the
content of agreements submitted to the Board under proposed Sec.
226.58(d) and posting of agreements offered to the public on the card
issuer's Web site and availability of agreements for all open accounts
under Sec. 226.58(f).
Agreements Submitted to the Board Under Sec. 226.58(d)
Under proposed Appendix N, each agreement submitted to the Board
must contain the provisions of the agreement and the pricing
information in effect as of the last business day of the preceding
calendar quarter.
Proposed Appendix N also would specify that information that is not
uniform for all cardholders under an agreement, but that instead may
vary from one cardholder to another depending upon a cardholder's
creditworthiness, State of residence, or other factors, such as the
pricing information, must be set forth in an addendum to the agreement.
The addendum would be required to provide the information either by
setting forth all the possible variations (such as purchase APRs of 6.9
percent, 8.9 percent, 10.9 percent, or 12.9 percent), or by providing a
range (such as purchase APR ranging from 6.9 percent to 12.9 percent).
Proposed Appendix N also would clarify that an issuer would not be
required to submit with an agreement any disclosures required by State
or Federal law such as affiliate marketing notices, privacy policies,
or disclosures under the E-Sign Act, except to the extent that those
disclosures are included in the provisions of the agreement or the
pricing information. Similarly, issuers would not be required to submit
solicitation materials or periodic statements.
As described in proposed Appendix N, agreements submitted to the
Board would not contain any personally identifiable information (such
as name, address, telephone number, or account number) relating to any
cardholder.
Finally, proposed Appendix N would clarify that issuers may not
provide provisions of the agreement or pricing information in the form
of change-in-terms notices or riders (other than the single addendum
described above, if applicable). Changes in provisions or pricing
information must be integrated into the body of the agreement (or into
the single addendum described above, if applicable). For example, it
would be impermissible for an issuer to submit to the Board an
agreement in the form of a terms and conditions document dated January
1, 2005, four subsequent change in terms notices, and 2 addenda showing
variations in pricing information. Instead, the issuer must submit a
document that integrates the changes made by each of the change in
terms notices into the body of the original terms and conditions
document and a single addendum displaying variations in pricing
information as described above.
The Board believes that permitting issuers to submit agreements
that include change-in-terms notices or riders containing amendments
and revisions would be confusing for consumers and would greatly lessen
the usefulness of agreements posted on the Board's Web site. Consumers
would be required to sift through change-in-terms notices and riders in
an attempt to assemble a coherent picture of the terms currently
offered. The Board believes that issuers are better placed than
consumers to assemble this information. While the Board understands
that this may somewhat increase the burden on issuers, the Board
believes that the corresponding benefit of increased transparency for
consumers outweighs this burden.
Posting of Agreements Offered to the Public on Card Issuer's Web Site
Under Sec. 226.58(f)(1)
Proposed Appendix N would clarify that, with respect to posting on
the issuer's Web site the agreements the issuer is required to submit
to the Board under proposed Sec. 226.58(f)(1), the agreements need not
conform to the electronic format required for submission to the Board
under proposed Sec. 226.58(d). For example, assume the Board requires
that agreements submitted to the Board under proposed Sec. 226.58(d)
be submitted in plain text format. When posting the agreements on its
own Web site under Sec. 226.58(f)(1), an issuer may post the
agreements in plain text format, in PDF format, in HTML format or in
some other electronic format, provided the format is readily usable by
the general public.
Proposed Appendix N specifies that, under proposed Sec.
226.58(f)(1), the content of the agreements posted on the issuer's Web
site must be the same as the content of the agreements submitted to the
Board, as described in the first part of proposed Appendix N. Under
proposed Appendix N, an issuer would be required to update the
agreements posted on its Web site under Sec. 226.58(f)(1) at least as
frequently as the quarterly schedule required for submission of
agreements to the Board under Sec. 226.58(d). If the issuer chooses to
update the agreements on its Web site more frequently, the agreements
posted on the issuer's Web site would be permitted to contain the
provisions of the agreement and the pricing information in effect as of
a date other
[[Page 54198]]
than the last business day of the preceding calendar quarter.
Proposed Appendix N also would specify that the agreements must be
posted on the issuer's Web site in a location that is prominent and
easily accessible by the public and must be presented in a clear and
legible typeface.
Availability of Agreements for All Open Accounts Under Sec.
226.58(f)(2)
With respect to cardholder agreements posted on the issuer's Web
site under proposed Sec. 226.58(f)(2), proposed Appendix N would
specify that such agreements may be posted in any electronic format
that is readily usable by the general public and must be placed in a
location that is prominent and easily accessible to the cardholder.
With respect to any agreement provided under Sec. 226.58(f)(2),
whether posted on the card issuer's Web site under Sec.
226.58(f)(2)(i) or made available upon the cardholder's request under
Sec. 226.58(f)(2)(ii), proposed Appendix N would provide that the
agreement generally must conform to the content requirements for
agreements submitted to the Board. However, the agreement would be
required to set forth the specific provisions and pricing information
applicable to the particular cardholder. The agreement also would be
permitted to contain personally identifiable information relating to
the cardholder, such as name address, telephone number, or account
number, provided that the issuer takes appropriate measures to make the
agreement accessible only to the cardholder or other authorized person.
Issuers would be permitted to provide pricing information in the text
of the agreement or in a single attached addendum. All agreements would
be required to be presented in a clear and legible typeface.
Agreements provided under Sec. 226.58(f)(2) would be required
under proposed Appendix N to include provisions and pricing information
that is complete and accurate as of a date no more than 60 days prior
to the date on which the agreement is posted on the card issuer's Web
site under Sec. 226.58(f)(2)(i) or the date the cardholder's request
is received under Sec. 226.58(f)(2)(ii). For example, an issuer posts
cardholder agreements on its Web site under Sec. 226.58(f)(2)(i). The
agreement posted on the Web site for a particular cardholder on May 1
must contain the provisions and pricing information applicable to that
cardholder as of March 2 or later. The Board believes that 60 days
gives issuers a reasonable amount of time to update provisions and
pricing information, while providing cardholders with card agreements
that are current and accurate. However, the Board solicits comments on
whether this period should be shorter or longer.
Finally, proposed Appendix N would clarify that issuers may not
provide provisions of the agreement or pricing information in the form
of change-in-terms notices or riders (other than the single addendum
described above, if applicable). Changes in provisions or pricing
information must be integrated into the text of the agreement (or into
the single addendum described above, if applicable). For example, it
would be not be permissible for an issuer to send to a cardholder under
Sec. 226.58(f)(2)(ii) an agreement consisting of a terms and
conditions document dated January 1, 2005, and four subsequent change-
in-terms notices. Instead, the issuer would be required to send to the
cardholder a single document that integrates the changes made by each
of the change-in-terms notices into the body of the terms and
conditions document.
As described above, the Board believes that requiring consumers to
sift through change in-terms notices and riders in an attempt to
assemble the agreement to which they are currently subject would be
burdensome for consumers. The Board believes that issuers are better
placed than consumers to assemble this information. While the Board
understands that this may somewhat increase the burden on issuers, the
Board believes that the corresponding benefit of increased transparency
for consumers would outweigh this burden.
VI. Regulatory Flexibility Analysis
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA)
requires an agency to perform an initial and final regulatory
flexibility analysis on the impact a rule is expected to have on small
entities.
Prior to proposing this rule, the Board conducted initial and final
regulatory flexibility analyses and ultimately concluded that the rules
in the Board's January 2009 Regulation Z Rule and July 2009 Regulation
Z Interim Final Rule would have a significant economic impact on a
substantial number of small entities. See 72 FR 33033-33034 (June 14,
2007); 74 FR 5390-5392; 74 FR 36092-36093. As discussed in I.
Background and Implementation of the Credit Card Act and V. Section-by-
Section Analysis, several of the provisions of the Credit Card Act are
similar to provisions in the Board's January 2009 Regulation Z Rule and
July 2009 Regulation Z Interim Final Rule. To the extent that the
provisions in the proposed rule are substantially similar to provisions
in those rules, the Board continues to rely on the regulatory
flexibility analyses conducted for the Board's January 2009 Regulation
Z Rule and July 2009 Regulation Z Interim Final Rule. The Credit Card
Act, however, also addresses practices or mandates disclosures that
were not addressed in the Board's January 2009 Regulation Z Rules and
July 2009 Regulation Z Interim Final Rule. The Board anticipates that
these proposed provisions would impose additional requirements and
burden on small entities. Therefore, based on its prior analyses and
for the reasons stated below, the Board believes that this proposed
rule would have a significant economic impact on a substantial number
of small entities. Accordingly, the Board has prepared the following
initial regulatory flexibility analysis pursuant to section 604 of the
RFA. A final regulatory flexibility analysis will be conducted after
consideration of comments received during the public comment period.
1. Statement of the need for, and objectives of, the proposed rule.
The proposed rule implements a number of new substantive and disclosure
provisions required by the Credit Card Act, which establishes fair and
transparent practices relating to the extension of open-end consumer
credit plans. The supplementary information above describes in detail
the reasons, objectives, and legal basis for each component of the
proposed rule.
2. Small entities affected by the proposed rule. All creditors that
offer open-end credit plans are subject to the proposed rule, although
several provisions apply only to credit card accounts under an open-end
(not home-secured) plan. In addition, institutions of higher education
are subject to proposed Sec. 226.57(b), regarding public disclosure of
agreements for purposes of marketing a credit card. The Board is
relying on its analysis in the January 2009 Regulation Z Rule, in which
the Board provided data on the number of entities which may be affected
because they offer open-end credit plans. The Board acknowledges,
however, that the total number of small entities likely to be affected
by the proposed rule is unknown, because the open-end credit provisions
of the Credit Card Act and Regulation Z have broad applicability to
individuals and businesses that extend even small amounts of consumer
credit. In addition, the total number of institutions of higher
education likely to be affected by the proposed rule is unknown because
the number of
[[Page 54199]]
institutions of higher education that are small entities and have a
credit card marketing contract or agreement with a card issuer or
creditor cannot be determined. (For a detailed description of the
Board's analysis of small entities subject to the January 2009
Regulation Z Rule, see 74 FR 5391.) The Board invites comment on the
effect of the proposed rule on small entities.
3. Recordkeeping, reporting, and compliance requirements. The
proposed rule does not impose any new recordkeeping requirements. The
proposed rule would, however, impose new reporting and compliance
requirements. The reporting and compliance requirements of this
proposed rule are described above in V. Section-by-Section Analysis.
The Board notes that the precise costs to small entities to conform
their open-end credit disclosures to the proposed rule and the costs of
updating their systems to comply with the rule are difficult to
predict. These costs will depend on a number of factors that are
unknown to the Board, including, among other things, the specifications
of the current systems used by such entities to prepare and provide
disclosures and administer open-end accounts, the complexity of the
terms of the open-end credit products that they offer, and the range of
such product offerings. The Board seeks information and comment on any
costs, compliance requirements, or changes in operating procedures
arising from the application of the proposed rule to small entities.
Proposals Regarding Consumer Credit Card Accounts
This subsection summarizes several of the proposed amendments to
Regulation Z and their likely impact on small entities that are card
issuers. More information regarding these and other proposed changes
can be found in V. Section-by-Section Analysis.
Proposed Sec. 226.7(b)(11) would generally require the payment due
date for credit card accounts under an open-end (not home-secured)
consumer credit plan be the same day of the month for each billing
cycle. Small entities that are card issuers may be required to update
their systems to comply with this provision.
Proposed Sec. 226.7(b)(12) would generally require card issuers
that are small entities to include on each periodic statement certain
disclosures regarding repayment, such as a minimum payment warning
statement, a minimum payment repayment estimate, and the monthly
payment based on repayment in 36 months. Compliance with this provision
would require card issuers that are small entities to calculate certain
minimum payment estimates for each account. The Board, however, seeks
to reduce the burden on small entities by proposing model forms which
can be used to ease compliance with the proposed rule.
Proposed Sec. 226.9(g)(3) would require card issuers that are
small entities to provide notice regarding an increase in rate based on
a consumer's failure to make a minimum periodic payment within 60 days
from the due date and disclose that the increase will cease to apply if
the small entity is a card issuer and receives six consecutive required
minimum period payments on or before the payment due date. The Board
anticipates that small entities subject to Sec. 226.9(g), with little
additional burden, will incorporate the proposed disclosure requirement
with the disclosure already required under Sec. 226.9(g).
Proposed Sec. 226.10(e) would limit fees related to certain
methods of payment for credit card accounts under an open-end (not
home-secured) consumer credit plan, with the exception of payments
involving expedited service by a customer service representative.
Proposed Sec. 226.10(e) may reduce revenue that some small entities
derive from fees associated with certain payment methods.
Proposed Sec. 226.52 would generally limit the imposition of fees
by card issuers during the first year after account opening. This
provision may reduce revenue that some entities derive from fees.
Proposed Sec. 226.54 would prohibit a card issuer from imposing
certain finance charges as a result of the loss of a grace period on a
credit card account, except in certain circumstances. This provision
may reduce revenue that some small entities derive from finance
charges.
Proposed Sec. 226.55(a) would generally prohibit small entities
that are card issuers from increasing an annual percentage rate or any
fee or charge required to be disclosed under Sec. 226.6(b)(2)(ii),
(b)(2)(iii), or (b)(2)(xii) on a credit card account unless
specifically permitted by one of the exceptions in Sec. 226.55(b).
This provision may reduce interest revenue and other revenue that
certain small entities derive from fees and charges.
Proposed Sec. 226.55(b)(3) would require small entities that are
card issuers to disclose, prior to the commencement of a specified
period of time, an increased annual percentage rate that would apply
after the period as a condition for an exception to Sec. 226.55(a).
However, Sec. 226.9(c)(2)(v)(B) as adopted in the July 2009 Regulation
Z Interim Final Rule already requires card issuers to disclose this
information so the Board does not anticipate any significant additional
burden on small entities.
Proposed Sec. 226.55(b)(5) would require small entities that are
card issuers to disclose, prior to commencement of the arrangement, the
terms of a workout and temporary hardship arrangement as a condition
for an exception to Sec. 226.55(a). However, Sec. 226.9(c)(2)(v)(D)
and (g)(4)(i) as adopted in the July 2009 Regulation Z Interim Final
Rule already require card issuers to disclose this information so the
Board does not anticipate any significant additional burden on small
entities.
Proposed Sec. 226.56 would prohibit small entities that are card
issuers from imposing fees or charges for an over-the-limit transaction
unless the card issuer provides the consumer with notice and obtains
the consumer's affirmative consent, or opt-in. Compliance with this
provision may impose additional costs on small entities in order to
provide notice and obtain consent, if the small entity elects to impose
fees or charges for over-the-limit transactions. Proposed Sec. 226.56
may reduce revenue that certain small entities derive from fees and
charges related to over-the-limit transaction. In addition, proposed
Sec. 226.56 may require some small entities to alter their systems in
order to comply with the provision. The cost of such change will depend
on the size of the institution and the composition of its portfolio.
Proposed Sec. 226.58 would require small entities that are card
issuers to post agreements for open-end consumer credit card plans on
the card issuer's Web site and to submit those agreements to the Board
for posting in a publicly-available on-line repository established and
maintained by the Board. The cost of compliance will depend on the size
of the institution and the composition of its portfolio. Proposed Sec.
226.58(e), however, provides a de minimis exception, which would reduce
the economic impact and compliance burden on small entities. Under
proposed Sec. 226.58(e), a card issuer would not be required to submit
an agreement to the Board if the card issuer has fewer than 10,000 open
accounts under open-end consumer credit card plans subject to Sec.
226.5a as of the last business day of the calendar quarter.
Accordingly, the Board believes that, in the aggregate, the
provisions of its proposed rule would have a significant economic
impact on a substantial number of small entities.
4. Other Federal rules. Other than the January 2009 FTC Act Rule
and similar
[[Page 54200]]
rules adopted by other Agencies, the Board has not identified any
Federal rules that duplicate, overlap, or conflict with the proposed
revisions to TILA. As discussed in the supplementary information to
this proposed rule, the Board intends to withdraw its January 2009 FTC
Act Rule when finalizing this proposal.
5. Significant alternatives to the proposed revisions. The
provisions of the proposed rule would implement the statutory
requirements of the Credit Card Act that go into effect on February 22,
2010. The Board has sought to avoid imposing additional burden, while
effectuating the statute in a manner that is beneficial to consumers.
The Board welcomes comment on any significant alternatives, consistent
with the Credit Card Act, which would minimize impact of the proposed
rule on small entities.
VII. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act (PRA) of 1995 (44
U.S.C. 3506; 5 CFR Part 1320 Appendix A.1), the Board reviewed the
proposed rule under the authority delegated to the Board by the Office
of Management and Budget (OMB). The collection of information that is
required by this proposed rule is found in 12 CFR part 226. The Federal
Reserve may not conduct or sponsor, and an organization is not required
to respond to, this information collection unless the information
collection displays a currently valid OMB control number. The OMB
control number is 7100-0199.\50\
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\50\ The information collection will be re-titled--Reporting,
Recordkeeping and Disclosure Requirements associated with Regulation
Z (Truth in Lending) and Regulation AA (Unfair or Deceptive Acts or
Practices).
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This information collection is required to provide benefits for
consumers and is mandatory (15 U.S.C. 1601 et seq.). The respondents/
recordkeepers are creditors and other entities subject to Regulation Z,
including for-profit financial institutions, small businesses, and
institutions of higher education. TILA and Regulation Z are intended to
ensure effective disclosure of the costs and terms of credit to
consumers. For open-end credit, creditors are required to, among other
things, disclose information about the initial costs and terms and to
provide periodic statements of account activity, notices of changes in
terms, and statements of rights concerning billing error procedures.
Regulation Z requires specific types of disclosures for credit and
charge card accounts and home-equity plans. For closed-end loans, such
as mortgage and installment loans, cost disclosures are required to be
provided prior to consummation. Special disclosures are required in
connection with certain products, such as reverse mortgages, certain
variable-rate loans, and certain mortgages with rates and fees above
specified thresholds. TILA and Regulation Z also contain rules
concerning credit advertising. Creditors are required to retain
evidence of compliance for twenty-four months (Sec. 226.25), but
Regulation Z does not specify the types of records that must be
retained.
Under the PRA, the Federal Reserve accounts for the paperwork
burden associated with Regulation Z for the State member banks and
other creditors supervised by the Federal Reserve that engage in
lending covered by Regulation Z and, therefore, are respondents under
the PRA. Appendix I of Regulation Z defines the Federal Reserve-
regulated institutions as: State member banks, branches and agencies of
foreign banks (other than Federal branches, Federal agencies, and
insured State branches of foreign banks), commercial lending companies
owned or controlled by foreign banks, and organizations operating under
section 25 or 25A of the Federal Reserve Act. Other Federal agencies
account for the paperwork burden on other entities subject to
Regulation Z. To ease the burden and cost of complying with Regulation
Z (particularly for small entities), the Federal Reserve provides model
forms, which are appended to the regulation.
As discussed in I. Background and Implementation of the Credit Card
Act and V. Section-by-Section Analysis, several of the provisions of
the Credit Card Act are similar to provisions in the Board's January
2009 Regulation Z Rules. To the extent that the provisions in the
proposed rule are substantially similar to provisions in the January
2009 Regulation Z Rule, the Board continues to rely on the substance of
its PRA analysis in the January 2009 Regulation Z Rule. See 74 FR 5392-
5393. The Credit Card Act, however, also addresses practices or
mandates disclosures that were not addressed in the Board's January
2009 Regulation Z Rules. The Board anticipates increased burden caused
by additional disclosure requirements in the proposed rule and
therefore, revises its prior PRA analysis accordingly.
Under proposed Sec. 226.7(b)(12), creditors are generally required
to include on each periodic statement certain disclosures regarding
repayment, such as a minimum payment warning statement, a minimum
payment repayment estimate, and the monthly payment based on repayment
in 36 months. As mentioned in the preamble, in an effort to reduce
burden the Board is proposing guidance in Appendix M1 on how to
calculate repayment estimates. Appendix M2 to part 226 provides sample
calculations of repayment estimates using guidance in Appendix M1. The
Board estimates that 1,138 respondents would take, on average, 80 hours
(two business weeks) to update their systems to comply with the
proposed disclosure requirements in Sec. 226.7(b)(12). This one-time
revision would increase the burden by 91,040 hours. The Board does not
anticipate any additional burden on a continuing basis.
Under proposed Sec. 226.9(g)(3), if a rate is increased based on a
consumer's failure to make a minimum periodic payment within 60 days
from the due date, a creditor is required to provide notice containing
a statement of the reason for the increase and that the increase will
cease to apply if the creditor receives six consecutive required
minimum period payments on or before the payment due date. The Board
anticipates that creditors, with little additional burden, will
incorporate the proposed disclosure requirement with the disclosure
already required under Sec. 226.9(g). The Board estimates that 1,138
respondents would take, on average, 8 hours to update their systems to
comply with the proposed disclosure requirements in Sec. 226.9(g)(3)
and estimates the one-time burden to be 9,104 hours.
Under proposed Sec. 226.55(b)(3), a card issuer must disclose,
prior to the commencement of a specified period of time, an increased
annual percentage rate that would apply after the period as a condition
for an exception to Sec. 226.55(a). However, Sec. 226.9(c)(2)(v)(B)
as adopted in the July 2009 Regulation Z Interim Final Rule already
requires card issuers to disclose this information so the Board does
not anticipate any additional burden.
Under proposed Sec. 226.55(b)(5), a card issuer must disclose,
prior to commencement of the arrangement, the terms of a workout and
temporary hardship arrangement as a condition for an exception to Sec.
226.55(a). However, Sec. 226.9(c)(2)(v)(D) and (g)(4)(i) as adopted in
the July 2009 Regulation Z Interim Final Rule already require card
issuers to disclose this information so the Board does not anticipate
any additional burden.
Under proposed Sec. 226.57(b), an institution of higher education
is required to publicly disclose any contract or other agreement made
with
[[Page 54201]]
a card issuer or creditor for the purpose of marketing a credit card.
Since the regulation does not specify a required method for public
disclosure the Board estimates that 4,276 respondents \51\ would take,
on average, 8 hours to comply with the proposed disclosure requirements
and estimates the annual burden to be 34,208 hours.
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\51\ The number of institutions of higher learning that granted
college degrees in 2005. See Upcoming Statistical Abstract of the
United States: 2008. (available at http://www.census.gov/Press-Release/www/2007/cb07ff-11.pdf).
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Under proposed Sec. 226.57(d), creditors that are a party to one
or more college credit card agreements would be required to register
with the Board and to submit annual reports to the Board regarding
those agreements. Creditor registration requirements would comprise
primarily of contact information. In addition, creditors would be
required to provide specific information related to the agreements. The
Board estimates that 2,200 creditors \52\ would take, on average, 160
hours (one month) to comply with the proposed disclosure requirements
in Sec. 226.57(d) and estimates the one-time annual burden to be
352,000 hours. To avoid double counting the burden estimate for
creditor registration and updates to all agreements is accounted for
under proposed Sec. 226.58.
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\52\ The number of creditors that are a party to one or more
college credit card agreements is unknown.
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Under proposed Sec. 226.58, a creditor is required to post
agreements for open-end consumer credit card plans on the creditor's
Web site and to submit those agreements to the Board for posting in a
publicly-available on-line repository established and maintained by the
Board. Creditors would be required to register with the Board and
submit to the Board all agreements for open-end consumer credit card
plans. The Board estimates that 2,200 creditors \53\ would take, on
average, 30 minutes to register their contact information and estimates
the one-time annual burden to be 1,100 hours. In addition, the Board
estimates that 2,200 creditors would take, on average, 40 hours (one
business week) to comply with the proposed disclosure requirements in
Sec. 226.58 and estimates the annual burden to be 88,000 hours. On a
continuing basis, the Board estimates creditors would take, on average,
8 hours (quarterly) to update agreements and estimates the annual
burden to be 70,400 hours.
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\53\ Creditors with credit card activity. Under proposed Sec.
226.58, the Board will assume burden for creditors regulated by the:
Office of the Comptroller of the Currency (OCC), Office of Thrift
Supervision (OTS), Federal Deposit Insurance Corporation (FDIC),
National Credit Union Administration (NCUA), and Federal Trade
Commission.
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Based on these adjustments to the Board's prior estimates and the
Board's PRA analysis in the January 2009 Regulation Z Rule, the
proposed rule would impose a one-time increase in the total annual
burden under Regulation Z for all respondents regulated by the Federal
Reserve by 575,452 hours, from 1,008,962 to 1,584,414 hours. The total
one-time burden increase represents averages for all respondents
regulated by the Federal Reserve. The Federal Reserve expects that the
amount of time required to implement each of the proposed changes for a
given financial institution or entity may vary based on the size and
complexity of the respondent. In addition, the Federal Reserve
estimates that, on a continuing basis, the proposed revisions to the
rules would increase the total annual burden on a continuing basis from
1,008,962 to 1,079,362 hours. The total annual burden for the
Regulation Z information collection is estimated to increase from
1,008,962 to 1,654,814 hours.\54\
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\54\ The burden estimate for this rulemaking does not include
the burden addressing changes to implement provisions of Closed-End
Mortgages (Docket No. R-1366) or the Home-Equity Lines of Credit
(Docket No. R-1367), as announced in separate proposed rulemakings.
See 74 FR 43232 and 74 FR 43428.
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The other Federal financial agencies: Office of the Comptroller of
the Currency (OCC), Office of Thrift Supervision (OTS), the Federal
Deposit Insurance Corporation (FDIC), and the National Credit Union
Administration (NCUA) are responsible for estimating and reporting to
OMB the total paperwork burden for the domestically chartered
commercial banks, thrifts, and Federal credit unions and U.S. branches
and agencies of foreign banks for which they have primary
administrative enforcement jurisdiction under TILA Section 108(a), 15.
U.S.C. 1607(a). These agencies are permitted, but are not required, to
use the Board's burden estimation methodology. Using the Board's
method, the total current estimated annual burden for the approximately
17,200 domestically chartered commercial banks, thrifts, and Federal
credit unions and U.S. branches and agencies of foreign banks
supervised by the Federal Reserve, OCC, OTS, FDIC, and NCUA under TILA
would be approximately 13,568,725 hours. The proposed rule would impose
a one-time increase in the estimated annual burden for such
institutions by 4,274,200 hours to 17,842,925 hours. On a continuing
basis the proposed rule would impose an increase in the estimated
annual burden by 137,600 to 13,706,325 hours. The above estimates
represent an average across all respondents; the Board expects
variations between institutions based on their size, complexity, and
practices.
Comments are invited on: (1) Whether the proposed collection of
information is necessary for the proper performance of the Board's
functions; including whether the information has practical utility; (2)
the accuracy of the Board's estimate of the burden of the proposed
information collection, including the cost of compliance; (3) ways to
enhance the quality, utility, and clarity of the information to be
collected; and (4) ways to minimize the burden of information
collection on respondents, including through the use of automated
collection techniques or other forms of information technology.
Comments on the collection of information should be sent to Michelle
Shore, Federal Reserve Board Clearance Officer, Division of Research
and Statistics, Mail Stop 95-A, Board of Governors of the Federal
Reserve System, Washington, DC 20551, with copies of such comments sent
to the Office of Management and Budget, Paperwork Reduction Project
(7100-0199), Washington, DC 20503.
List of Subjects in 12 CFR Part 226
Advertising, Consumer protection, Federal Reserve System, Reporting
and recordkeeping requirements, Truth in Lending.
Text of Interim Final Revisions
For the reasons set forth in the preamble, the Board proposes to
amend Regulation Z, 12 CFR part 226, as set forth below:
PART 226--TRUTH IN LENDING (REGULATION Z)
1. The authority citation for part 226 continues to read as
follows:
Authority: 12 U.S.C. 3806; 15 U.S.C. 1604, 1637(c)(5), and
1639(l); Public Law 111-24 Sec. 2, 123 Stat. 1734.
Subpart A--General
2. Section 226.1 is revised to read as follows:
Sec. 226.1 Authority, purpose, coverage, organization, enforcement,
and liability.
(a) Authority. This regulation, known as Regulation Z, is issued by
the Board of Governors of the Federal Reserve System to implement the
Federal Truth in Lending Act, which is contained in title I of the
Consumer Credit Protection Act, as amended (15 U.S.C. 1601 et seq.).
This regulation also implements title XII, section 1204 of the
Competitive
[[Page 54202]]
Equality Banking Act of 1987 (Pub. L. 100-86, 101 Stat. 552).
Information-collection requirements contained in this regulation have
been approved by the Office of Management and Budget under the
provisions of 44 U.S.C. 3501 et seq. and have been assigned OMB No.
7100-0199.
(b) Purpose. The purpose of this regulation is to promote the
informed use of consumer credit by requiring disclosures about its
terms and cost. The regulation also gives consumers the right to cancel
certain credit transactions that involve a lien on a consumer's
principal dwelling, regulates certain credit card practices, and
provides a means for fair and timely resolution of credit billing
disputes. The regulation does not govern charges for consumer credit.
The regulation requires a maximum interest rate to be stated in
variable-rate contracts secured by the consumer's dwelling. It also
imposes limitations on home-equity plans that are subject to the
requirements of Sec. 226.5b and mortgages that are subject to the
requirements of Sec. 226.32. The regulation prohibits certain acts or
practices in connection with credit secured by a consumer's principal
dwelling. The regulation also regulates certain practices of creditors
who extend private education loans as defined in Sec. 226.46(b)(5).
(c) Coverage. (1) In general, this regulation applies to each
individual or business that offers or extends credit when four
conditions are met:
(i) The credit is offered or extended to consumers;
(ii) The offering or extension of credit is done regularly; \1\
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\1\ [Reserved]
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(iii) The credit is subject to a finance charge or is payable by a
written agreement in more than four installments; and
(iv) The credit is primarily for personal, family, or household
purposes.
(2) If a credit card is involved, however, certain provisions apply
even if the credit is not subject to a finance charge, or is not
payable by a written agreement in more than four installments, or if
the credit card is to be used for business purposes.
(3) In addition, certain requirements of Sec. 226.5b apply to
persons who are not creditors but who provide applications for home-
equity plans to consumers.
(4) Furthermore, certain requirements of Sec. 226.57 apply to
institutions of higher education.
(d) Organization. The regulation is divided into subparts and
appendices as follows:
(1) Subpart A contains general information. It sets forth:
(i) The authority, purpose, coverage, and organization of the
regulation;
(ii) The definitions of basic terms;
(iii) The transactions that are exempt from coverage; and (iv) the
method of determining the finance charge.
(2) Subpart B contains the rules for open-end credit. It requires
that account-opening disclosures and periodic statements be provided,
as well as additional disclosures for credit and charge card
applications and solicitations and for home-equity plans subject to the
requirements of Sec. 226.5a and Sec. 226.5b, respectively. It also
describes special rules that apply to credit card transactions,
treatment of payments and credit balances, procedures for resolving
credit billing errors, annual percentage rate calculations, rescission
requirements, and advertising.
(3) Subpart C relates to closed-end credit. It contains rules on
disclosures, treatment of credit balances, annual percentages rate
calculations, rescission requirements, and advertising.
(4) Subpart D contains rules on oral disclosures, disclosures in
languages other than English, record retention, effect on State laws,
State exemptions, and rate limitations.
(5) Subpart E contains special rules for certain mortgage
transactions. Section 226.32 requires certain disclosures and provides
limitations for loans that have rates and fees above specified amounts.
Section 226.33 requires disclosures, including the total annual loan
cost rate, for reverse mortgage transactions. Section 226.34 prohibits
specific acts and practices in connection with mortgage transactions
that are subject to Sec. 226.32. Section 226.35 prohibits specific
acts and practices in connection with higher-priced mortgage loans, as
defined in Sec. 226.35(a). Section 226.36 prohibits specific acts and
practices in connection with credit secured by a consumer's principal
dwelling.
(6) Subpart F relates to private education loans. It contains rules
on disclosures, limitations on changes in terms after approval, the
right to cancel the loan, and limitations on co-branding in the
marketing of private education loans.
(7) Subpart G relates to credit card accounts under an open-end
(not home-secured) consumer credit plan (except for Sec. 226.57(c),
which applies to all open-end credit plans). Section 226.51 contains
rules on evaluation of a consumer's ability to make the required
payments under the terms of an account. Section 226.52 limits the fees
that can be charged to an open-end (not home-secured) consumer credit
plan during the first year after account opening. Section 226.53
contains rules on allocation of payments in excess of the minimum
payment. Section 226.54 sets forth certain limitations on the
imposition of finance charges as the result of a loss of a grace
period. Section 226.55 contains limitations on increases in annual
percentage rates, fees, and charges for credit card accounts. Section
226.56 prohibits the assessment of fees or charges for over-the-limit
transactions unless the consumer affirmatively consents to the
creditor's paying of over-the-limit transactions. Section 226.57 sets
forth rules for marketing of open-end credit to college students.
Section 226.58 sets for requirements for the Internet posting of credit
card accounts under an open-end (not home-secured) consumer credit
plan.
(8) Several appendices contain information such as the procedures
for determinations about State laws, State exemptions and issuance of
staff interpretations, special rules for certain kinds of credit plans,
a list of enforcement agencies, and the rules for computing annual
percentage rates in closed-end credit transactions and total-annual-
loan-cost rates for reverse mortgage transactions.
(e) Enforcement and liability. Section 108 of the act contains the
administrative enforcement provisions. Sections 112, 113, 130, 131, and
134 contain provisions relating to liability for failure to comply with
the requirements of the act and the regulation. Section 1204(c) of
title XII of the Competitive Equality Banking Act of 1987, Public Law
100-86, 101 Stat. 552, incorporates by reference administrative
enforcement and civil liability provisions of sections 108 and 130 of
the act.
3. Section 226.2 is revised to read as follows:
Sec. 226.2 Definitions and rules of construction.
(a) Definitions. For purposes of this regulation, the following
definitions apply:
(1) Act means the Truth in Lending Act (15 U.S.C. 1601 et seq.).
(2) Advertisement means a commercial message in any medium that
promotes, directly or indirectly, a credit transaction.
(3) [Reserved] \2\
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\2\ [Reserved]
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(4) Billing cycle or cycle means the interval between the days or
dates of regular periodic statements. These intervals shall be equal
and no longer
[[Page 54203]]
than a quarter of a year. An interval will be considered equal if the
number of days in the cycle does not vary more than four days from the
regular day or date of the periodic statement.
(5) Board means the Board of Governors of the Federal Reserve
System.
(6) Business day means a day on which the creditor's offices are
open to the public for carrying on substantially all of its business
functions. However, for purposes of rescission under Sec. Sec. 226.15
and 226.23, and for purposes of Sec. Sec. 226.19(a)(1)(ii),
226.19(a)(2), 226.31, and 226.46(d)(4), the term means all calendar
days except Sundays and the legal public holidays specified in 5 U.S.C.
6103(a), such as New Year's Day, the Birthday of Martin Luther King,
Jr., Washington's Birthday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.
(7) Card issuer means a person that issues a credit card or that
person's agent with respect to the card.
(8) Cardholder means a natural person to whom a credit card is
issued for consumer credit purposes, or a natural person who has agreed
with the card issuer to pay consumer credit obligations arising from
the issuance of credit card to another natural person. For purposes of
Sec. 226.12(a) and (b), the term includes any person to whom a credit
card is issued for any purpose, including business, commercial or
agricultural use, or a person who has agreed with the card issuer to
pay obligations arising from the issuance of such a credit card to
another person.
(9) Cash price means the price at which a creditor, in the ordinary
course of business, offers to sell for cash property or service that is
the subject of the transaction. At the creditor's option, the term may
include the price of accessories, services related to the sale, service
contracts and taxes and fees for license, title, and registration. The
term does not include any finance charge.
(10) Closed-end credit means consumer credit other than ``open-end
credit'' as defined in this section.
(11) Consumer means a cardholder or natural person to whom consumer
credit is offered or extended. However, for purposes of rescission
under Sec. Sec. 226.15 and 226.23, the term also includes a natural
person in whose principal dwelling a security interest is or will be
retained or acquired, if that person's ownership interest in the
dwelling is or will be subject to the security interest.
(12) Consumer credit means credit offered or extended to a consumer
primarily for personal, family, or household purposes.
(13) Consummation means the time that a consumer becomes
contractually obligated on a credit transaction.
(14) Credit means the right to defer payment of debt or to incur
debt and defer its payment.
(15)(i) Credit card means any card, plate, or other single credit
device that may be used from time to time to obtain credit.
(ii) Credit card account under an open-end (not home-secured)
consumer credit plan means any credit account accessed by a credit
card, except:
(A) A credit card that accesses a home-equity plan subject to the
requirements of Sec. 226.5b; or
(B) An overdraft line of credit accessed by a debit card.
(iii) Charge card means a credit card on an account for which no
periodic rate is used to compute a finance charge.
(16) Credit sale means a sale in which the seller is a creditor.
The term includes a bailment or lease (unless terminable without
penalty at any time by the consumer) under which the consumer--
(i) Agrees to pay as compensation for use a sum substantially
equivalent to, or in excess of, the total value of the property and
service involved; and
(ii) Will become (or has the option to become), for no additional
consideration or for nominal consideration, the owner of the property
upon compliance with the agreement.
(17) Creditor means:
(i) A person who regularly extends consumer credit \3\ that is
subject to a finance charge or is payable by written agreement in more
than four installments (not including a down payment), and to whom the
obligation is initially payable, either on the face of the note or
contract, or by agreement when there is no note or contract.
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\3\ [Reserved]
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(ii) For purposes of Sec. Sec. 226.4(c)(8) (Discounts), 226.9(d)
(Finance charge imposed at time of transaction), and 226.12(e) (Prompt
notification of returns and crediting of refunds), a person that honors
a credit card.
(iii) For purposes of subpart B, any card issuer that extends
either open-end credit or credit that is not subject to a finance
charge and is not payable by written agreement in more than four
installments.
(iv) For purposes of subpart B (except for the credit and charge
card disclosures contained in Sec. Sec. 226.5a and 226.9(e) and (f),
the finance charge disclosures contained in Sec. 226.6(a)(1) and
(b)(3)(i) and Sec. 226.7(a)(4) through (7) and (b)(4) through (6) and
the right of rescission set forth in Sec. 226.15) and subpart C, any
card issuer that extends closed-end credit that is subject to a finance
charge or is payable by written agreement in more than four
installments.
(v) A person regularly extends consumer credit only if it extended
credit (other than credit subject to the requirements of Sec. 226.32)
more than 25 times (or more than 5 times for transactions secured by a
dwelling) in the preceding calendar year. If a person did not meet
these numerical standards in the preceding calendar year, the numerical
standards shall be applied to the current calendar year. A person
regularly extends consumer credit if, in any 12-month period, the
person originates more than one credit extension that is subject to the
requirements of Sec. 226.32 or one or more such credit extensions
through a mortgage broker.
(18) Downpayment means an amount, including the value of property
used as a trade-in, paid to a seller to reduce the cash price of goods
or services purchased in a credit sale transaction. A deferred portion
of a downpayment may be treated as part of the downpayment if it is
payable not later than the due date of the second otherwise regularly
scheduled payment and is not subject to a finance charge.
(19) Dwelling means a residential structure that contains one to
four units, whether or not that structure is attached to real property.
The term includes an individual condominium unit, cooperative unit,
mobile home, and trailer, if it is used as a residence.
(20) Open-end credit means consumer credit extended by a creditor
under a plan in which:
(i) The creditor reasonably contemplates repeated transactions;
(ii) The creditor may impose a finance charge from time to time on
an outstanding unpaid balance; and
(iii) The amount of credit that may be extended to the consumer
during the term of the plan (up to any limit set by the creditor) is
generally made available to the extent that any outstanding balance is
repaid.
(21) Periodic rate means a rate of finance charge that is or may be
imposed by a creditor on a balance for a day, week, month, or other
subdivision of a year.
(22) Person means a natural person or an organization, including a
corporation, partnership, proprietorship, association, cooperative,
estate, trust, or government unit.
(23) Prepaid finance charge means any finance charge paid
separately in
[[Page 54204]]
cash or by check before or at consummation of a transaction, or
withheld from the proceeds of the credit at any time.
(24) Residential mortgage transaction means a transaction in which
a mortgage, deed of trust, purchase money security interest arising
under an installment sales contract, or equivalent consensual security
interest is created or retained in the consumer's principal dwelling to
finance the acquisition or initial construction of that dwelling.
(25) Security interest means an interest in property that secures
performance of a consumer credit obligation and that is recognized by
State or Federal law. It does not include incidental interests such as
interests in proceeds, accessions, additions, fixtures, insurance
proceeds (whether or not the creditor is a loss payee or beneficiary),
premium rebates, or interests in after-acquired property. For purposes
of disclosures under Sec. Sec. 226.6 and 226.18, the term does not
include an interest that arises solely by operation of law. However,
for purposes of the right of rescission under Sec. Sec. 226.15 and
226.23, the term does include interests that arise solely by operation
of law.
(26) State means any State, the District of Columbia, the
Commonwealth of Puerto Rico, and any territory or possession of the
United States.
(b) Rules of construction. For purposes of this regulation, the
following rules of construction apply:
(1) Where appropriate, the singular form of a word includes the
plural form and plural includes singular.
(2) Where the words obligation and transaction are used in the
regulation, they refer to a consumer credit obligation or transaction,
depending upon the context. Where the work credit is used in the
regulation, it means consumer credit unless the context clearly
indicates otherwise.
(3) Unless defined in this regulation, the words used have the
meanings given to them by State law or contract.
(4) Footnotes have the same legal effect as the text of the
regulation.
(5) Where the word amount is used in this regulation to describe
disclosure requirements, it refers to a numerical amount.
4. Section 226.3 is revised to read as follows:
Sec. 226.3 Exempt transactions.
This regulation does not apply to the following: \4\
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\4\ [Reserved]
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(a) Business, commercial, agricultural, or organizational credit.
(1) An extension of credit primarily for a business, commercial or
agricultural purpose.
(2) An extension of credit to other than a natural person,
including credit to government agencies or instrumentalities.
(b) Credit over $25,000 not secured by real property or a dwelling.
An extension of credit in which the amount financed exceeds $25,000 or
in which there is an express written commitment to extend credit in
excess of $25,000, unless the extension of credit is:
(1) Secured by real property, or by personal property used or
expected to be used as the principal dwelling of the consumer; or
(2) A private education loan as defined in Sec. 226.46(b)(5).
(c) Public utility credit. An extension of credit that involves
public utility services provided through pipe, wire, other connected
facilities, or radio or similar transmission (including extensions of
such facilities), if the charges for service, delayed payment, or any
discounts for prompt payment are filed with or regulated by any
government unit. The financing of durable goods or home improvements by
a public utility is not exempt.
(d) Securities or commodities accounts. Transactions in securities
or commodities accounts in which credit is extended by a broker-dealer
registered with the Securities and Exchange Commission or the Commodity
Futures Trading Commission.
(e) Home fuel budget plans. An installment agreement for the
purchase of home fuels in which no finance charge is imposed.
(f) Student loan programs. Loans made, insured, or guaranteed
pursuant to a program authorized by title IV of the Higher Education
Act of 1965 (20 U.S.C. 1070 et seq.).
(g) Employer-sponsored retirement plans. An extension of credit to
a participant in an employer-sponsored retirement plan qualified under
Section 401(a) of the Internal Revenue Code, a tax-sheltered annuity
under Section 403(b) of the Internal Revenue Code, or an eligible
governmental deferred compensation plan under Section 457(b) of the
Internal Revenue Code (26 U.S.C. 401(a); 26 U.S.C. 403(b); 26 U.S.C.
457(b)), provided that the extension of credit is comprised of fully
vested funds from such participant's account and is made in compliance
with the Internal Revenue Code (26 U.S.C. 1 et seq.).
5. Section 226.4 is revised to read as follows:
Sec. 226.4 Finance charge.
(a) Definition. The finance charge is the cost of consumer credit
as a dollar amount. It includes any charge payable directly or
indirectly by the consumer and imposed directly or indirectly by the
creditor as an incident to or a condition of the extension of credit.
It does not include any charge of a type payable in a comparable cash
transaction.
(1) Charges by third parties. The finance charge includes fees and
amounts charged by someone other than the creditor, unless otherwise
excluded under this section, if the creditor:
(i) Requires the use of a third party as a condition of or an
incident to the extension of credit, even if the consumer can choose
the third party; or
(ii) Retains a portion of the third-party charge, to the extent of
the portion retained.
(2) Special rule; closing agent charges. Fees charged by a third
party that conducts the loan closing (such as a settlement agent,
attorney, or escrow or title company) are finance charges only if the
creditor--
(i) Requires the particular services for which the consumer is
charged;
(ii) Requires the imposition of the charge; or
(iii) Retains a portion of the third-party charge, to the extent of
the portion retained.
(3) Special rule; mortgage broker fees. Fees charged by a mortgage
broker (including fees paid by the consumer directly to the broker or
to the creditor for delivery to the broker) are finance charges even if
the creditor does not require the consumer to use a mortgage broker and
even if the creditor does not retain any portion of the charge.
(b) Examples of finance charges. The finance charge includes the
following types of charges, except for charges specifically excluded by
paragraphs (c) through (e) of this section:
(1) Interest, time price differential, and any amount payable under
an add-on or discount system of additional charges.
(2) Service, transaction, activity, and carrying charges, including
any charge imposed on a checking or other transaction account to the
extent that the charge exceeds the charge for a similar account without
a credit feature.
(3) Points, loan fees, assumption fees, finder's fees, and similar
charges.
(4) Appraisal, investigation, and credit report fees.
(5) Premiums or other charges for any guarantee or insurance
protecting the creditor against the consumer's default or other credit
loss.
[[Page 54205]]
(6) Charges imposed on a creditor by another person for purchasing
or accepting a consumer's obligation, if the consumer is required to
pay the charges in cash, as an addition to the obligation, or as a
deduction from the proceeds of the obligation.
(7) Premiums or other charges for credit life, accident, health, or
loss-of-income insurance, written in connection with a credit
transaction.
(8) Premiums or other charges for insurance against loss of or
damage to property, or against liability arising out of the ownership
or use of property, written in connection with a credit transaction.
(9) Discounts for the purpose of inducing payment by a means other
than the use of credit.
(10) Charges or premiums paid for debt cancellation or debt
suspension coverage written in connection with a credit transaction,
whether or not the coverage is insurance under applicable law.
(c) Charges excluded from the finance charge. The following charges
are not finance charges:
(1) Application fees charged to all applicants for credit, whether
or not credit is actually extended.
(2) Charges for actual unanticipated late payment, for exceeding a
credit limit, or for delinquency, default, or a similar occurrence.
(3) Charges imposed by a financial institution for paying items
that overdraw an account, unless the payment of such items and the
imposition of the charge were previously agreed upon in writing.
(4) Fees charged for participation in a credit plan, whether
assessed on an annual or other periodic basis.
(5) Seller's points.
(6) Interest forfeited as a result of an interest reduction
required by law on a time deposit used as security for an extension of
credit.
(7) Real-estate related fees. The following fees in a transaction
secured by real property or in a residential mortgage transaction, if
the fees are bona fide and reasonable in amount:
(i) Fees for title examination, abstract of title, title insurance,
property survey, and similar purposes.
(ii) Fees for preparing loan-related documents, such as deeds,
mortgages, and reconveyance or settlement documents.
(iii) Notary and credit-report fees.
(iv) Property appraisal fees or fees for inspections to assess the
value or condition of the property if the service is performed prior to
closing, including fees related to pest-infestation or flood-hazard
determinations.
(v) Amounts required to be paid into escrow or trustee accounts if
the amounts would not otherwise be included in the finance charge.
(8) Discounts offered to induce payment for a purchase by cash,
check, or other means, as provided in section 167(b) of the Act.
(d) Insurance and debt cancellation and debt suspension coverage.
(1) Voluntary credit insurance premiums. Premiums for credit life,
accident, health, or loss-of-income insurance may be excluded from the
finance charge if the following conditions are met:
(i) The insurance coverage is not required by the creditor, and
this fact is disclosed in writing.
(ii) The premium for the initial term of insurance coverage is
disclosed in writing. If the term of insurance is less than the term of
the transaction, the term of insurance also shall be disclosed. The
premium may be disclosed on a unit-cost basis only in open-end credit
transactions, closed-end credit transactions by mail or telephone under
Sec. 226.17(g), and certain closed-end credit transactions involving
an insurance plan that limits the total amount of indebtedness subject
to coverage.
(iii) The consumer signs or initials an affirmative written request
for the insurance after receiving the disclosures specified in this
paragraph, except as provided in paragraph (d)(4) of this section. Any
consumer in the transaction may sign or initial the request.
(2) Property insurance premiums. Premiums for insurance against
loss of or damage to property, or against liability arising out of the
ownership or use of property, including single interest insurance if
the insurer waives all right of subrogation against the consumer,\5\
may be excluded from the finance charge if the following conditions are
met:
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\5\ [Reserved]
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(i) The insurance coverage may be obtained from a person of the
consumer's choice,\6\ and this fact is disclosed. (A creditor may
reserve the right to refuse to accept, for reasonable cause, an insurer
offered by the consumer.)
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\6\ [Reserved]
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(ii) If the coverage is obtained from or through the creditor, the
premium for the initial term of insurance coverage shall be disclosed.
If the term of insurance is less than the term of the transaction, the
term of insurance shall also be disclosed. The premium may be disclosed
on a unit-cost basis only in open-end credit transactions, closed-end
credit transactions by mail or telephone under Sec. 226.17(g), and
certain closed-end credit transactions involving an insurance plan that
limits the total amount of indebtedness subject to coverage.
(3) Voluntary debt cancellation or debt suspension fees. Charges or
premiums paid for debt cancellation coverage for amounts exceeding the
value of the collateral securing the obligation or for debt
cancellation or debt suspension coverage in the event of the loss of
life, health, or income or in case of accident may be excluded from the
finance charge, whether or not the coverage is insurance, if the
following conditions are met:
(i) The debt cancellation or debt suspension agreement or coverage
is not required by the creditor, and this fact is disclosed in writing;
(ii) The fee or premium for the initial term of coverage is
disclosed in writing. If the term of coverage is less than the term of
the credit transaction, the term of coverage also shall be disclosed.
The fee or premium may be disclosed on a unit-cost basis only in open-
end credit transactions, closed-end credit transactions by mail or
telephone under Sec. 226.17(g), and certain closed-end credit
transactions involving a debt cancellation agreement that limits the
total amount of indebtedness subject to coverage;
(iii) The following are disclosed, as applicable, for debt
suspension coverage: That the obligation to pay loan principal and
interest is only suspended, and that interest will continue to accrue
during the period of suspension.
(iv) The consumer signs or initials an affirmative written request
for coverage after receiving the disclosures specified in this
paragraph, except as provided in paragraph (d)(4) of this section. Any
consumer in the transaction may sign or initial the request.
(4) Telephone purchases. If a consumer purchases credit insurance
or debt cancellation or debt suspension coverage for an open-end (not
home-secured) plan by telephone, the creditor must make the disclosures
under paragraphs (d)(1)(i) and (ii) or (d)(3)(i) through (iii) of this
section, as applicable, orally. In such a case, the creditor shall:
(i) Maintain evidence that the consumer, after being provided the
disclosures orally, affirmatively elected to purchase the insurance or
coverage; and
(ii) Mail the disclosures under paragraphs (d)(1)(i) and (ii) or
(d)(3)(i) through (iii) of this section, as
[[Page 54206]]
applicable, within three business days after the telephone purchase.
(e) Certain security interest charges. If itemized and disclosed,
the following charges may be excluded from the finance charge:
(1) Taxes and fees prescribed by law that actually are or will be
paid to public officials for determining the existence of or for
perfecting, releasing, or satisfying a security interest.
(2) The premium for insurance in lieu of perfecting a security
interest to the extent that the premium does not exceed the fees
described in paragraph (e)(1) of this section that otherwise would be
payable.
(3) Taxes on security instruments. Any tax levied on security
instruments or on documents evidencing indebtedness if the payment of
such taxes is a requirement for recording the instrument securing the
evidence of indebtedness.
(f) Prohibited offsets. Interest, dividends, or other income
received or to be received by the consumer on deposits or investments
shall not be deducted in computing the finance charge.
Subpart B--Open-End Credit
6. Section 226.5 is revised to read as follows:
Sec. 226.5 General disclosure requirements.
(a) Form of disclosures. (1) General. (i) The creditor shall make
the disclosures required by this subpart clearly and conspicuously.
(ii) The creditor shall make the disclosures required by this
subpart in writing,\7\ in a form that the consumer may keep,\8\ except
that:
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\7\ [Reserved]
\8\ [Reserved]
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(A) The following disclosures need not be written: Disclosures
under Sec. 226.6(b)(3) of charges that are imposed as part of an open-
end (not home-secured) plan that are not required to be disclosed under
Sec. 226.6(b)(2) and related disclosures under Sec.
226.9(c)(2)(iii)(B) of charges; disclosures under Sec.
226.9(c)(2)(vi); disclosures under Sec. 226.9(d) when a finance charge
is imposed at the time of the transaction; and disclosures under Sec.
226.56(b)(1)(i).
(B) The following disclosures need not be in a retainable form:
Disclosures that need not be written under paragraph (a)(1)(ii)(A) of
this section; disclosures for credit and charge card applications and
solicitations under Sec. 226.5a; home-equity disclosures under Sec.
226.5b(d); the alternative summary billing-rights statement under Sec.
226.9(a)(2); the credit and charge card renewal disclosures required
under Sec. 226.9(e); and the payment requirements under Sec.
226.10(b), except as provided in Sec. 226.7(b)(13).
(iii) The disclosures required by this subpart may be provided to
the consumer in electronic form, subject to compliance with the
consumer consent and other applicable provisions of the Electronic
Signatures in Global and National Commerce Act (E-Sign Act) (15 U.S.C.
7001 et seq.). The disclosures required by Sec. Sec. 226.5a, 226.5b,
and 226.16 may be provided to the consumer in electronic form without
regard to the consumer consent or other provisions of the E-Sign Act in
the circumstances set forth in those sections.
(2) Terminology. (i) Terminology used in providing the disclosures
required by this subpart shall be consistent.
(ii) For home-equity plans subject to Sec. 226.5b, the terms
finance charge and annual percentage rate, when required to be
disclosed with a corresponding amount or percentage rate, shall be more
conspicuous than any other required disclosure.\9\ The terms need not
be more conspicuous when used for periodic statement disclosures under
Sec. 226.7(a)(4) and for advertisements under Sec. 226.16.
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\9\ [Reserved]
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(iii) If disclosures are required to be presented in a tabular
format pursuant to paragraph (a)(3) of this section, the term penalty
APR shall be used, as applicable. The term penalty APR need not be used
in reference to the annual percentage rate that applies with the loss
of a promotional rate, assuming the annual percentage rate that applies
is not greater than the annual percentage rate that would have applied
at the end of the promotional period; or if the annual percentage rate
that applies with the loss of a promotional rate is a variable rate,
the annual percentage rate is calculated using the same index and
margin as would have been used to calculate the annual percentage rate
that would have applied at the end of the promotional period. If credit
insurance or debt cancellation or debt suspension coverage is required
as part of the plan, the term required shall be used and the program
shall be identified by its name. If an annual percentage rate is
required to be presented in a tabular format pursuant to paragraph
(a)(3)(i) or (a)(3)(iii) of this section, the term fixed, or a similar
term, may not be used to describe such rate unless the creditor also
specifies a time period that the rate will be fixed and the rate will
not increase during that period, or if no such time period is provided,
the rate will not increase while the plan is open.
(3) Specific formats. (i) Certain disclosures for credit and charge
card applications and solicitations must be provided in a tabular
format in accordance with the requirements of Sec. 226.5a(a)(2).
(ii) Certain disclosures for home-equity plans must precede other
disclosures and must be given in accordance with the requirements of
Sec. 226.5b(a).
(iii) Certain account-opening disclosures must be provided in a
tabular format in accordance with the requirements of Sec.
226.6(b)(1).
(iv) Certain disclosures provided on periodic statements must be
grouped together in accordance with the requirements of Sec.
226.7(b)(6) and (b)(13).
(v) Certain disclosures provided on periodic statements must be
given in accordance with the requirements of Sec. 226.7(b)(12).
(vi) Certain disclosures accompanying checks that access a credit
card account must be provided in a tabular format in accordance with
the requirements of Sec. 226.9(b)(3).
(vii) Certain disclosures provided in a change-in-terms notice must
be provided in a tabular format in accordance with the requirements of
Sec. 226.9(c)(2)(iv)(C).
(viii) Certain disclosures provided when a rate is increased due to
delinquency, default or as a penalty must be provided in a tabular
format in accordance with the requirements of Sec. 226.9(g)(3)(ii).
(b) Time of disclosures. (1) Account-opening disclosures. (i)
General rule. The creditor shall furnish account-opening disclosures
required by Sec. 226.6 before the first transaction is made under the
plan.
(ii) Charges imposed as part of an open-end (not home-secured)
plan. Charges that are imposed as part of an open-end (not home-
secured) plan and are not required to be disclosed under Sec.
226.6(b)(2) may be disclosed after account opening but before the
consumer agrees to pay or becomes obligated to pay for the charge,
provided they are disclosed at a time and in a manner that a consumer
would be likely to notice them. This provision does not apply to
charges imposed as part of a home-equity plan subject to the
requirements of Sec. 226.5b.
(iii) Telephone purchases. Disclosures required by Sec. 226.6 may
be provided as soon as reasonably practicable after the first
transaction if:
(A) The first transaction occurs when a consumer contacts a
merchant by
[[Page 54207]]
telephone to purchase goods and at the same time the consumer accepts
an offer to finance the purchase by establishing an open-end plan with
the merchant or third-party creditor;
(B) The merchant or third-party creditor permits consumers to
return any goods financed under the plan and provides consumers with a
sufficient time to reject the plan and return the goods free of cost
after the merchant or third-party creditor has provided the written
disclosures required by Sec. 226.6; and
(C) The consumer's right to reject the plan and return the goods is
disclosed to the consumer as a part of the offer to finance the
purchase.
(iv) Membership fees. (A) General. In general, a creditor may not
collect any fee before account-opening disclosures are provided. A
creditor may collect, or obtain the consumer's agreement to pay,
membership fees, including application fees excludable from the finance
charge under Sec. 226.4(c)(1), before providing account-opening
disclosures if, after receiving the disclosures, the consumer may
reject the plan and have no obligation to pay these fees (including
application fees) or any other fee or charge. A membership fee for
purposes of this paragraph has the same meaning as a fee for the
issuance or availability of credit described in Sec. 226.5a(b)(2). If
the consumer rejects the plan, the creditor must promptly refund the
membership fee if it has been paid, or take other action necessary to
ensure the consumer is not obligated to pay that fee or any other fee
or charge.
(B) Home-equity plans. Creditors offering home-equity plans subject
to the requirements of Sec. 226.5b are not subject to the requirements
of paragraph (b)(1)(iv)(A) of this section.
(v) Application fees. A creditor may collect an application fee
excludable from the finance charge under Sec. 226.4(c)(1) before
providing account-opening disclosures. However, if a consumer rejects
the plan after receiving account-opening disclosures, the consumer must
have no obligation to pay such an application fee, or if the fee was
paid, it must be refunded. See Sec. 226.5(b)(1)(iv).
(2) Periodic statements. (i) The creditor shall mail or deliver a
periodic statement as required by Sec. 226.7 for each billing cycle at
the end of which an account has a debit or credit balance of more than
$1 or on which a finance charge has been imposed. A periodic statement
need not be sent for an account if the creditor deems it uncollectible,
if delinquency collection proceedings have been instituted, if the
creditor has charged off the account in accordance with loan-loss
provisions and will not charge any additional fees or interest on the
account, or if furnishing the statement would violate Federal law.
(ii) Creditors must adopt reasonable procedures designed to ensure
that periodic statements are mailed or delivered at least 21 days prior
to the payment due date and the date on which any grace period
expires.\10\ A creditor that fails to meet this requirement shall not
treat a payment as late for any purpose or collect any finance or other
charge imposed as a result of such failure. For purposes of this
paragraph, ``grace period'' means a period within which any credit
extended may be repaid without incurring a finance charge due to a
periodic interest rate.
---------------------------------------------------------------------------
\10\ [Reserved]
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(iii) The timing requirement under this paragraph (b)(2) does not
apply if the creditor is unable to meet the requirement because of an
act of God, war, civil disorder, natural disaster, or strike.
(3) Credit and charge card application and solicitation
disclosures. The card issuer shall furnish the disclosures for credit
and charge card applications and solicitations in accordance with the
timing requirements of Sec. 226.5a.
(4) Home-equity plans. Disclosures for home-equity plans shall be
made in accordance with the timing requirements of Sec. 226.5b(b).
(c) Basis of disclosures and use of estimates. Disclosures shall
reflect the terms of the legal obligation between the parties. If any
information necessary for accurate disclosure is unknown to the
creditor, it shall make the disclosure based on the best information
reasonably available and shall state clearly that the disclosure is an
estimate.
(d) Multiple creditors; multiple consumers. If the credit plan
involves more than one creditor, only one set of disclosures shall be
given, and the creditors shall agree among themselves which creditor
must comply with the requirements that this regulation imposes on any
or all of them. If there is more than one consumer, the disclosures may
be made to any consumer who is primarily liable on the account. If the
right of rescission under Sec. 226.15 is applicable, however, the
disclosures required by Sec. Sec. 226.6 and 226.15(b) shall be made to
each consumer having the right to rescind.
(e) Effect of subsequent events. If a disclosure becomes inaccurate
because of an event that occurs after the creditor mails or delivers
the disclosures, the resulting inaccuracy is not a violation of this
regulation, although new disclosures may be required under Sec.
226.9(c).
7. Section 226.5a is revised to read as follows:
Sec. 226.5a Credit and charge card applications and solicitations.
(a) General rules. The card issuer shall provide the disclosures
required under this section on or with a solicitation or an application
to open a credit or charge card account.
(1) Definition of solicitation. For purposes of this section, the
term solicitation means an offer by the card issuer to open a credit or
charge card account that does not require the consumer to complete an
application. A ``firm offer of credit'' as defined in section 603(l) of
the Fair Credit Reporting Act (15 U.S.C. 1681a(l)) for a credit or
charge card is a solicitation for purposes of this section.
(2) Form of disclosures; tabular format.
(i) The disclosures in paragraphs (b)(1) through (5) (except for
(b)(1)(iv)(B)) and (b)(7) through (15) of this section made pursuant to
paragraph (c), (d)(2), (e)(1) or (f) of this section generally shall be
in the form of a table with headings, content, and format substantially
similar to any of the applicable tables found in G-10 in appendix G to
this part.
(ii) The table described in paragraph (a)(2)(i) of this section
shall contain only the information required or permitted by this
section. Other information may be presented on or with an application
or solicitation, provided such information appears outside the required
table.
(iii) Disclosures required by paragraphs (b)(1)(iv)(B) and (b)(6)
of this section must be placed directly beneath the table.
(iv) When a tabular format is required, any annual percentage rate
required to be disclosed pursuant to paragraph (b)(1) of this section,
any introductory rate required to be disclosed pursuant to paragraph
(b)(1)(ii) of this section, any rate that will apply after a premium
initial rate expires required to be disclosed under paragraph
(b)(1)(iii) of this section, and any fee or percentage amounts required
to be disclosed pursuant to paragraphs (b)(2), (b)(4), (b)(8) through
(b)(13) of this section must be disclosed in bold text. However, bold
text shall not be used for: Any maximum limits on fee amounts disclosed
in the table that do not relate to fees that vary by State; the amount
of any periodic fee disclosed pursuant to paragraph (b)(2) of this
section that is
[[Page 54208]]
not an annualized amount; and other annual percentage rates or fee
amounts disclosed in the table.
(v) For an application or a solicitation that is accessed by the
consumer in electronic form, the disclosures required under this
section may be provided to the consumer in electronic form on or with
the application or solicitation.
(vi)(A) Except as provided in paragraph (a)(2)(vi)(B) of this
section, the table described in paragraph (a)(2)(i) of this section
must be provided in a prominent location on or with an application or a
solicitation.
(B) If the table described in paragraph (a)(2)(i) of this section
is provided electronically, it must be provided in close proximity to
the application or solicitation.
(3) Fees based on a percentage. If the amount of any fee required
to be disclosed under this section is determined on the basis of a
percentage of another amount, the percentage used and the
identification of the amount against which the percentage is applied
may be disclosed instead of the amount of the fee.
(4) Fees that vary by State. Card issuers that impose fees referred
to in paragraphs (b)(8) through (12) of this section that vary by State
may, at the issuer's option, disclosed in the table required by
paragraph (a)(2) of this section, the specific fee applicable to the
consumer's account, or the range of the fees, if the disclosure
includes a statement that the amount of the fee varies by State and
refers the consumer to a disclosure provided with the table where the
amount of the fee applicable to the consumer's account is disclosed. A
card issuer may not list fees for multiple states in the table.
(5) Exceptions. This section does not apply to:
(i) Home-equity plans accessible by a credit or charge card that
are subject to the requirements of Sec. 226.5b;
(ii) Overdraft lines of credit tied to asset accounts accessed by
check-guarantee cards or by debit cards;
(iii) Lines of credit accessed by check-guarantee cards or by debit
cards that can be used only at automated teller machines;
(iv) Lines of credit accessed solely by account numbers;
(v) Additions of a credit or charge card to an existing open-end
plan;
(vi) General purpose applications unless the application, or
material accompanying it, indicates that it can be used to open a
credit or charge card account; or
(vii) Consumer-initiated requests for applications.
(b) Required disclosures. The card issuer shall disclose the items
in this paragraph on or with an application or a solicitation in
accordance with the requirements of paragraphs (c), (d), (e)(1) or (f)
of this section. A credit card issuer shall disclose all applicable
items in this paragraph except for paragraph (b)(7) of this section. A
charge card issuer shall disclose the applicable items in paragraphs
(b)(2), (4), (7) through (12), and (15) of this section.
(1) Annual percentage rate. Each periodic rate that may be used to
compute the finance charge on an outstanding balance for purchases, a
cash advance, or a balance transfer, expressed as an annual percentage
rate (as determined by Sec. 226.14(b)). When more than one rate
applies for a category of transactions, the range of balances to which
each rate is applicable shall also be disclosed. The annual percentage
rate for purchases disclosed pursuant to this paragraph shall be in at
least 16-point type, except for the following: Oral disclosures of the
annual percentage rate for purchases; or a penalty rate that may apply
upon the occurrence of one or more specific events.
(i) Variable rate information. If a rate disclosed under paragraph
(b)(1) of this section is a variable rate, the card issuer shall also
disclose the fact that the rate may vary and how the rate is
determined. In describing how the applicable rate will be determined,
the card issuer must identify the type of index or formula that is used
in setting the rate. The value of the index and the amount of the
margin that are used to calculate the variable rate shall not be
disclosed in the table. A disclosure of any applicable limitations on
rate increases or decreases shall not be included in the table.
(ii) Discounted initial rate. If the initial rate is an
introductory rate, as that term is defined in Sec. 226.16(g)(2)(ii),
the card issuer must disclose in the table the introductory rate, the
time period during which the introductory rate will remain in effect,
and must use the term ``introductory'' or ``intro'' in immediate
proximity to the introductory rate. The card issuer also must disclose
the rate that would otherwise apply to the account pursuant to
paragraph (b)(1) of this section. Where the rate is not tied to an
index or formula, the card issuer must disclose the rate that will
apply after the introductory rate expires. In a variable-rate account,
the card issuer must disclose a rate based on the applicable index or
formula in accordance with the accuracy requirements set forth in
paragraphs (c), (d), or (e) of this section, as applicable.
(iii) Premium initial rate. If the initial rate is temporary and is
higher than the rate that will apply after the temporary rate expires,
the card issuer must disclose the premium initial rate pursuant to
paragraph (b)(1) of this section and the time period during which the
premium initial rate will remain in effect. Consistent with paragraph
(b)(1) of this section, the premium initial rate for purchases must be
in at least 16-point type. The issuer must also disclose in the table
the rate that will apply after the premium initial rate expires in at
least 16-point type.
(iv) Penalty rates. (A) In general. Except as provided in paragraph
(b)(1)(iv)(B), if a rate may increase as a penalty for one or more
events specified in the account agreement, such as a late payment or an
extension of credit that exceeds the credit limit, the card issuer must
disclose pursuant to paragraph (b)(1) of this section the increased
rate that may apply, a brief description of the event or events that
may result in the increased rate, and a brief description of how long
the increased rate will remain in effect.
(B) Introductory rates. If the issuer discloses an introductory
rate, as that term is defined in Sec. 226.16(g)(2)(ii), in the table
or in any written or electronic promotional materials accompanying
applications or solicitations subject to paragraph (c) or (e) of this
section, the issuer must briefly disclose directly beneath the table
the circumstances, if any, under which the introductory rate may be
revoked, and the type of rate that will apply after the introductory
rate is revoked.
(v) Rates that depend on consumer's creditworthiness. If a rate
cannot be determined at the time disclosures are given because the rate
depends, at least in part, on a later determination of the consumer's
creditworthiness, the card issuer must disclose the specific rates or
the range of rates that could apply and a statement that the rate for
which the consumer may qualify at account opening will depend on the
consumer's creditworthiness, and other factors if applicable. If the
rate that depends, at least in part, on a later determination of the
consumer's creditworthiness is a penalty rate, as described in
paragraph (b)(1)(iv) of this section, the card issuer at its option may
disclose the highest rate that could apply, instead of disclosing the
specific rates or the range of rates that could apply.
(vi) APRs that vary by State. Issuers imposing annual percentage
rates that vary by State may, at the issuer's option, disclose in the
table (A) the specific annual percentage rate applicable to the
consumer's account, or (B) the range of
[[Page 54209]]
the annual percentage rates, if the disclosure includes a statement
that the annual percentage rate varies by State and refers the consumer
to a disclosure provided with the table where the annual percentage
rate applicable to the consumer's account is disclosed. A card issuer
may not list annual percentage rates for multiple states in the table.
(2) Fees for issuance or availability. (i) Any annual or other
periodic fee that may be imposed for the issuance or availability of a
credit or charge card, including any fee based on account activity or
inactivity; how frequently it will be imposed; and the annualized
amount of the fee.
(ii) Any non-periodic fee that relates to opening an account. A
card issuer must disclose that the fee is a one-time fee.
(3) Fixed finance charge; minimum interest charge. Any fixed
finance charge and a brief description of the charge. Any minimum
interest charge if it exceeds $1.00 that could be imposed during a
billing cycle, and a brief description of the charge. The $1.00
threshold amount shall be adjusted periodically by the Board to reflect
changes in the Consumer Price Index. The Board shall calculate each
year a price level adjusted minimum interest charge using the Consumer
Price Index in effect on the June 1 of that year. When the cumulative
change in the adjusted minimum value derived from applying the annual
Consumer Price level to the current minimum interest charge threshold
has risen by a whole dollar, the minimum interest charge will be
increased by $1.00. The issuer may, at its option, disclose in the
table minimum interest charges below this threshold.
(4) Transaction charges. Any transaction charge imposed by the card
issuer for the use of the card for purchases.
(5) Grace period. The date by which or the period within which any
credit extended for purchases may be repaid without incurring a finance
charge due to a periodic interest rate and any conditions on the
availability of the grace period. If no grace period is provided, that
fact must be disclosed. If the length of the grace period varies, the
card issuer may disclose the range of days, the minimum number of days,
or the average number of days in the grace period, if the disclosure is
identified as a range, minimum, or average. In disclosing in the
tabular format a grace period that applies to all types of purchases,
the phrase ``How to Avoid Paying Interest on Purchases'' shall be used
as the heading for the row describing the grace period. If a grace
period is not offered on all types of purchases, in disclosing this
fact in the tabular format, the phrase ``Paying Interest'' shall be
used as the heading for the row describing this fact.
(6) Balance computation method. The name of the balance computation
method listed in paragraph (g) of this section that is used to
determine the balance for purchases on which the finance charge is
computed, or an explanation of the method used if it is not listed. In
determining which balance computation method to disclose, the card
issuer shall assume that credit extended for purchases will not be
repaid within the grace period, if any.
(7) Statement on charge card payments. A statement that charges
incurred by use of the charge card are due when the periodic statement
is received.
(8) Cash advance fee. Any fee imposed for an extension of credit in
the form of cash or its equivalent.
(9) Late payment fee. Any fee imposed for a late payment.
(10) Over-the-limit fee. Any fee imposed for exceeding a credit
limit.
(11) Balance transfer fee. Any fee imposed to transfer an
outstanding balance.
(12) Returned-payment fee. Any fee imposed by the card issuer for a
returned payment.
(13) Required insurance, debt cancellation or debt suspension
coverage. (i) A fee for insurance described in Sec. 226.4(b)(7) or
debt cancellation or suspension coverage described in Sec.
226.4(b)(10), if the insurance or debt cancellation or suspension
coverage is required as part of the plan; and
(ii) A cross reference to any additional information provided about
the insurance or coverage accompanying the application or solicitation,
as applicable.
(14) Available credit. If a card issuer requires fees for the
issuance or availability of credit described in paragraph (b)(2) of
this section, or requires a security deposit for such credit, and the
total amount of those required fees and/or security deposit that will
be imposed and charged to the account when the account is opened is 15
percent or more of the minimum credit limit for the card, a card issuer
must disclose the available credit remaining after these fees or
security deposit are debited to the account, assuming that the consumer
receives the minimum credit limit. In determining whether the 15
percent threshold test is met, the issuer must only consider fees for
issuance or availability of credit, or a security deposit, that are
required. If fees for issuance or availability are optional, these fees
should not be considered in determining whether the disclosure must be
given. Nonetheless, if the 15 percent threshold test is met, the issuer
in providing the disclosure must disclose the amount of available
credit calculated by excluding those optional fees, and the available
credit including those optional fees. This paragraph does not apply
with respect to fees or security deposits that are not debited to the
account.
(15) Web site reference. A reference to the Web site established by
the Board and a statement that consumers may obtain on the Web site
information about shopping for and using credit cards.
(c) Direct mail and electronic applications and solicitations. (1)
General. The card issuer shall disclose the applicable items in
paragraph (b) of this section on or with an application or solicitation
that is mailed to consumers or provided to consumers in electronic
form.
(2) Accuracy. (i) Disclosures in direct mail applications and
solicitations must be accurate as of the time the disclosures are
mailed. An accurate variable annual percentage rate is one in effect
within 60 days before mailing.
(ii) Disclosures provided in electronic form must be accurate as of
the time they are sent, in the case of disclosures sent to a consumer's
e-mail address, or as of the time they are viewed by the public, in the
case of disclosures made available at a location such as a card
issuer's Web site. An accurate variable annual percentage rate provided
in electronic form is one in effect within 30 days before it is sent to
a consumer's e-mail address, or viewed by the public, as applicable.
(d) Telephone applications and solicitations. (1) Oral disclosure.
The card issuer shall disclose orally the information in paragraphs
(b)(1) through (7) and (b)(14) of this section, to the extent
applicable, in a telephone application or solicitation initiated by the
card issuer.
(2) Alternative disclosure. The oral disclosure under paragraph
(d)(1) of this section need not be given if the card issuer either:
(i)(A) Does not impose a fee described in paragraph (b)(2) of this
section; or
(B) Imposes such a fee but provides the consumer with a right to
reject the plan consistent with Sec. 226.5(b)(1)(iv); and
(ii) The card issuer discloses in writing within 30 days after the
consumer requests the card (but in no event later than the delivery of
the card) the following:
[[Page 54210]]
(A) The applicable information in paragraph (b) of this section;
and
(B) As applicable, the fact that the consumer has the right to
reject the plan and not be obligated to pay fees described in paragraph
(b)(2) or any other fees or charges until the consumer has used the
account or made a payment on the account after receiving a billing
statement.
(3) Accuracy. (i) The oral disclosures under paragraph (d)(1) of
this section must be accurate as of the time they are given.
(ii) The alternative disclosures under paragraph (d)(2) of this
section generally must be accurate as of the time they are mailed or
delivered. A variable annual percentage rate is one that is accurate if
it was:
(A) In effect at the time the disclosures are mailed or delivered;
or
(B) In effect as of a specified date (which rate is then updated
from time to time, but no less frequently than each calendar month).
(e) Applications and solicitations made available to general
public. The card issuer shall provide disclosures, to the extent
applicable, on or with an application or solicitation that is made
available to the general public, including one contained in a catalog,
magazine, or other generally available publication. The disclosures
shall be provided in accordance with paragraph (e)(1) or (e)(2) of this
section.
(1) Disclosure of required credit information. The card issuer may
disclose in a prominent location on the application or solicitation the
following:
(i) The applicable information in paragraph (b) of this section;
(ii) The date the required information was printed, including a
statement that the required information was accurate as of that date
and is subject to change after that date; and
(iii) A statement that the consumer should contact the card issuer
for any change in the required information since it was printed, and a
toll-free telephone number or a mailing address for that purpose.
(2) No disclosure of credit information. If none of the items in
paragraph (b) of this section is provided on or with the application or
solicitation, the card issuer may state in a prominent location on the
application or solicitation the following:
(i) There are costs associated with the use of the card; and
(ii) The consumer may contact the card issuer to request specific
information about the costs, along with a toll-free telephone number
and a mailing address for that purpose.
(3) Prompt response to requests for information. Upon receiving a
request for any of the information referred to in this paragraph, the
card issuer shall promptly and fully disclose the information
requested.
(4) Accuracy. The disclosures given pursuant to paragraph (e)(1) of
this section must be accurate as of the date of printing. A variable
annual percentage rate is accurate if it was in effect within 30 days
before printing.
(f) In-person applications and solicitations. A card issuer shall
disclose the information in paragraph (b) of this section, to the
extent applicable, on or with an application or solicitation that is
initiated by the card issuer and given to the consumer in person. A
card issuer complies with the requirements of this paragraph if the
issuer provides disclosures in accordance with paragraph (c)(1) or
(e)(1) of this section.
(g) Balance computation methods defined. The following methods may
be described by name. Methods that differ due to variations such as the
allocation of payments, whether the finance charge begins to accrue on
the transaction date or the date of posting the transaction, the
existence or length of a grace period, and whether the balance is
adjusted by charges such as late payment fees, annual fees and unpaid
finance charges do not constitute separate balance computation methods.
(1)(i) Average daily balance (including new purchases). This
balance is figured by adding the outstanding balance (including new
purchases and deducting payments and credits) for each day in the
billing cycle, and then dividing by the number of days in the billing
cycle.
(ii) Average daily balance (excluding new purchases). This balance
is figured by adding the outstanding balance (excluding new purchases
and deducting payments and credits) for each day in the billing cycle,
and then dividing by the number of days in the billing cycle.
(2) Adjusted balance. This balance is figured by deducting payments
and credits made during the billing cycle from the outstanding balance
at the beginning of the billing cycle.
(3) Previous balance. This balance is the outstanding balance at
the beginning of the billing cycle.
(4) Daily balance. For each day in the billing cycle, this balance
is figured by taking the beginning balance each day, adding any new
purchases, and subtracting any payment and credits.
8. In Sec. 226.6, revise paragraph (b) to read as follows:
Sec. 226.6 Account-opening disclosures.
* * * * *
(b) Rules affecting open-end (not home-secured) plans. The
requirements of paragraph (b) of this section apply to plans other than
home-equity plans subject to the requirements of Sec. 226.5b.
(1) Form of disclosures; tabular format for open-end (not home-
secured) plans. Creditors must provide the account-opening disclosures
specified in paragraph (b)(2)(i) through (b)(2)(v) (except for
(b)(2)(i)(D)(2)) and (b)(2)(vii) through (b)(2)(xiv) of this section in
the form of a table with the headings, content, and format
substantially similar to any of the applicable tables in G-17 in
appendix G.
(i) Highlighting. In the table, any annual percentage rate required
to be disclosed pursuant to paragraph (b)(2)(i) of this section; any
introductory rate permitted to be disclosed pursuant to paragraph
(b)(2)(i)(B) or required to be disclosed under paragraph (b)(2)(i)(F)
of this section, any rate that will apply after a premium initial rate
expires permitted to be disclosed pursuant to paragraph (b)(2)(i)(C) or
required to be disclosed pursuant to paragraph (b)(2)(i)(F), and any
fee or percentage amounts required to be disclosed pursuant to
paragraphs (b)(2)(ii), (b)(2)(iv), (b)(2)(vii) through (b)(2)(xii) of
this section must be disclosed in bold text. However, bold text shall
not be used for: Any maximum limits on fee amounts disclosed in the
table that do not relate to fees that vary by State; the amount of any
periodic fee disclosed pursuant to paragraph (b)(2) of this section
that is not an annualized amount; and other annual percentage rates or
fee amounts disclosed in the table.
(ii) Location. Only the information required or permitted by
paragraphs (b)(2)(i) through (b)(2)(v) (except for (b)(2)(i)(D)(2)) and
(b)(2)(vii) through (b)(2)(xiv) of this section shall be in the table.
Disclosures required by paragraphs (b)(2)(i)(D)(2), (b)(2)(vi) and
(b)(2)(xv) of this section shall be placed directly below the table.
Disclosures required by paragraphs (b)(3) through (b)(5) of this
section that are not otherwise required to be in the table and other
information may be presented with the account agreement or account-
opening disclosure statement, provided such information appears outside
the required table.
(iii) Fees that vary by State. Creditors that impose fees referred
to in paragraphs (b)(2)(vii) through (b)(2)(xi) of this section that
vary by State and that provide the disclosures required by paragraph
(b) of this section in person at the time the open-end (not home-
[[Page 54211]]
secured) plan is established in connection with financing the purchase
of goods or services may, at the creditor's option, disclose in the
account-opening table (A) the specific fee applicable to the consumer's
account, or (B) the range of the fees, if the disclosure includes a
statement that the amount of the fee varies by State and refers the
consumer to the account agreement or other disclosure provided with the
account-opening table where the amount of the fee applicable to the
consumer's account is disclosed. A creditor may not list fees for
multiple states in the account-opening summary table.
(iv) Fees based on a percentage. If the amount of any fee required
to be disclosed under this section is determined on the basis of a
percentage of another amount, the percentage used and the
identification of the amount against which the percentage is applied
may be disclosed instead of the amount of the fee.
(2) Required disclosures for account-opening table for open-end
(not home-secured) plans. A creditor shall disclose the items in this
section, to the extent applicable:
(i) Annual percentage rate. Each periodic rate that may be used to
compute the finance charge on an outstanding balance for purchases, a
cash advance, or a balance transfer, expressed as an annual percentage
rate (as determined by Sec. 226.14(b)). When more than one rate
applies for a category of transactions, the range of balances to which
each rate is applicable shall also be disclosed. The annual percentage
rate for purchases disclosed pursuant to this paragraph shall be in at
least 16-point type, except for the following: A penalty rate that may
apply upon the occurrence of one or more specific events.
(A) Variable-rate information. If a rate disclosed under paragraph
(b)(2)(i) of this section is a variable rate, the creditor shall also
disclose the fact that the rate may vary and how the rate is
determined. In describing how the applicable rate will be determined,
the creditor must identify the type of index or formula that is used in
setting the rate. The value of the index and the amount of the margin
that are used to calculate the variable rate shall not be disclosed in
the table. A disclosure of any applicable limitations on rate increases
or decreases shall not be included in the table.
(B) Discounted initial rates. If the initial rate is an
introductory rate, as that term is defined in Sec. 226.16(g)(2)(ii),
the creditor must disclose the rate that would otherwise apply to the
account pursuant to paragraph (b)(2)(i) of this section. Where the rate
is not tied to an index or formula, the creditor must disclose the rate
that will apply after the introductory rate expires. In a variable-rate
account, the card issuer must disclose a rate based on the applicable
index or formula in accordance with the accuracy requirements of
paragraph (b)(4)(ii)(G) of this section. Except as provided in
paragraph (b)(2)(i)(F) of this section, the creditor is not required
to, but may disclose in the table the introductory rate along with the
rate that would otherwise apply to the account if the creditor also
discloses the time period during which the introductory rate will
remain in effect, and uses the term ``introductory'' or ``intro'' in
immediate proximity to the introductory rate.
(C) Premium initial rate. If the initial rate is temporary and is
higher than the rate that will apply after the temporary rate expires,
the creditor must disclose the premium initial rate pursuant to
paragraph (b)(2)(i) of this section. Consistent with paragraph
(b)(2)(i) of this section, the premium initial rate for purchases must
be in at least 16-point type. Except as provided in paragraph
(b)(2)(i)(F) of this section, the creditor is not required to, but may
disclose in the table the rate that will apply after the premium
initial rate expires if the creditor also discloses the time period
during which the premium initial rate will remain in effect. If the
creditor also discloses in the table the rate that will apply after the
premium initial rate for purchases expires, that rate also must be in
at least 16-point type.
(D) Penalty rates. (1) In general. Except as provided in paragraph
(b)(2)(i)(D)(2) of this section, if a rate may increase as a penalty
for one or more events specified in the account agreement, such as a
late payment or an extension of credit that exceeds the credit limit,
the creditor must disclose pursuant to paragraph (b)(2)(i) of this
section the increased rate that may apply, a brief description of the
event or events that may result in the increased rate, and a brief
description of how long the increased rate will remain in effect. If
more than one penalty rate may apply, the creditor at its option may
disclose the highest rate that could apply, instead of disclosing the
specific rates or the range of rates that could apply.
(2) Introductory rates. If the creditor discloses in the table an
introductory rate, as that term is defined in Sec. 226.16(g)(2)(ii),
creditors must briefly disclose directly beneath the table the
circumstances under which the introductory rate may be revoked, and the
rate that will apply after the introductory rate is revoked.
(E) Point of sale where APRs vary by State or based on
creditworthiness. Creditors imposing annual percentage rates that vary
by State or based on the consumer's creditworthiness and providing the
disclosures required by paragraph (b) of this section in person at the
time the open-end (not home-secured) plan is established in connection
with financing the purchase of goods or services may, at the creditor's
option, disclose pursuant to paragraph (b)(2)(i) of this section in the
account-opening table:
(1) The specific annual percentage rate applicable to the
consumer's account; or
(2) The range of the annual percentage rates, if the disclosure
includes a statement that the annual percentage rate varies by State or
will be determined based on the consumer's creditworthiness and refers
the consumer to the account agreement or other disclosure provided with
the account-opening table where the annual percentage rate applicable
to the consumer's account is disclosed. A creditor may not list annual
percentage rates for multiple states in the account-opening table.
(F) Credit card accounts under an open-end (not home-secured)
consumer credit plan. Notwithstanding paragraphs (b)(2)(i)(B) and
(b)(2)(i)(C) of this section, for credit card accounts under an open-
end (not home-secured) plan, issuers must disclose in the table
required by paragraph (b)(1) of this section, any introductory rate
that would apply to the account, consistent with the requirements of
paragraph (b)(2)(i)(B) of this section, and any rate that would apply
upon the expiration of a premium initial rate, consistent with the
requirements of paragraph (b)(2)(i)(C) of this section.
(ii) Fees for issuance or availability. (A) Any annual or other
periodic fee that may be imposed for the issuance or availability of an
open-end plan, including any fee based on account activity or
inactivity; how frequently it will be imposed; and the annualized
amount of the fee.
(B) Any non-periodic fee that relates to opening the plan. A
creditor must disclose that the fee is a one-time fee.
(iii) Fixed finance charge; minimum interest charge. Any fixed
finance charge and a brief description of the charge. Any minimum
interest charge if it exceeds $1.00 that could be imposed during a
billing cycle, and a brief description of the charge. The $1.00
threshold amount shall be adjusted periodically by the Board to reflect
changes in the Consumer Price Index. The Board shall calculate each
year a
[[Page 54212]]
price level adjusted minimum interest charge using the Consumer Price
Index in effect on the June 1 of that year. When the cumulative change
in the adjusted minimum value derived from applying the annual Consumer
Price level to the current minimum interest charge threshold has risen
by a whole dollar, the minimum interest charge will be increased by
$1.00. The creditor may, at its option, disclose in the table minimum
interest charges below this threshold.
(iv) Transaction charges. Any transaction charge imposed by the
creditor for use of the open-end plan for purchases.
(v) Grace period. The date by which or the period within which any
credit extended may be repaid without incurring a finance charge due to
a periodic interest rate and any conditions on the availability of the
grace period. If no grace period is provided, that fact must be
disclosed. If the length of the grace period varies, the creditor may
disclose the range of days, the minimum number of days, or the average
number of the days in the grace period, if the disclosure is identified
as a range, minimum, or average. In disclosing in the tabular format a
grace period that applies to all features on the account, the phrase
``How to Avoid Paying Interest'' shall be used as the heading for the
row describing the grace period. If a grace period is not offered on
all features of the account, in disclosing this fact in the tabular
format, the phrase ``Paying Interest'' shall be used as the heading for
the row describing this fact.
(vi) Balance computation method. The name of the balance
computation method listed in Sec. 226.5a(g) that is used to determine
the balance on which the finance charge is computed for each feature,
or an explanation of the method used if it is not listed, along with a
statement that an explanation of the method(s) required by paragraph
(b)(4)(i)(D) of this section is provided with the account-opening
disclosures. In determining which balance computation method to
disclose, the creditor shall assume that credit extended will not be
repaid within any grace period, if any.
(vii) Cash advance fee. Any fee imposed for an extension of credit
in the form of cash or its equivalent.
(viii) Late payment fee. Any fee imposed for a late payment.
(ix) Over-the-limit fee. Any fee imposed for exceeding a credit
limit.
(x) Balance transfer fee. Any fee imposed to transfer an
outstanding balance.
(xi) Returned-payment fee. Any fee imposed by the creditor for a
returned payment.
(xii) Required insurance, debt cancellation or debt suspension
coverage. (A) A fee for insurance described in Sec. 226.4(b)(7) or
debt cancellation or suspension coverage described in Sec.
226.4(b)(10), if the insurance, or debt cancellation or suspension
coverage is required as part of the plan; and
(B) A cross reference to any additional information provided about
the insurance or coverage, as applicable.
(xiii) Available credit. If a creditor requires fees for the
issuance or availability of credit described in paragraph (b)(2)(ii) of
this section, or requires a security deposit for such credit, and the
total amount of those required fees and/or security deposit that will
be imposed and charged to the account when the account is opened is 15
percent or more of the minimum credit limit for the plan, a creditor
must disclose the available credit remaining after these fees or
security deposit are debited to the account. The determination whether
the 15 percent threshold is met must be based on the minimum credit
limit for the plan. However, the disclosure provided under this
paragraph must be based on the actual initial credit limit provided on
the account. In determining whether the 15 percent threshold test is
met, the creditor must only consider fees for issuance or availability
of credit, or a security deposit, that are required. If fees for
issuance or availability are optional, these fees should not be
considered in determining whether the disclosure must be given.
Nonetheless, if the 15 percent threshold test is met, the creditor in
providing the disclosure must disclose the amount of available credit
calculated by excluding those optional fees, and the available credit
including those optional fees. The creditor shall also disclose that
the consumer has the right to reject the plan and not be obligated to
pay those fees or any other fee or charges until the consumer has used
the account or made a payment on the account after receiving a periodic
statement. This paragraph does not apply with respect to fees or
security deposits that are not debited to the account.
(xiv) Web site reference. For issuers of credit cards that are not
charge cards, a reference to the Web site established by the Board and
a statement that consumers may obtain on the Web site information about
shopping for and using credit cards.
(xv) Billing error rights reference. A statement that information
about consumers' right to dispute transactions is included in the
account-opening disclosures.
(3) Disclosure of charges imposed as part of open-end (not home-
secured) plans. A creditor shall disclose, to the extent applicable:
(i) For charges imposed as part of an open-end (not home-secured)
plan, the circumstances under which the charge may be imposed,
including the amount of the charge or an explanation of how the charge
is determined. For finance charges, a statement of when the charge
begins to accrue and an explanation of whether or not any time period
exists within which any credit that has been extended may be repaid
without incurring the charge. If such a time period is provided, a
creditor may, at its option and without disclosure, elect not to impose
a finance charge when payment is received after the time period
expires.
(ii) Charges imposed as part of the plan are:
(A) Finance charges identified under Sec. 226.4(a) and Sec.
226.4(b).
(B) Charges resulting from the consumer's failure to use the plan
as agreed, except amounts payable for collection activity after
default, attorney's fees whether or not automatically imposed, and
post-judgment interest rates permitted by law.
(C) Taxes imposed on the credit transaction by a State or other
governmental body, such as documentary stamp taxes on cash advances.
(D) Charges for which the payment, or nonpayment, affect the
consumer's access to the plan, the duration of the plan, the amount of
credit extended, the period for which credit is extended, or the timing
or method of billing or payment.
(E) Charges imposed for terminating a plan.
(F) Charges for voluntary credit insurance, debt cancellation or
debt suspension.
(iii) Charges that are not imposed as part of the plan include:
(A) Charges imposed on a cardholder by an institution other than
the card issuer for the use of the other institution's ATM in a shared
or interchange system.
(B) A charge for a package of services that includes an open-end
credit feature, if the fee is required whether or not the open-end
credit feature is included and the non-credit services are not merely
incidental to the credit feature.
(C) Charges under Sec. 226.4(e) disclosed as specified.
[[Page 54213]]
(4) Disclosure of rates for open-end (not home-secured) plans. A
creditor shall disclose, to the extent applicable:
(i) For each periodic rate that may be used to calculate interest:
(A) Rates. The rate, expressed as a periodic rate and a
corresponding annual percentage rate.
(B) Range of balances. The range of balances to which the rate is
applicable; however, a creditor is not required to adjust the range of
balances disclosure to reflect the balance below which only a minimum
charge applies.
(C) Type of transaction. The type of transaction to which the rate
applies, if different rates apply to different types of transactions.
(D) Balance computation method. An explanation of the method used
to determine the balance to which the rate is applied.
(ii) Variable-rate accounts. For interest rate changes that are
tied to increases in an index or formula (variable-rate accounts)
specifically set forth in the account agreement:
(A) The fact that the annual percentage rate may increase.
(B) How the rate is determined, including the margin.
(C) The circumstances under which the rate may increase.
(D) The frequency with which the rate may increase.
(E) Any limitation on the amount the rate may change.
(F) The effect(s) of an increase.
(G) A rate is accurate if it is a rate as of a specified date and
this rate was in effect within the last 30 days before the disclosures
are provided.
(iii) Rate changes not due to index or formula. For interest rate
changes that are specifically set forth in the account agreement and
not tied to increases in an index or formula:
(A) The initial rate (expressed as a periodic rate and a
corresponding annual percentage rate) required under paragraph
(b)(4)(i)(A) of this section.
(B) How long the initial rate will remain in effect and the
specific events that cause the initial rate to change.
(C) The rate (expressed as a periodic rate and a corresponding
annual percentage rate) that will apply when the initial rate is no
longer in effect and any limitation on the time period the new rate
will remain in effect.
(D) The balances to which the new rate will apply.
(E) The balances to which the current rate at the time of the
change will apply.
(5) Additional disclosures for open-end (not home-secured) plans. A
creditor shall disclose, to the extent applicable:
(i) Voluntary credit insurance, debt cancellation or debt
suspension. The disclosures in Sec. Sec. 226.4(d)(1)(i) and (d)(1)(ii)
and (d)(3)(i) through (d)(3)(iii) if the creditor offers optional
credit insurance or debt cancellation or debt suspension coverage that
is identified in Sec. 226.4(b)(7) or (b)(10).
(ii) Security interests. The fact that the creditor has or will
acquire a security interest in the property purchased under the plan,
or in other property identified by item or type.
(iii) Statement of billing rights. A statement that outlines the
consumer's rights and the creditor's responsibilities under Sec. Sec.
226.12(c) and 226.13 and that is substantially similar to the statement
found in Model Form G-3(A) in appendix G to this part.
9. Section 226.7 is amended by revising paragraph (b), removing
paragraphs (c), (d), (e), (f), (g), (h), (i), (j), and (k), and
removing and reserving footnotes 14 and 15 to read as follows:
Sec. 226.7 Periodic statement.
* * * * *
(b) Rules affecting open-end (not home-secured) plans. The
requirements of paragraph (b) of this section apply only to plans other
than home-equity plans subject to the requirements of Sec. 226.5b.
(1) Previous balance. The account balance outstanding at the
beginning of the billing cycle.
(2) Identification of transactions. An identification of each
credit transaction in accordance with Sec. 226.8.
(3) Credits. Any credit to the account during the billing cycle,
including the amount and the date of crediting. The date need not be
provided if a delay in crediting does not result in any finance or
other charge.
(4) Periodic rates. (i) Except as provided in paragraph (b)(4)(ii)
of this section, each periodic rate that may be used to compute the
interest charge expressed as an annual percentage rate and using the
term, Annual Percentage Rate, along with the range of balances to which
it is applicable. If no interest charge is imposed when the outstanding
balance is less than a certain amount, the creditor is not required to
disclose that fact, or the balance below which no interest charge will
be imposed. The types of transactions to which the periodic rates apply
shall also be disclosed. For variable-rate plans, the fact that the
annual percentage rate may vary.
(ii) Exception. A promotional rate, as that term is defined in
Sec. 226.16(g)(2)(i) is required to be disclosed only in periods in
which the offered rate is actually applied.
(5) Balance on which finance charge computed. The amount of the
balance to which a periodic rate was applied and an explanation of how
that balance was determined, using the term Balance Subject to Interest
Rate. When a balance is determined without first deducting all credits
and payments made during the billing cycle, the fact and the amount of
the credits and payments shall be disclosed. As an alternative to
providing an explanation of how the balance was determined, a creditor
that uses a balance computation method identified in Sec. 226.5a(g)
may, at the creditor's option, identify the name of the balance
computation method and provide a toll-free telephone number where
consumers may obtain from the creditor more information about the
balance computation method and how resulting interest charges were
determined. If the method used is not identified in Sec. 226.5a(g),
the creditor shall provide a brief explanation of the method used.
(6) Charges imposed. (i) The amounts of any charges imposed as part
of a plan as stated in Sec. 226.6(b)(3), grouped together, in
proximity to transactions identified under paragraph (b)(2) of this
section, substantially similar to Sample G-18(A) in appendix G to this
part.
(ii) Interest. Finance charges attributable to periodic interest
rates, using the term Interest Charge, must be grouped together under
the heading Interest Charged, itemized and totaled by type of
transaction, and a total of finance charges attributable to periodic
interest rates, using the term Total Interest, must be disclosed for
the statement period and calendar year to date, using a format
substantially similar to Sample G-18(A) in appendix G to this part.
(iii) Fees. Charges imposed as part of the plan other than charges
attributable to periodic interest rates must be grouped together under
the heading Fees, identified consistent with the feature or type, and
itemized, and a total of charges, using the term Fees, must be
disclosed for the statement period and calendar year to date, using a
format substantially similar to Sample G-18(A) in appendix G.
(7) Change-in-terms and increased penalty rate summary for open-end
(not home-secured) plans. Creditors that provide a change-in-terms
notice required by Sec. 226.9(c), or a rate increase notice required
by Sec. 226.9(g), on or with the periodic statement, must disclose the
information in Sec. 226.9(c)(2)(iv)(A) and (c)(2)(iv)(B) (if
applicable) or Sec. 226.9(g)(3)(i) on the periodic statement in
accordance with the format requirements in Sec. 226.9(c)(2)(iv)(C),
and Sec. 226.9(g)(3)(ii). See Forms G-18(F) and G-18(G) in appendix G
to this part.
[[Page 54214]]
(8) Grace period. The date by which or the time period within which
the new balance or any portion of the new balance must be paid to avoid
additional finance charges. If such a time period is provided, a
creditor may, at its option and without disclosure, impose no finance
charge if payment is received after the time period's expiration.
(9) Address for notice of billing errors. The address to be used
for notice of billing errors. Alternatively, the address may be
provided on the billing rights statement permitted by Sec.
226.9(a)(2).
(10) Closing date of billing cycle; new balance. The closing date
of the billing cycle and the account balance outstanding on that date.
The new balance must be disclosed in accordance with the format
requirements of paragraph (b)(13) of this section.
(11) Due date; late payment costs. (i) Except as provided in
paragraph (b)(11)(ii) of this section and in accordance with the format
requirements in paragraph (b)(13) of this section, for a credit card
account under an open-end (not home-secured) consumer credit plan, a
card issuer must provide on each periodic statement:
(A) The due date for a payment. The due date disclosed pursuant to
this paragraph shall be the same day of the month for each billing
cycle.
(B) The amount of any late payment fee and any increased periodic
rate(s) (expressed as an annual percentage rate(s)) that may be imposed
on the account as a result of a late payment. If a range of late
payment fees may be assessed, the card issuer may state the range of
fees, or the highest fee and at the issuer's option with the highest
fee an indication that the fee imposed could be lower. If the rate may
be increased for more than one feature or balance, the card issuer may
state the range of rates or the highest rate that could apply and at
the issuer's option an indication that the rate imposed could be lower.
(ii) Exception. The requirements of paragraph (b)(11)(i)(B) of this
section do not apply to periodic statements provided solely for charge
card accounts.
(12) Repayment disclosures. (i) In general. Except as provided in
paragraphs (b)(12)(ii) and (b)(12)(v), for a credit card account under
an open-end (not home-secured) consumer credit plan, a card issuer must
provide the following disclosures on each periodic statement:
(A) The following statement with a bold heading: ``Minimum Payment
Warning: If you make only the minimum payment each period, you will pay
more in interest and it will take you longer to pay off your balance;''
(B) The minimum payment repayment estimate, as described in
Appendix M1 to this part. If the minimum payment repayment estimate is
less than 2 years, the card issuers must disclose the estimate in
months. Otherwise, the estimate must be disclosed in years and rounded
to the nearest whole year;
(C) The minimum payment total cost estimate, as described in
Appendix M1 to this part. The minimum payment total cost estimate must
be rounded to the nearest whole dollar;
(D) A statement that the minimum payment repayment estimate and the
minimum payment total cost estimate are based on the current
outstanding balance shown on the periodic statement. A statement that
the minimum payment repayment estimate and the minimum payment total
cost estimate are based on the assumption that only minimum payments
are made and no other amounts are added to the balance;
(E) A toll-free telephone number where the consumer may obtain from
the card issuer information about credit counseling services consistent
with paragraph (b)(12)(iv) of this section; and
(F) Except if the minimum payment repayment estimate that is
disclosed on the periodic statement pursuant to paragraph (b)(12)(i)(B)
of this section is three years or less, the following disclosures:
(1) The estimated monthly payment for repayment in 36 months, as
described in Appendix M1 to this part. The estimated monthly payment
for repayment in 36 months must be rounded to the nearest whole dollar;
(2) A statement that the card issuer estimates that the consumer
will repay the outstanding balance shown on the periodic statement in 3
years if the consumer pays the estimated monthly payment each month for
3 years;
(3) The total cost estimate for repayment in 36 months, as
described in Appendix M1 to this part. The total cost estimate for
repayment in 36 months must be rounded to the nearest whole dollar; and
(4) The savings estimate for repayment in 36 months, as described
in Appendix M1 to this part. The savings estimate for repayment in 36
months must be rounded to the nearest whole dollar.
(ii) Negative or no amortization. If negative or no amortization
occurs when calculating the minimum payment repayment estimate as
described in Appendix M1 of this part, a card issuer must provide the
following disclosures on the periodic statement instead of the
disclosures set forth in paragraph (b)(12)(i) of this section:
(A) The following statement: ``Minimum Payment Warning: Even if you
make no more charges using this card, if you make only the minimum
payment each month we estimate you will never pay off the balance shown
on this statement because your payment will be less than the interest
charged each month;''
(B) The following statement: ``If you make more than the minimum
payment each period, you will pay less in interest and pay off your
balance sooner;''
(C) The estimated monthly payment for repayment in 36 months, as
described in Appendix M1 to this part. The estimated monthly payment
for repayment in 36 months must be rounded to the nearest whole dollar;
(D) A statement that the card issuer estimates that the consumer
will repay the outstanding balance shown on the periodic statement in 3
years if the consumer pays the estimated monthly payment each month for
3 years; and
(E) A toll-free telephone number where the consumer may obtain from
the card issuer information about credit counseling services consistent
with paragraph (b)(12)(iv) of this section.
(iii) Format requirements. A card issuer must provide the
disclosures required by paragraph (b)(12)(i) or (b)(12)(ii) of this
section in accordance with the format requirements of paragraph (b)(13)
of this section, and in a format substantially similar to Samples G-
18(C)(1), G-18(C)(2) and G-18(C)(3) in Appendix G to this part, as
applicable.
(iv) Provision of information about credit counseling services. A
card issuer must provide the following information about credit
counseling services through the toll-free telephone number disclosed
pursuant to paragraphs (b)(12)(i) or (b)(12)(ii) of this section:
(A) The name, street address, telephone number, and Web site
address for at least three organizations that have been approved by the
United States Trustee or a bankruptcy administrator pursuant to 11
U.S.C. 111(a)(1) to provide credit counseling services in the State in
which the billing address for the account is located or the State
specified by the consumer.
(B) Upon the request of the consumer and to the extent available
from the United States Trustee or a bankruptcy administrator, the name,
street address, telephone number, and Web site address for at least one
organization that satisfies the requirements in paragraph
(b)(12)(iv)(A) of this section and provides credit counseling services
in a
[[Page 54215]]
language other than English that is specified by the consumer.
(v) Exemptions. Paragraph (b)(12) of this section does not apply
to:
(A) Charge card accounts that require payment of outstanding
balances in full at the end of each billing cycle;
(B) A billing cycle immediately following two consecutive billing
cycles in which the consumer paid the entire balance in full, had a
zero outstanding balance or had a credit balance; and
(C) A billing cycle where paying the minimum payment due for that
billing cycle will pay the entire outstanding balance on the account
for that billing cycle.
(13) Format requirements. The due date required by paragraph
(b)(11) of this section shall be disclosed on the front of the first
page of the periodic statement. The amount of the late payment fee and
the annual percentage rate(s) required by paragraph (b)(11) of this
section shall be stated in close proximity to the due date. The ending
balance required by paragraph (b)(10) of this section and the
disclosures required by paragraph (b)(12) of this section shall be
disclosed closely proximate to the minimum payment due. The due date,
late payment fee and annual percentage rate, ending balance, minimum
payment due, and disclosures required by paragraph (b)(12) of this
section shall be grouped together. Sample G-18(D) in Appendix G to this
part sets forth an example of how these terms may be grouped.
(14) Deferred interest or similar transactions. For accounts with
an outstanding balance subject to a deferred interest or similar
program, the date by which that outstanding balance must be paid in
full in order to avoid the obligation to pay finance charges on such
balance must be disclosed on the front of the periodic statement for
two billing cycles immediately preceding the billing cycle in which
such date occurs. The disclosure provided pursuant to this paragraph
must be substantially similar to Sample G-18(H) in Appendix G to this
part.
10. Section 226.8 is revised to read as follows:
Sec. 226.8 Identifying transactions on periodic statements.
The creditor shall identify credit transactions on or with the
first periodic statement that reflects the transaction by furnishing
the following information, as applicable.\16\
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\16\ [Reserved]
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(a) Sale credit. (1) Except as provided in paragraph (a)(2) of this
section, for each credit transaction involving the sale of property or
services, the creditor must disclose the amount and date of the
transaction, and either:
(i) A brief identification \17\ of the property or services
purchased, for creditors and sellers that are the same or related; \18\
or
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\17\ [Reserved]
\18\ [Reserved]
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(ii) The seller's name; and the city and State or foreign country
where the transaction took place.\19\ The creditor may omit the address
or provide any suitable designation that helps the consumer to identify
the transaction when the transaction took place at a location that is
not fixed; took place in the consumer's home; or was a mail, Internet,
or telephone order.
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\19\ [Reserved]
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(2) Creditors need not comply with paragraph (a)(1) of this section
if an actual copy of the receipt or other credit document is provided
with the first periodic statement reflecting the transaction, and the
amount of the transaction and either the date of the transaction to the
consumer's account or the date of debiting the transaction are
disclosed on the copy or on the periodic statement.
(b) Nonsale credit. For each credit transaction not involving the
sale of property or services, the creditor must disclose a brief
identification of the transaction; \20\ the amount of the transaction;
and at least one of the following dates: The date of the transaction,
the date the transaction was debited to the consumer's account, or, if
the consumer signed the credit document, the date appearing on the
document. If an actual copy of the receipt or other credit document is
provided and that copy shows the amount and at least one of the
specified dates, the brief identification may be omitted.
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\20\ [Reserved]
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(c) Alternative creditor procedures; consumer inquiries for
clarification or documentation. The following procedures apply to
creditors that treat an inquiry for clarification or documentation as a
notice of a billing error, including correcting the account in
accordance with Sec. 226.13(e):
(1) Failure to disclose the information required by paragraphs (a)
and (b) of this section is not a failure to comply with the regulation,
provided that the creditor also maintains procedures reasonably
designed to obtain and provide the information. This applies to
transactions that take place outside a State, as defined in Sec.
226.2(a)(26), whether or not the creditor maintains procedures
reasonably adapted to obtain the required information.
(2) As an alternative to the brief identification for sale or
nonsale credit, the creditor may disclose a number or symbol that also
appears on the receipt or other credit document given to the consumer,
if the number or symbol reasonably identifies that transaction with
that creditor.
11. Section 226.9 is amended by revising paragraphs (a), (b),
(c)(2), (e), (g), and (h) and to read as follows:
Sec. 226.9 Subsequent disclosure requirements.
(a) Furnishing statement of billing rights. (1) Annual statement.
The creditor shall mail or deliver the billing rights statement
required by Sec. 226.6(a)(5) and (b)(5)(iii) at least once per
calendar year, at intervals of not less than 6 months nor more than 18
months, either to all consumers or to each consumer entitled to receive
a periodic statement under Sec. 226.5(b)(2) for any one billing cycle.
(2) Alternative summary statement. As an alternative to paragraph
(a)(1) of this section, the creditor may mail or deliver, on or with
each periodic statement, a statement substantially similar to Model
Form G-4 or Model Form G-4(A) in appendix G to this part, as
applicable. Creditors offering home-equity plans subject to the
requirements of Sec. 226.5b may use either Model Form, at their
option.
(b) Disclosures for supplemental credit access devices and
additional features. (1) If a creditor, within 30 days after mailing or
delivering the account-opening disclosures under Sec. 226.6(a)(1) or
(b)(3)(ii)(A), as applicable, adds a credit feature to the consumer's
account or mails or delivers to the consumer a credit access device,
including but not limited to checks that access a credit card account,
for which the finance charge terms are the same as those previously
disclosed, no additional disclosures are necessary. Except as provided
in paragraph (b)(3) of this section, after 30 days, if the creditor
adds a credit feature or furnishes a credit access device (other than
as a renewal, resupply, or the original issuance of a credit card) on
the same finance charge terms, the creditor shall disclose, before the
consumer uses the feature or device for the first time, that it is for
use in obtaining credit under the terms previously disclosed.
(2) Except as provided in paragraph (b)(3) of this section,
whenever a credit feature is added or a credit access device is mailed
or delivered, and the finance charge terms for the feature or device
differ from disclosures
[[Page 54216]]
previously given, the disclosures required by Sec. 226.6(a)(1) or
(b)(3)(ii)(A), as applicable, that are applicable to the added feature
or device shall be given before the consumer uses the feature or device
for the first time.
(3) Checks that access a credit card account.
(i) Disclosures. For open-end plans not subject to the requirements
of Sec. 226.5b, if checks that can be used to access a credit card
account are provided more than 30 days after account-opening
disclosures under Sec. 226.6(b) are mailed or delivered, or are
provided within 30 days of the account-opening disclosures and the
finance charge terms for the checks differ from the finance charge
terms previously disclosed, the creditor shall disclose on the front of
the page containing the checks the following terms in the form of a
table with the headings, content, and form substantially similar to
Sample G-19 in appendix G to this part:
(A) If a promotional rate, as that term is defined in Sec.
226.16(g)(2)(i) applies to the checks:
(1) The promotional rate and the time period during which the
promotional rate will remain in effect;
(2) The type of rate that will apply (such as whether the purchase
or cash advance rate applies) after the promotional rate expires, and
the annual percentage rate that will apply after the promotional rate
expires. For a variable-rate account, a creditor must disclose an
annual percentage rate based on the applicable index or formula in
accordance with the accuracy requirements set forth in paragraph
(b)(3)(ii) of this section; and
(3) The date, if any, by which the consumer must use the checks in
order to qualify for the promotional rate. If the creditor will honor
checks used after such date but will apply an annual percentage rate
other than the promotional rate, the creditor must disclose this fact
and the type of annual percentage rate that will apply if the consumer
uses the checks after such date.
(B) If no promotional rate applies to the checks:
(1) The type of rate that will apply to the checks and the
applicable annual percentage rate. For a variable-rate account, a
creditor must disclose an annual percentage rate based on the
applicable index or formula in accordance with the accuracy
requirements set forth in paragraph (b)(3)(ii) of this section.
(2) [Reserved]
(C) Any transaction fees applicable to the checks disclosed under
Sec. 226.6(b)(2)(iv); and
(D) Whether or not a grace period is given within which any credit
extended by use of the checks may be repaid without incurring a finance
charge due to a periodic interest rate. When disclosing whether there
is a grace period, the phrase ``How to Avoid Paying Interest on Check
Transactions'' shall be used as the row heading when a grace period
applies to credit extended by the use of the checks. When disclosing
the fact that no grace period exists for credit extended by use of the
checks, the phrase ``Paying Interest'' shall be used as the row
heading.
(ii) Accuracy. The disclosures in paragraph (b)(3)(i) of this
section must be accurate as of the time the disclosures are mailed or
delivered. A variable annual percentage rate is accurate if it was in
effect within 60 days of when the disclosures are mailed or delivered.
(c)* * *
(2) Rules affecting open-end (not home-secured) plans. (i) Changes
where written advance notice is required. For plans other than home-
equity plans subject to the requirements of Sec. 226.5b, except as
provided in paragraphs (c)(2)(iii) and (c)(2)(v) of this section, when
a significant change in account terms as described in paragraph
(c)(2)(ii) of this section is made to a term required to be disclosed
under Sec. 226.6(b)(3), (b)(4) or (b)(5) is changed or the required
minimum periodic payment is increased, a creditor must provide a
written notice of the change at least 45 days prior to the effective
date of the change to each consumer who may be affected. The 45-day
timing requirement does not apply if the consumer has agreed to a
particular change; the notice shall be given, however, before the
effective date of the change. Increases in the rate applicable to a
consumer's account due to delinquency, default or as a penalty
described in paragraph (g) of this section that are not due to a change
in the contractual terms of the consumer's account must be disclosed
pursuant to paragraph (g) of this section instead of paragraph (c)(2)
of this section.
(ii) Significant changes in account terms. For purposes of this
section, a ``significant change in account terms'' means a change to a
term required to be disclosed under Sec. 226.6(b)(1) and (b)(2) or an
increase in the required minimum periodic payment.
(iii) Charges not covered by Sec. 226.6(b)(1) and (b)(2). Except
as provided in paragraph (c)(2)(vi) of this section, if a creditor
increases any component of a charge, or introduces a new charge,
required to be disclosed under Sec. 226.6(b)(3) that is not a
significant change in account terms as described in paragraph
(c)(2)(ii) of this section, a creditor may either, at its option:
(A) Comply with the requirements of paragraph (c)(2)(i) of this
section; or
(B) Provide notice of the amount of the charge before the consumer
agrees to or becomes obligated to pay the charge, at a time and in a
manner that a consumer would be likely to notice the disclosure of the
charge. The notice may be provided orally or in writing.
(iv) Disclosure requirements. (A) Significant changes in account
terms. If a creditor makes a significant change in account terms as
described in paragraph (c)(2)(ii) of this section, the notice provided
pursuant to paragraph (c)(2)(i) of this section must provide the
following information:
(1) A summary of the changes made to terms required by Sec.
226.6(b)(1) and (b)(2) and a summary of any increase in the required
minimum periodic payment;
(2) A statement that changes are being made to the account;
(3) For accounts other than credit card accounts under an open-end
(not home-secured) consumer credit plan subject to Sec.
226.9(c)(2)(iv)(B), a statement indicating the consumer has the right
to opt out of these changes, if applicable, and a reference to
additional information describing the opt-out right provided in the
notice, if applicable;
(4) The date the changes will become effective;
(5) If applicable, a statement that the consumer may find
additional information about the summarized changes, and other changes
to the account, in the notice;
(6) If the creditor is changing a rate on the account, other than a
penalty rate, a statement that if a penalty rate currently applies to
the consumer's account, the new rate described in the notice will not
apply to the consumer's account until the consumer's account balances
are no longer subject to the penalty rate; and
(7) If the change in terms being disclosed is an increase in an
annual percentage rate, the balances to which the increased rate will
be applied. If applicable, a statement identifying the balances to
which the current rate will continue to apply as of the effective date
of the change in terms.
(B) Credit card accounts under an open-end (not home-secured)
consumer credit plan. In addition to the information in paragraph
(c)(2)(iv)(A) of this section, if a card issuer makes a significant
change in account terms on a credit card account under an open-end (not
home-secured) consumer credit
[[Page 54217]]
plan, the creditor must generally provide the following information on
the notice provided pursuant to paragraph (c)(2)(i) of this section.
This information is not required to be provided in the case of an
increase in the required minimum periodic payment, an increase in an
annual percentage rate applicable to a consumer's account, a change in
the balance computation method applicable to consumer's account
necessary to comply with Sec. 226.54, or when the change results from
the creditor not receiving the consumer's required minimum periodic
payment within 60 days after the due date for that payment:
(1) A statement that the consumer has the right to reject the
change or changes prior to the effective date of the changes, unless
the consumer fails to make a required minimum periodic payment within
60 days after the due date for that payment;
(2) Instructions for rejecting the change or changes, and a toll-
free telephone number that the consumer may use to notify the creditor
of the rejection; and
(3) If applicable, a statement that if the consumer rejects the
change or changes, the consumer's ability to use the account for
further advances will be terminated or suspended.
(C) Format requirements. (1) Tabular format. The summary of changes
described in paragraph (c)(2)(iv)(A)(1) of this section must be in a
tabular format (except for a summary of any increase in the required
minimum periodic payment), with headings and format substantially
similar to any of the account-opening tables found in G-17 in appendix
G to this part. The table must disclose the changed term and
information relevant to the change, if that relevant information is
required by Sec. 226.6(b)(1) and (b)(2). The new terms shall be
described in the same level of detail as required when disclosing the
terms under Sec. 226.6(b)(2).
(2) Notice included with periodic statement. If a notice required
by paragraph (c)(2)(i) of this section is included on or with a
periodic statement, the information described in paragraph
(c)(2)(iv)(A)(1) of this section must be disclosed on the front of any
page of the statement. The summary of changes described in paragraph
(c)(1)(iv)(A)(1) of this section must immediately follow the
information described in paragraph (c)(2)(iv)(A)(2) through
(c)(2)(iv)(A)(7) and, if applicable, paragraph (c)(2)(iv)(B) of this
section, and be substantially similar to the format shown in Sample G-
20 or G-21 in appendix G to this part.
(3) Notice provided separately from periodic statement. If a notice
required by paragraph (c)(2)(i) of this section is not included on or
with a periodic statement, the information described in paragraph
(c)(2)(iv)(A)(1) of this section must, at the creditor's option, be
disclosed on the front of the first page of the notice or segregated on
a separate page from other information given with the notice. The
summary of changes required to be in a table pursuant to paragraph
(c)(2)(iv)(A)(1) of this section may be on more than one page, and may
use both the front and reverse sides, so long as the table begins on
the front of the first page of the notice and there is a reference on
the first page indicating that the table continues on the following
page. The summary of changes described in paragraph (c)(2)(iv)(A)(1) of
this section must immediately follow the information described in
paragraph (c)(1)(iv)(A)(2) through (c)(1)(iv)(A)(7) and, if applicable,
paragraph (c)(2)(iv)(B), of this section, substantially similar to the
format shown in Sample G-20 or G-21 in appendix G to this part.
(v) Notice not required. For open-end plans (other than home equity
plans subject to the requirements of Sec. 226.5b) a creditor is not
required to provide notice under this section:
(A) When the change involves charges for documentary evidence; a
reduction of any component of a finance or other charge; suspension of
future credit privileges (except as provided in paragraph (c)(2)(vi) of
this section) or termination of an account or plan; when the change
results from an agreement involving a court proceeding; when the change
is an extension of the grace period; or if the change is applicable
only to a check or checks that access a credit card account and the
changed terms are disclosed on or with the checks in accordance with
Sec. 226.9(b)(3);
(B) When the change is an increase in an annual percentage rate
upon the expiration of a specified period of time, provided that:
(1) Prior to commencement of that period, the creditor disclosed in
writing to the consumer, in a clear and conspicuous manner, the length
of the period and the annual percentage rate that would apply after
expiration of the period;
(2) The disclosure of the length of the period and the annual
percentage rate that would apply after expiration of the period are set
forth in close proximity and in equal prominence to the disclosure of
the rate that applies during the specified period of time; and
(3) The annual percentage rate that applies after that period does
not exceed the rate disclosed pursuant to paragraph (c)(2)(v)(B)(1) of
this paragraph or, if the rate disclosed pursuant to paragraph
(c)(2)(v)(B)(1) of this section was a variable rate, the rate following
any such increase is a variable rate determined by the same formula
(index and margin) that was used to calculate the variable rate
disclosed pursuant to paragraph (c)(2)(v)(B)(1);
(C) When the change is an increase in a variable annual percentage
rate in accordance with a credit card or other account agreement that
provides for changes in the rate according to operation of an index
that is not under the control of the creditor and is available to the
general public; or
(D) When the change is an increase in an annual percentage rate or
a fee or charge required to be disclosed under Sec. 226.6(b)(2)(ii),
(b)(2)(iii), or (b)(2)(xii) due to the completion of a workout or
temporary hardship arrangement by the consumer or the consumer's
failure to comply with the terms of such an arrangement, provided that:
(1) The annual percentage rate or fee or charge applicable to a
category of transactions following any such increase does not exceed
the rate or fee or charge that applied to that category of transactions
prior to commencement of the arrangement or, if the rate that applied
to a category of transactions prior to the commencement of the workout
or temporary hardship arrangement was a variable rate, the rate
following any such increase is a variable rate determined by the same
formula (index and margin) that applied to the category of transactions
prior to commencement of the workout or temporary hardship arrangement;
and
(2) The creditor has provided the consumer, prior to the
commencement of such arrangement, with a clear and conspicuous written
disclosure of the terms of the arrangement (including any increases due
to such completion or failure).
(vi) Reduction of the credit limit. For open-end plans that are not
subject to the requirements of Sec. 226.5b, if a creditor decreases
the credit limit on an account, advance notice of the decrease must be
provided before an over-the-limit fee or a penalty rate can be imposed
solely as a result of the consumer exceeding the newly decreased credit
limit. Notice shall be provided in writing or orally at least 45 days
prior to imposing the over-the-limit fee or penalty rate and shall
state that the credit limit on the account has been or will be
decreased.
* * * * *
(e) Disclosures upon renewal of credit or charge card. (1) Notice
prior to
[[Page 54218]]
renewal. A card issuer that imposes any annual or other periodic fee to
renew a credit or charge card account of the type subject to Sec.
226.5a, including any fee based on account activity or inactivity or
any card issuer that has changed or amended any term of a cardholder's
account required to be disclosed under Sec. 226.6(b)(1) and (b)(2)
that has not previously been disclosed to the consumer, shall mail or
deliver written notice of the renewal to the cardholder. If the card
issuer imposes any annual or other periodic fee for renewal, the notice
shall be provided at least 30 days or one billing cycle, whichever is
less, before the mailing or the delivery of the periodic statement on
which any renewal fee is initially charged to the account. If the card
issuer has changed or amended any term required to be disclosed under
Sec. 226.(b)(1) and (b)(2) and such changed or amended term has not
previously been disclosed to the consumer, the notice shall be provided
at least 30 days prior to the scheduled renewal date of the consumer's
credit or charge card. The notice shall contain the following
information:
(i) The disclosures contained in Sec. 226.5a(b)(1) through (b)(7)
that would apply if the account were renewed; \20a\ and
---------------------------------------------------------------------------
\20a\ [Reserved]
---------------------------------------------------------------------------
(ii) How and when the cardholder may terminate credit availability
under the account to avoid paying the renewal fee, if applicable.
(2) Notification on periodic statements. The disclosures required
by this paragraph may be made on or with a periodic statement. If any
of the disclosures are provided on the back of a periodic statement,
the card issuer shall include a reference to those disclosures on the
front of the statement.
(g) Increase in rates due to delinquency or default or as a
penalty. (1) Increases subject to this section. For plans other than
home-equity plans subject to the requirements of Sec. 226.5b, except
as provided in paragraph (g)(4) of this section, a creditor must
provide a written notice to each consumer who may be affected when:
(i) A rate is increased due to the consumer's delinquency or
default; or
(ii) A rate is increased as a penalty for one or more events
specified in the account agreement, such as making a late payment or
obtaining an extension of credit that exceeds the credit limit.
(2) Timing of written notice. Whenever any notice is required to be
given pursuant to paragraph (g)(1) of this section, the creditor shall
provide written notice of the increase in rates at least 45 days prior
to the effective date of the increase. The notice must be provided
after the occurrence of the events described in paragraphs (g)(1)(i)
and (g)(1)(ii) of this section that trigger the imposition of the rate
increase.
(3)(i) Disclosure requirements for rate increases. (A) General. If
a creditor is increasing the rate due to delinquency or default or as a
penalty, the creditor must provide the following information on the
notice sent pursuant to paragraph (g)(1) of this section:
(1) A statement that the delinquency or default rate or penalty
rate, as applicable, has been triggered;
(2) The date on which the delinquency or default rate or penalty
rate will apply;
(3) The circumstances under which the delinquency or default rate
or penalty rate, as applicable, will cease to apply to the consumer's
account, or that the delinquency or default rate or penalty rate will
remain in effect for a potentially indefinite time period;
(4) A statement indicating to which balances the delinquency or
default rate or penalty rate will be applied; and
(5) If applicable, a description of any balances to which the
current rate will continue to apply as of the effective date of the
rate increase, unless a consumer fails to make a minimum periodic
payment within 60 days from the due date for that payment.
(B) Rate increases resulting from failure to make minimum periodic
payment within 60 days from due date. For a credit card account under
an open-end (not home-secured) consumer credit plan, if the rate
increase required to be disclosed pursuant to paragraph (g)(1) of this
section is an increase pursuant to Sec. 226.55(b)(4) based on the
consumer's failure to make a minimum periodic payment within 60 days
from the due date for that payment, the notice provided pursuant to
paragraph (g)(1) of this section must also contain the following
information:
(1) A statement of the reason for the increase; and
(2) That the increase will cease to apply if the creditor receives
six consecutive required minimum periodic payments on or before the
payment due date, beginning with the first payment due following the
effective date of the increase.
(ii) Format requirements. (A) If a notice required by paragraph
(g)(1) of this section is included on or with a periodic statement, the
information described in paragraph (g)(3)(i) of this section must be in
the form of a table and provided on the front of any page of the
periodic statement, above the notice described in paragraph (c)(2)(iv)
of this section if that notice is provided on the same statement.
(B) If a notice required by paragraph (g)(1) of this section is not
included on or with a periodic statement, the information described in
paragraph (g)(3)(i) of this section must be disclosed on the front of
the first page of the notice. Only information related to the increase
in the rate to a penalty rate may be included with the notice, except
that this notice may be combined with a notice described in paragraph
(c)(2)(iv) or (g)(4) of this section.
(4) Exception for decrease in credit limit. A creditor is not
required to provide, prior to increasing the rate for obtaining an
extension of credit that exceeds the credit limit, a notice pursuant to
paragraph (g)(1) of this section, provided that:
(i) The creditor provides at least 45 days in advance of imposing
the penalty rate a notice, in writing, that includes:
(A) A statement that the credit limit on the account has been or
will be decreased.
(B) A statement indicating the date on which the penalty rate will
apply, if the outstanding balance exceeds the credit limit as of that
date;
(C) A statement that the penalty rate will not be imposed on the
date specified in paragraph (g)(4)(i)(B) of this section, if the
outstanding balance does not exceed the credit limit as of that date;
(D) The circumstances under which the penalty rate, if applied,
will cease to apply to the account, or that the penalty rate, if
applied, will remain in effect for a potentially indefinite time
period;
(E) A statement indicating to which balances the penalty rate may
be applied; and
(F) If applicable, a description of any balances to which the
current rate will continue to apply as of the effective date of the
rate increase, unless the consumer fails to make a minimum periodic
payment within 60 days from the due date for that payment; and
(ii) The creditor does not increase the rate applicable to the
consumer's account to the penalty rate if the outstanding balance does
not exceed the credit limit on the date set forth in the notice and
described in paragraph 9(g)(4)(i)(B) of this section.
(iii) (A) If a notice provided pursuant to paragraph (g)(4)(i) of
this section is included on or with a periodic statement, the
information described in paragraph (g)(4)(i) of this section must be in
the form of a table and provided on the front of any page of the
periodic statement; or
(B) If a notice required by paragraph (g)(4)(i) of this section is
not included
[[Page 54219]]
on or with a periodic statement, the information described in paragraph
(g)(4)(i) of this section must be disclosed on the front of the first
page of the notice. Only information related to the reduction in credit
limit may be included with the notice, except that this notice may be
combined with a notice described in paragraph (c)(2)(iv) or (g)(1) of
this section.
(h) Consumer rejection of certain significant changes in terms. (1)
Right to reject. If paragraph (c)(2)(iv)(B) of this section requires
disclosure of the consumer's right to reject a significant change to an
account term, the consumer may reject that change by notifying the
creditor of the rejection before the effective date of the change.
(2) Effect of rejection. If a creditor is notified of a rejection
of a significant change to an account term as provided in paragraph
(h)(1) of this section, the creditor must not:
(i) Apply the change to the account;
(ii) Impose a fee or charge or treat the account as in default
solely as a result of the rejection; or
(iii) Require repayment of the balance on the account using a
method that is less beneficial to the consumer than one of the methods
listed in Sec. 226.55(c)(2).
(3) Exception. Section 226.9(h) does not apply when the creditor
has not received the consumer's required minimum periodic payment
within 60 days after the due date for that payment.
12. Section 226.10 is revised to read as follows:
Sec. 226.10 Payments.
(a) General rule. A creditor shall credit a payment to the
consumer's account as of the date of receipt, except when a delay in
crediting does not result in a finance or other charge or except as
provided in paragraph (b) of this section.
(b) Specific requirements for payments. (1) General rule. A
creditor may specify reasonable requirements for payments that enable
most consumers to make conforming payments.
(2) Examples of reasonable requirements for payments. Reasonable
requirements for making payment may include:
(i) Requiring that payments be accompanied by the account number or
payment stub;
(ii) Setting reasonable cut-off times for payments to be received
by mail, by electronic means, by telephone, and in person (except as
provided in paragraph (b)(3) of this section), provided that such cut-
off times shall be no earlier than 5 p.m. on the payment due date at
the location specified by the creditor for the receipt of such
payments;
(iii) Specifying that only checks or money orders should be sent by
mail;
(iv) Specifying that payment is to be made in U.S. dollars; or
(v) Specifying one particular address for receiving payments, such
as a post office box.
(3) In-person payments on credit card accounts. (i) General. A card
issuer that is a financial institution shall not impose a cut-off time
earlier than the close of business for payments on a credit card
account under an open-end (not home-secured) consumer credit plan made
in person at any branch or office of the card issuer at which such
payments are accepted. Any such payment made in person at a branch or
office of the card issuer earlier than the close of business of that
branch or office shall be considered received on the date on which the
consumer makes the payment.
(ii) Financial institution. For purposes of paragraph (b)(3) of
this section, ``financial institution'' shall mean a ``depository
institution'' as defined in 12 U.S.C. 1813(c).
(4) Nonconforming payments. If a creditor specifies, on or with the
periodic statement, requirements for the consumer to follow in making
payments, but accepts a payment that does not conform to the
requirements, the creditor shall credit the payment within five days of
receipt.
(c) Adjustment of account. If a creditor fails to credit a payment,
as required by paragraphs (a) or (b) of this section, in time to avoid
the imposition of finance or other charges, the creditor shall adjust
the consumer's account so that the charges imposed are credited to the
consumer's account during the next billing cycle.
(d) Crediting of payments when creditor does not receive or accept
payments on due date. If the due date for payments is a day on which
the creditor does not receive or accept payments by mail, the creditor
may generally not treat a payment received by any method the next
business day as late for any purpose. However, if the creditor accepts
or receives payments made on the due date by a method other than mail,
such as electronic or telephone payments, the creditor is not required
to treat a payment made by that method on the next business day as
timely, even if it does not accept mailed payments on the due date.
(e) Limitations on fees related to method of payment. For credit
card accounts under an open-end (not home-secured) consumer credit
plan, a creditor may not impose a separate fee to allow consumers to
make a payment by any method, such as mail, electronic, or telephone
payments, unless such payment method involves an expedited service by a
customer service representative of the creditor.
(f) Changes by card issuer. If a card issuer makes a material
change in the address for receiving payment or procedures for handling
cardholder payments, and such change causes a material delay in the
crediting of a payment to the consumer's account during the 60-day
period following the date on which such change took effect, the card
issuer may not impose any late fee or finance charge for a late payment
on the credit card account.
13. Section 226.11 is revised to read as follows:
Sec. 226.11 Treatment of credit balances; account termination.
(a) Credit balances. When a credit balance in excess of $1 is
created on a credit account (through transmittal of funds to a creditor
in excess of the total balance due on an account, through rebates of
unearned finance charges or insurance premiums, or through amounts
otherwise owed to or held for the benefit of the consumer), the
creditor shall--
(1) Credit the amount of the credit balance to the consumer's
account;
(2) Refund any part of the remaining credit balance within seven
business days from receipt of a written request from the consumer;
(3) Make a good faith effort to refund to the consumer by cash,
check, or money order, or credit to a deposit account of the consumer,
any part of the credit balance remaining in the account for more than
six months. No further action is required if the consumer's current
location is not known to the creditor and cannot be traced through the
consumer's last known address or telephone number.
(b) Account termination. (1) A creditor shall not terminate an
account prior to its expiration date solely because the consumer does
not incur a finance charge.
(2) Nothing in paragraph (b)(1) of this section prohibits a
creditor from terminating an account that is inactive for three or more
consecutive months. An account is inactive for purposes of this
paragraph if no credit has been extended (such as by purchase, cash
advance or balance transfer) and if the account has no outstanding
balance.
(c) Timely settlement of estate debts. (1) General rule. For credit
card accounts under an open-end (not home-secured) consumer credit
plan, creditors must adopt reasonable procedures designed to ensure
that an administrator or executor of an estate of a deceased
[[Page 54220]]
accountholder can determine the amount of and pay any balance on the
account in a timely manner.
(2) Fees and charges. (i) Limitation on fees and charges. Except as
provided in paragraph (c)(2)(ii) of this section, upon receiving a
request by the administrator or executor of an estate for the amount of
the balance on a deceased consumer's account, a creditor may not impose
fees or charges, such as a late fee or finance charge, on the account
on or after the date of receiving the request.
(ii) Application to joint accounts. For joint accounts, a creditor
may impose fees and charges on an account of a deceased consumer if a
joint accountholder remains on the account.
(3) Timely statement of balance. (i) Requirement. Upon request by
the administrator or executor of an estate, a creditor must provide the
administrator or executor of an estate with the amount of the balance
on a deceased consumer's account in a timely manner.
(ii) Safe harbor. For the purposes of paragraph (c)(3)(i) of this
section, providing the amount of the balance on the account within 30
days of receiving the request is deemed to be timely.
14. Section 226.12 is revised to read as follows:
Sec. 226.12 Special credit card provisions.
(a) Issuance of credit cards. Regardless of the purpose for which a
credit card is to be used, including business, commercial, or
agricultural use, no credit card shall be issued to any person except--
(1) In response to an oral or written request or application for
the card; or
(2) As a renewal of, or substitute for, an accepted credit
card.\21\
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\21\ [Reserved]
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(b) Liability of cardholder for unauthorized use. (1)(i) Definition
of unauthorized use. For purposes of this section, the term
``unauthorized use'' means the use of a credit card by a person, other
than the cardholder, who does not have actual, implied, or apparent
authority for such use, and from which the cardholder receives no
benefit.
(ii) Limitation on amount. The liability of a cardholder for
unauthorized use \22\ of a credit card shall not exceed the lesser of
$50 or the amount of money, property, labor, or services obtained by
the unauthorized use before notification to the card issuer under
paragraph (b)(3) of this section.
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\22\ [Reserved]
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(2) Conditions of liability. A cardholder shall be liable for
unauthorized use of a credit card only if:
(i) The credit card is an accepted credit card;
(ii) The card issuer has provided adequate notice \23\ of the
cardholder's maximum potential liability and of means by which the card
issuer may be notified of loss or theft of the card. The notice shall
state that the cardholder's liability shall not exceed $50 (or any
lesser amount) and that the cardholder may give oral or written
notification, and shall describe a means of notification (for example,
a telephone number, an address, or both); and
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\23\ [Reserved]
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(iii) The card issuer has provided a means to identify the
cardholder on the account or the authorized user of the card.
(3) Notification to card issuer. Notification to a card issuer is
given when steps have been taken as may be reasonably required in the
ordinary course of business to provide the card issuer with the
pertinent information about the loss, theft, or possible unauthorized
use of a credit card, regardless of whether any particular officer,
employee, or agent of the card issuer does, in fact, receive the
information. Notification may be given, at the option of the person
giving it, in person, by telephone, or in writing. Notification in
writing is considered given at the time of receipt or, whether or not
received, at the expiration of the time ordinarily required for
transmission, whichever is earlier.
(4) Effect of other applicable law or agreement. If State law or an
agreement between a cardholder and the card issuer imposes lesser
liability than that provided in this paragraph, the lesser liability
shall govern.
(5) Business use of credit cards. If 10 or more credit cards are
issued by one card issuer for use by the employees of an organization,
this section does not prohibit the card issuer and the organization
from agreeing to liability for unauthorized use without regard to this
section. However, liability for unauthorized use may be imposed on an
employee of the organization, by either the card issuer or the
organization, only in accordance with this section.
(c) Right of cardholder to assert claims or defenses against card
issuer.\24\ (1) General rule. When a person who honors a credit card
fails to resolve satisfactorily a dispute as to property or services
purchased with the credit card in a consumer credit transaction, the
cardholder may assert against the card issuer all claims (other than
tort claims) and defenses arising out of the transaction and relating
to the failure to resolve the dispute. The cardholder may withhold
payment up to the amount of credit outstanding for the property or
services that gave rise to the dispute and any finance or other charges
imposed on that amount.\25\
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\24\ [Reserved]
\25\ [Reserved]
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(2) Adverse credit reports prohibited. If, in accordance with
paragraph (c)(1) of this section, the cardholder withholds payment of
the amount of credit outstanding for the disputed transaction, the card
issuer shall not report that amount as delinquent until the dispute is
settled or judgment is rendered.
(3) Limitations. (i) General. The rights stated in paragraphs
(c)(1) and (c)(2) of this section apply only if:
(A) The cardholder has made a good faith attempt to resolve the
dispute with the person honoring the credit card; and
(B) The amount of credit extended to obtain the property or
services that result in the assertion of the claim or defense by the
cardholder exceeds $50, and the disputed transaction occurred in the
same State as the cardholder's current designated address or, if not
within the same State, within 100 miles from that address.\26\
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\26\ [Reserved]
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(ii) Exclusion. The limitations stated in paragraph (c)(3)(i)(B) of
this section shall not apply when the person honoring the credit card:
(A) Is the same person as the card issuer;
(B) Is controlled by the card issuer directly or indirectly;
(C) Is under the direct or indirect control of a third person that
also directly or indirectly controls the card issuer;
(D) Controls the card issuer directly or indirectly;
(E) Is a franchised dealer in the card issuer's products or
services; or
(F) Has obtained the order for the disputed transaction through a
mail solicitation made or participated in by the card issuer.
(d) Offsets by card issuer prohibited. (1) A card issuer may not
take any action, either before or after termination of credit card
privileges, to offset a cardholder's indebtedness arising from a
consumer credit transaction under the relevant credit card plan against
funds of the cardholder held on deposit with the card issuer.
(2) This paragraph does not alter or affect the right of a card
issuer acting under State or Federal law to do any of the following
with regard to funds of a cardholder held on deposit with the card
issuer if the same procedure is constitutionally available to creditors
[[Page 54221]]
generally: obtain or enforce a consensual security interest in the
funds; attach or otherwise levy upon the funds; or obtain or enforce a
court order relating to the funds.
(3) This paragraph does not prohibit a plan, if authorized in
writing by the cardholder, under which the card issuer may periodically
deduct all or part of the cardholder's credit card debt from a deposit
account held with the card issuer (subject to the limitations in Sec.
226.13(d)(1)).
(e) Prompt notification of returns and crediting of refunds. (1)
When a creditor other than the card issuer accepts the return of
property or forgives a debt for services that is to be reflected as a
credit to the consumer's credit card account, that creditor shall,
within 7 business days from accepting the return or forgiving the debt,
transmit a credit statement to the card issuer through the card
issuer's normal channels for credit statements.
(2) The card issuer shall, within 3 business days from receipt of a
credit statement, credit the consumer's account with the amount of the
refund.
(3) If a creditor other than a card issuer routinely gives cash
refunds to consumers paying in cash, the creditor shall also give
credit or cash refunds to consumers using credit cards, unless it
discloses at the time the transaction is consummated that credit or
cash refunds for returns are not given. This section does not require
refunds for returns nor does it prohibit refunds in kind.
(f) Discounts; tie-in arrangements. No card issuer may, by contract
or otherwise:
(1) Prohibit any person who honors a credit card from offering a
discount to a consumer to induce the consumer to pay by cash, check, or
similar means rather than by use of a credit card or its underlying
account for the purchase of property or services; or
(2) Require any person who honors the card issuer's credit card to
open or maintain any account or obtain any other service not essential
to the operation of the credit card plan from the card issuer or any
other person, as a condition of participation in a credit card plan. If
maintenance of an account for clearing purposes is determined to be
essential to the operation of the credit card plan, it may be required
only if no service charges or minimum balance requirements are imposed.
(g) Relation to Electronic Fund Transfer Act and Regulation E. For
guidance on whether Regulation Z (12 CFR part 226) or Regulation E (12
CFR part 205) applies in instances involving both credit and electronic
fund transfer aspects, refer to Regulation E, 12 CFR 205.12(a)
regarding issuance and liability for unauthorized use. On matters other
than issuance and liability, this section applies to the credit aspects
of combined credit/electronic fund transfer transactions, as
applicable.
15. Section 226.13 is revised to read as follows:
Sec. 226.13 Billing error resolution.\27\
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\27\ [Reserved]
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(a) Definition of billing error. For purposes of this section, the
term billing error means:
(1) A reflection on or with a periodic statement of an extension of
credit that is not made to the consumer or to a person who has actual,
implied, or apparent authority to use the consumer's credit card or
open-end credit plan.
(2) A reflection on or with a periodic statement of an extension of
credit that is not identified in accordance with the requirements of
Sec. Sec. 226.7(a)(2) or (b)(2), as applicable, and 226.8.
(3) A reflection on or with a periodic statement of an extension of
credit for property or services not accepted by the consumer or the
consumer's designee, or not delivered to the consumer or the consumer's
designee as agreed.
(4) A reflection on a periodic statement of the creditor's failure
to credit properly a payment or other credit issued to the consumer's
account.
(5) A reflection on a periodic statement of a computational or
similar error of an accounting nature that is made by the creditor.
(6) A reflection on a periodic statement of an extension of credit
for which the consumer requests additional clarification, including
documentary evidence.
(7) The creditor's failure to mail or deliver a periodic statement
to the consumer's last known address if that address was received by
the creditor, in writing, at least 20 days before the end of the
billing cycle for which the statement was required.
(b) Billing error notice.\28\ A billing error notice is a written
notice \29\ from a consumer that:
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\28\ [Reserved]
\29\ [Reserved]
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(1) Is received by a creditor at the address disclosed under Sec.
226.7(a)(9) or (b)(9), as applicable, no later than 60 days after the
creditor transmitted the first periodic statement that reflects the
alleged billing error;
(2) Enables the creditor to identify the consumer's name and
account number; and
(3) To the extent possible, indicates the consumer's belief and the
reasons for the belief that a billing error exists, and the type, date,
and amount of the error.
(c) Time for resolution; general procedures.
(1) The creditor shall mail or deliver written acknowledgment to
the consumer within 30 days of receiving a billing error notice, unless
the creditor has complied with the appropriate resolution procedures of
paragraphs (e) and (f) of this section, as applicable, within the 30-
day period; and
(2) The creditor shall comply with the appropriate resolution
procedures of paragraphs (e) and (f) of this section, as applicable,
within 2 complete billing cycles (but in no event later than 90 days)
after receiving a billing error notice.
(d) Rules pending resolution. Until a billing error is resolved
under paragraph (e) or (f) of this section, the following rules apply:
(1) Consumer's right to withhold disputed amount; collection action
prohibited. The consumer need not pay (and the creditor may not try to
collect) any portion of any required payment that the consumer believes
is related to the disputed amount (including related finance or other
charges).\30\ If the cardholder has enrolled in an automatic payment
plan offered by the card issuer and has agreed to pay the credit card
indebtedness by periodic deductions from the cardholder's deposit
account, the card issuer shall not deduct any part of the disputed
amount or related finance or other charges if a billing error notice is
received any time up to 3 business days before the scheduled payment
date.
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\30\ [Reserved]
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(2) Adverse credit reports prohibited. The creditor or its agent
shall not (directly or indirectly) make or threaten to make an adverse
report to any person about the consumer's credit standing, or report
that an amount or account is delinquent, because the consumer failed to
pay the disputed amount or related finance or other charges.
(3) Acceleration of debt and restriction of account prohibited. A
creditor shall not accelerate any part of the consumer's indebtedness
or restrict or close a consumer's account solely because the consumer
has exercised in good faith rights provided by this section. A creditor
may be subject to the forfeiture penalty under section 161(e) of the
act for failure to comply with any of the requirements of this section.
(4) Permitted creditor actions. A creditor is not prohibited from
taking
[[Page 54222]]
action to collect any undisputed portion of the item or bill; from
deducting any disputed amount and related finance or other charges from
the consumer's credit limit on the account; or from reflecting a
disputed amount and related finance or other charges on a periodic
statement, provided that the creditor indicates on or with the periodic
statement that payment of any disputed amount and related finance or
other charges is not required pending the creditor's compliance with
this section.
(e) Procedures if billing error occurred as asserted. If a creditor
determines that a billing error occurred as asserted, it shall within
the time limits in paragraph (c)(2) of this section:
(1) Correct the billing error and credit the consumer's account
with any disputed amount and related finance or other charges, as
applicable; and
(2) Mail or deliver a correction notice to the consumer.
(f) Procedures if different billing error or no billing error
occurred. If, after conducting a reasonable investigation,\31\ a
creditor determines that no billing error occurred or that a different
billing error occurred from that asserted, the creditor shall within
the time limits in paragraph (c)(2) of this section:
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\31\ [Reserved]
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(1) Mail or deliver to the consumer an explanation that sets forth
the reasons for the creditor's belief that the billing error alleged by
the consumer is incorrect in whole or in part;
(2) Furnish copies of documentary evidence of the consumer's
indebtedness, if the consumer so requests; and
(3) If a different billing error occurred, correct the billing
error and credit the consumer's account with any disputed amount and
related finance or other charges, as applicable.
(g) Creditor's rights and duties after resolution. If a creditor,
after complying with all of the requirements of this section,
determines that a consumer owes all or part of the disputed amount and
related finance or other charges, the creditor:
(1) Shall promptly notify the consumer in writing of the time when
payment is due and the portion of the disputed amount and related
finance or other charges that the consumer still owes;
(2) Shall allow any time period disclosed under Sec. 226.6(a)(1)
or (b)(2)(v), as applicable, and Sec. 226.7(a)(8) or (b)(8), as
applicable, during which the consumer can pay the amount due under
paragraph (g)(1) of this section without incurring additional finance
or other charges;
(3) May report an account or amount as delinquent because the
amount due under paragraph (g)(1) of this section remains unpaid after
the creditor has allowed any time period disclosed under Sec.
226.6(a)(1) or (b)(2)(v), as applicable, and Sec. 226.7(a)(8) or
(b)(8), as applicable or 10 days (whichever is longer) during which the
consumer can pay the amount; but
(4) May not report that an amount or account is delinquent because
the amount due under paragraph (g)(1) of the section remains unpaid, if
the creditor receives (within the time allowed for payment in paragraph
(g)(3) of this section) further written notice from the consumer that
any portion of the billing error is still in dispute, unless the
creditor also:
(i) Promptly reports that the amount or account is in dispute;
(ii) Mails or delivers to the consumer (at the same time the report
is made) a written notice of the name and address of each person to
whom the creditor makes a report; and
(iii) Promptly reports any subsequent resolution of the reported
delinquency to all persons to whom the creditor has made a report.
(h) Reassertion of billing error. A creditor that has fully
complied with the requirements of this section has no further
responsibilities under this section (other than as provided in
paragraph (g)(4) of this section) if a consumer reasserts substantially
the same billing error.
(i) Relation to Electronic Fund Transfer Act and Regulation E. If
an extension of credit is incident to an electronic fund transfer,
under an agreement between a consumer and a financial institution to
extend credit when the consumer's account is overdrawn or to maintain a
specified minimum balance in the consumer's account, the creditor shall
comply with the requirements of Regulation E, 12 CFR 205.11 governing
error resolution rather than those of paragraphs (a), (b), (c), (e),
(f), and (h) of this section.
16. Section 226.14 is revised to read as follows:
Sec. 226.14 Determination of annual percentage rate.
(a) General rule. The annual percentage rate is a measure of the
cost of credit, expressed as a yearly rate. An annual percentage rate
shall be considered accurate if it is not more than [frac18]th of 1
percentage point above or below the annual percentage rate determined
in accordance with this section.\31a\ An error in disclosure of the
annual percentage rate or finance charge shall not, in itself, be
considered a violation of this regulation if:
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\31a\ [Reserved]
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(1) The error resulted from a corresponding error in a calculation
tool used in good faith by the creditor; and
(2) Upon discovery of the error, the creditor promptly discontinues
use of that calculation tool for disclosure purposes, and notifies the
Board in writing of the error in the calculation tool.
(b) Annual percentage rate--in general. Where one or more periodic
rates may be used to compute the finance charge, the annual percentage
rate(s) to be disclosed for purposes of Sec. Sec. 226.5a, 226.5b,
226.6, 226.7(a)(4) or (b)(4), 226.9, 226.15, 226.16, and 226.26 shall
be computed by multiplying each periodic rate by the number of periods
in a year.
(c) Optional effective annual percentage rate for periodic
statements for creditors offering open-end plans subject to the
requirements of Sec. 226.5b. A creditor offering an open-end plan
subject to the requirements of Sec. 226.5b need not disclose an
effective annual percentage rate. Such a creditor may, at its option,
disclose an effective annual percentage rate(s) pursuant to Sec.
226.7(a)(7) and compute the effective annual percentage rate as
follows:
(1) Solely periodic rates imposed. If the finance charge is
determined solely by applying one or more periodic rates, at the
creditor's option, either:
(i) By multiplying each periodic rate by the number of periods in a
year; or
(ii) By dividing the total finance charge for the billing cycle by
the sum of the balances to which the periodic rates were applied and
multiplying the quotient (expressed as a percentage) by the number of
billing cycles in a year.
(2) Minimum or fixed charge, but not transaction charge, imposed.
If the finance charge imposed during the billing cycle is or includes a
minimum, fixed, or other charge not due to the application of a
periodic rate, other than a charge with respect to any specific
transaction during the billing cycle, by dividing the total finance
charge for the billing cycle by the amount of the balance(s) to which
it is applicable \32\ and multiplying the quotient (expressed as a
percentage) by the number of billing cycles in a year.\33\ If there is
no balance to which the finance charge is applicable, an annual
percentage rate cannot be determined under this section. Where the
finance charge imposed during the billing cycle is or includes a loan
fee, points, or similar
[[Page 54223]]
charge that relates to opening, renewing, or continuing an account, the
amount of such charge shall not be included in the calculation of the
annual percentage rate.
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\32\ [Reserved]
\33\ [Reserved]
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(3) Transaction charge imposed. If the finance charge imposed
during the billing cycle is or includes a charge relating to a specific
transaction during the billing cycle (even if the total finance charge
also includes any other minimum, fixed, or other charge not due to the
application of a periodic rate), by dividing the total finance charge
imposed during the billing cycle by the total of all balances and other
amounts on which a finance charge was imposed during the billing cycle
without duplication, and multiplying the quotient (expressed as a
percentage) by the number of billing cycles in a year,\34\ except that
the annual percentage rate shall not be less than the largest rate
determined by multiplying each periodic rate imposed during the billing
cycle by the number of periods in a year.\35\ Where the finance charge
imposed during the billing cycle is or includes a loan fee, points, or
similar charge that relates to the opening, renewing, or continuing an
account, the amount of such charge shall not be included in the
calculation of the annual percentage rate. See appendix F to this part
regarding determination of the denominator of the fraction under this
paragraph.
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\34\ [Reserved]
\35\ [Reserved]
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(4) If the finance charge imposed during the billing cycle is or
includes a minimum, fixed, or other charge not due to the application
of a periodic rate and the total finance charge imposed during the
billing cycle does not exceed 50 cents for a monthly or longer billing
cycle, or the pro rata part of 50 cents for a billing cycle shorter
than monthly, at the creditor's option, by multiplying each applicable
periodic rate by the number of periods in a year, notwithstanding the
provisions of paragraphs (c)(2) and (c)(3) of this section.
(d) Calculations where daily periodic rate applied. If the
provisions of paragraph (c)(1)(ii) or (c)(2) of this section apply and
all or a portion of the finance charge is determined by the application
of one or more daily periodic rates, the annual percentage rate may be
determined either:
(1) By dividing the total finance charge by the average of the
daily balances and multiplying the quotient by the number of billing
cycles in a year; or
(2) By dividing the total finance charge by the sum of the daily
balances and multiplying the quotient by 365.
17. Section 226.16 is revised to read as follows:
Sec. 226.16 Advertising.
(a) Actually available terms. If an advertisement for credit states
specific credit terms, it shall state only those terms that actually
are or will be arranged or offered by the creditor.
(b) Advertisement of terms that require additional disclosures. (1)
Any term required to be disclosed under Sec. 226.6(b)(3) set forth
affirmatively or negatively in an advertisement for an open-end (not
home-secured) credit plan triggers additional disclosures under this
section. Any term required to be disclosed under Sec. 226.6(a)(1) or
(a)(2) set forth affirmatively or negatively in an advertisement for a
home-equity plan subject to the requirements of Sec. 226.5b triggers
additional disclosures under this section. If any of the terms that
trigger additional disclosures under this paragraph is set forth in an
advertisement, the advertisement shall also clearly and conspicuously
set forth the following: \36d\
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\36d\ [Reserved]
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(i) Any minimum, fixed, transaction, activity or similar charge
that is a finance charge under Sec. 226.4 that could be imposed.
(ii) Any periodic rate that may be applied expressed as an annual
percentage rate as determined under Sec. 226.14(b). If the plan
provides for a variable periodic rate, that fact shall be disclosed.
(iii) Any membership or participation fee that could be imposed.
(2) If an advertisement for credit to finance the purchase of goods
or services specified in the advertisement states a periodic payment
amount, the advertisement shall also state the total of payments and
the time period to repay the obligation, assuming that the consumer
pays only the periodic payment amount advertised. The disclosure of the
total of payments and the time period to repay the obligation must be
equally prominent to the statement of the periodic payment amount.
(c) Catalogs or other multiple-page advertisements; electronic
advertisements. (1) If a catalog or other multiple-page advertisement,
or an electronic advertisement (such as an advertisement appearing on
an Internet Web site), gives information in a table or schedule in
sufficient detail to permit determination of the disclosures required
by paragraph (b) of this section, it shall be considered a single
advertisement if:
(i) The table or schedule is clearly and conspicuously set forth;
and
(ii) Any statement of terms set forth in Sec. 226.6 appearing
anywhere else in the catalog or advertisement clearly refers to the
page or location where the table or schedule begins.
(2) A catalog or other multiple-page advertisement or an electronic
advertisement (such as an advertisement appearing on an Internet Web
site) complies with this paragraph if the table or schedule of terms
includes all appropriate disclosures for a representative scale of
amounts up to the level of the more commonly sold higher-priced
property or services offered.
(d) Additional requirements for home-equity plans. (1)
Advertisement of terms that require additional disclosures. If any of
the terms required to be disclosed under Sec. 226.6(a)(1) or (a)(2) or
the payment terms of the plan are set forth, affirmatively or
negatively, in an advertisement for a home-equity plan subject to the
requirements of Sec. 226.5b, the advertisement also shall clearly and
conspicuously set forth the following:
(i) Any loan fee that is a percentage of the credit limit under the
plan and an estimate of any other fees imposed for opening the plan,
stated as a single dollar amount or a reasonable range.
(ii) Any periodic rate used to compute the finance charge,
expressed as an annual percentage rate as determined under Sec.
226.14(b).
(iii) The maximum annual percentage rate that may be imposed in a
variable-rate plan.
(2) Discounted and premium rates. If an advertisement states an
initial annual percentage rate that is not based on the index and
margin used to make later rate adjustments in a variable-rate plan, the
advertisement also shall state with equal prominence and in close
proximity to the initial rate:
(i) The period of time such initial rate will be in effect; and
(ii) A reasonably current annual percentage rate that would have
been in effect using the index and margin.
(3) Balloon payment. If an advertisement contains a statement of
any minimum periodic payment and a balloon payment may result if only
the minimum periodic payments are made, even if such a payment is
uncertain or unlikely, the advertisement also shall state with equal
prominence and in close proximity to the minimum periodic payment
statement that a balloon payment may result, if
[[Page 54224]]
applicable.\36e\ A balloon payment results if paying the minimum
periodic payments does not fully amortize the outstanding balance by a
specified date or time, and the consumer is required to repay the
entire outstanding balance at such time. If a balloon payment will
occur when the consumer makes only the minimum payments required under
the plan, an advertisement for such a program which contains any
statement of any minimum periodic payment shall also state with equal
prominence and in close proximity to the minimum periodic payment
statement:
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\36e\ [Reserved.]
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(i) That a balloon payment will result; and
(ii) The amount and timing of the balloon payment that will result
if the consumer makes only the minimum payments for the maximum period
of time that the consumer is permitted to make such payments.
(4) Tax implications. An advertisement that states that any
interest expense incurred under the home-equity plan is or may be tax
deductible may not be misleading in this regard. If an advertisement
distributed in paper form or through the Internet (rather than by radio
or television) is for a home-equity plan secured by the consumer's
principal dwelling, and the advertisement states that the advertised
extension of credit may exceed the fair market value of the dwelling,
the advertisement shall clearly and conspicuously state that:
(i) The interest on the portion of the credit extension that is
greater than the fair market value of the dwelling is not tax
deductible for Federal income tax purposes; and
(ii) The consumer should consult a tax adviser for further
information regarding the deductibility of interest and charges.
(5) Misleading terms. An advertisement may not refer to a home-
equity plan as ``free money'' or contain a similarly misleading term.
(6) Promotional rates and payments. (i) Definitions. The following
definitions apply for purposes of paragraph (d)(6) of this section:
(A) Promotional rate. The term ``promotional rate'' means, in a
variable-rate plan, any annual percentage rate that is not based on the
index and margin that will be used to make rate adjustments under the
plan, if that rate is less than a reasonably current annual percentage
rate that would be in effect under the index and margin that will be
used to make rate adjustments under the plan.
(B) Promotional payment. The term ``promotional payment'' means:
(1) For a variable-rate plan, any minimum payment applicable for a
promotional period that:
(i) Is not derived by applying the index and margin to the
outstanding balance when such index and margin will be used to
determine other minimum payments under the plan; and
(ii) Is less than other minimum payments under the plan derived by
applying a reasonably current index and margin that will be used to
determine the amount of such payments, given an assumed balance.
(2) For a plan other than a variable-rate plan, any minimum payment
applicable for a promotional period if that payment is less than other
payments required under the plan given an assumed balance.
(C) Promotional period. A ``promotional period'' means a period of
time, less than the full term of the loan, that the promotional rate or
promotional payment may be applicable.
(ii) Stating the promotional period and post-promotional rate or
payments. If any annual percentage rate that may be applied to a plan
is a promotional rate, or if any payment applicable to a plan is a
promotional payment, the following must be disclosed in any
advertisement, other than television or radio advertisements, in a
clear and conspicuous manner with equal prominence and in close
proximity to each listing of the promotional rate or payment:
(A) The period of time during which the promotional rate or
promotional payment will apply;
(B) In the case of a promotional rate, any annual percentage rate
that will apply under the plan. If such rate is variable, the annual
percentage rate must be disclosed in accordance with the accuracy
standards in Sec. Sec. 226.5b or 226.16(b)(1)(ii) as applicable; and
(C) In the case of a promotional payment, the amounts and time
periods of any payments that will apply under the plan. In variable-
rate transactions, payments that will be determined based on
application of an index and margin shall be disclosed based on a
reasonably current index and margin.
(iii) Envelope excluded. The requirements in paragraph (d)(6)(ii)
of this section do not apply to an envelope in which an application or
solicitation is mailed, or to a banner advertisement or pop-up
advertisement linked to an application or solicitation provided
electronically.
(e) Alternative disclosures--television or radio advertisements. An
advertisement made through television or radio stating any of the terms
requiring additional disclosures under paragraphs (b)(1) or (d)(1) of
this section may alternatively comply with paragraphs (b)(1) or (d)(1)
of this section by stating the information required by paragraphs
(b)(1)(ii) or (d)(1)(ii) of this section, as applicable, and listing a
toll-free telephone number, or any telephone number that allows a
consumer to reverse the phone charges when calling for information,
along with a reference that such number may be used by consumers to
obtain the additional cost information.
(f) Misleading terms. An advertisement may not refer to an annual
percentage rate as ``fixed,'' or use a similar term, unless the
advertisement also specifies a time period that the rate will be fixed
and the rate will not increase during that period, or if no such time
period is provided, the rate will not increase while the plan is open.
(g) Promotional Rates. (1) Scope. The requirements of this
paragraph apply to any advertisement of an open-end (not home-secured)
plan, including promotional materials accompanying applications or
solicitations subject to Sec. 226.5a(c) or accompanying applications
or solicitations subject to Sec. 226.5a(e).
(2) Definitions. (i) Promotional rate means any annual percentage
rate applicable to one or more balances or transactions on an open-end
(not home-secured) plan for a specified period of time that is lower
than the annual percentage rate that will be in effect at the end of
that period on such balances or transactions.
(ii) Introductory rate means a promotional rate offered in
connection with the opening of an account.
(iii) Promotional period means the maximum time period for which
the promotional rate may be applicable.
(3) Stating the term ``introductory''. If any annual percentage
rate that may be applied to the account is an introductory rate, the
term introductory or intro must be in immediate proximity to each
listing of the introductory rate in a written or electronic
advertisement.
(4) Stating the promotional period and post-promotional rate. If
any annual percentage rate that may be applied to the account is a
promotional rate under paragraph (g)(2)(i) of this section, the
information in paragraphs (g)(4)(i) and (g)(4)(ii) of this section must
be stated in a clear and conspicuous manner in the advertisement. If
the rate is stated in a written or electronic advertisement, the
information in paragraphs (g)(4)(i) and (g)(4)(ii) of this section must
also be stated in a prominent location closely
[[Page 54225]]
proximate to the first listing of the promotional rate.
(i) When the promotional rate will end; and
(ii) The annual percentage rate that will apply after the end of
the promotional period. If such rate is variable, the annual percentage
rate must comply with the accuracy standards in Sec. Sec.
226.5a(c)(2), 226.5a(d)(3), 226.5a(e)(4), or 226.16(b)(1)(ii), as
applicable. If such rate cannot be determined at the time disclosures
are given because the rate depends at least in part on a later
determination of the consumer's creditworthiness, the advertisement
must disclose the specific rates or the range of rates that might
apply.
(5) Envelope excluded. The requirements in paragraph (g)(4) of this
section do not apply to an envelope or other enclosure in which an
application or solicitation is mailed, or to a banner advertisement or
pop-up advertisement, linked to an application or solicitation provided
electronically.
(h) Deferred interest or similar offers. (1) Scope. The
requirements of this paragraph apply to any advertisement of an open-
end credit plan not subject to Sec. 226.5b, including promotional
materials accompanying applications or solicitations subject to Sec.
226.5a(c) or accompanying applications or solicitations subject to
Sec. 226.5a(e).
(2) Definitions. ``Deferred interest'' means finance charges
accrued on balances or transactions that a consumer is not obligated to
pay or that will be waived or refunded to a consumer if those balances
or transactions are paid in full by a specified date. The maximum
period from the date the consumer becomes obligated for the balance or
transaction until the specified date by which the consumer must pay the
balance or transaction in full in order to avoid finance charges, or
receive a waiver or refund of finance charges, is the ``deferred
interest period.'' ``Deferred interest'' does not include any finance
charges the consumer avoids paying in connection with any recurring
grace period.
(3) Stating the deferred interest period. If a deferred interest
offer is advertised, the deferred interest period must be stated in a
clear and conspicuous manner in the advertisement. If the phrase ``no
interest'' or similar term regarding the possible avoidance of interest
obligations under the deferred interest program is stated, the term
``if paid in full'' must also be stated in a clear and conspicuous
manner preceding the disclosure of the deferred interest period in the
advertisement. If the deferred interest offer is included in a written
or electronic advertisement, the deferred interest period and, if
applicable, the term ``if paid in full'' must also be stated in
immediate proximity to each statement of ``no interest,'' ``no
payments,'' ``deferred interest,'' ``same as cash,'' or similar term
regarding interest or payments during the deferred interest period.
(4) Stating the terms of the deferred interest or similar offer. If
any deferred interest offer is advertised, the information in
paragraphs (h)(4)(i) and (h)(4)(ii) of this section must be stated in
the advertisement, in language similar to Sample G-24 in Appendix G to
this part. If the deferred interest offer is included in a written or
electronic advertisement, the information in paragraphs (h)(4)(i), and
(h)(4)(ii) of this section must also be stated in a prominent location
closely proximate to the first statement of ``no interest,'' ``no
payments,'' ``deferred interest,'' ``same as cash,'' or similar term
regarding interest or payments during the deferred interest period.
(i) A statement that interest will be charged from the date the
consumer becomes obligated for the balance or transaction subject to
the deferred interest offer if the balance or transaction is not paid
in full within the deferred interest period; and
(ii) A statement, if applicable, that interest will be charged from
the date the consumer incurs the balance or transaction subject to the
deferred interest offer if the account is in default before the end of
the deferred interest period.
(5) Envelope excluded. The requirements in paragraph (h)(4) of this
section do not apply to an envelope or other enclosure in which an
application or solicitation is mailed, or to a banner advertisement or
pop-up advertisement linked to an application or solicitation provided
electronically.
18. Section 226.30 is revised to read as follows:
Sec. 226.30 Limitation on rates.
A creditor shall include in any consumer credit contract secured by
a dwelling and subject to the act and this regulation the maximum
interest rate that may be imposed during the term of the obligation
\50\ when:
---------------------------------------------------------------------------
\50\ [Reserved.]
---------------------------------------------------------------------------
(a) In the case of closed-end credit, the annual percentage rate
may increase after consummation, or
(b) In the case of open-end credit, the annual percentage rate may
increase during the plan.
* * * * *
19. A new subpart G consisting of Sec. Sec. 226.51, 226.52,
226.53, 226.54, 226.55, 226.56, 226.57, and 226.58 is added to read as
follows:
Subpart G--Special Rules Applicable to Credit Card Accounts and Open-
End Credit Offered to College Students
Sec.
226.51 Ability to Pay.
226.52 Limitations on fees.
226.53 Allocation of payments.
226.54 Limitations on the imposition of finance charges.
226.55 Limitations on increasing annual percentage rates, fees, and
charges.
226.56 Requirements for over-the-limit transactions.
226.57 Special rules for marketing open-end credit to college
students.
226.58 Internet posting of credit card agreements.
Subpart G--Special Rules Applicable to Credit Card Accounts and
Open-End Credit Offered to College Students
Sec. 226.51 Ability to Pay.
(a) General rule. (1) Consideration of ability to pay. A card
issuer must not open a credit card account for a consumer under an
open-end (not home-secured) consumer credit plan, or increase any
credit limit applicable to such account, unless the card issuer
considers the ability of the consumer to make the required minimum
periodic payments under the terms of the account based on the
consumer's income or assets and the consumer's current obligations.
Card issuers must have reasonable policies and procedures in place to
consider this information.
(2) Minimum payments. (i) Reasonable method. For purposes of
paragraph (a)(1) of this section, a card issuer must use a reasonable
method for estimating the minimum periodic payments the consumer would
be required to pay under the terms of the account.
(ii) Safe harbor. A card issuer complies with paragraph (a)(2)(i)
of this section if it estimates required minimum periodic payments
using the following method:
(A) The card issuer assumes utilization of the full credit line
that the issuer is considering offering to the consumer from the first
day of the billing cycle; and
(B) The card issuer uses a minimum payment formula employed by the
issuer for the product the issuer is considering offering to the
consumer or, in the case of an existing account, the minimum payment
formula that currently applies to that account, provided that:
(1) If the applicable minimum payment formula includes interest
[[Page 54226]]
charges, the card issuer estimates those charges using an interest rate
that the issuer is considering offering to the consumer for purchases
or, in the case of an existing account, the interest rate that
currently applies to purchases; and
(2) If the applicable minimum payment formula includes fees, the
card issuer may assume that no fees have been charged to the account.
(b) Rules affecting young consumers.
(1) Applications from young consumers. A card issuer may not open a
credit card account under an open-end (not home-secured) consumer
credit plan for a consumer less than 21 years old, unless the consumer
has submitted a written application and provided:
(i)(A) a signed agreement of a cosigner, guarantor, or joint
applicant who is at least 21 years old to be either secondarily liable
for any debt on the account incurred by the consumer before the
consumer has attained the age of 21 in the event the consumer defaults
on the account or jointly liable with the consumer for any debt on the
account incurred by either party, and
(B) financial information indicating such cosigner, guarantor, or
joint applicant has the ability to make the minimum payments on such
debts, consistent with paragraph (a) of this section; or
(ii) financial information indicating an independent ability to
make the minimum payments on the proposed extension of credit in
connection with the account, consistent with paragraph (a) of this
section.
(2) Credit line increases for young consumers. If a credit card
account has been opened pursuant to paragraph (b)(1)(i) of this
section, no increase in the credit limit may be made on such account
before the consumer attains the age of 21 unless the cosigner,
guarantor, or joint accountholder who assumed liability at account
opening agrees in writing to assume liability on the increase.
Sec. 226.52 Limitations on fees.
(a) Limitations during first year after account opening. (1)
General rule. Except as provided in paragraph (a)(2) of this section,
if a card issuer charges any fees to a credit card account under an
open-end (not home-secured) consumer credit plan during the first year
after the account is opened:
(i) The card issuer must not charge to the account during that
period fees that in total constitute more than 25 percent of the credit
limit in effect when the account is opened; and
(ii) The card issuer must not require the consumer to pay any fees
in excess of the total amount permitted by paragraph (a)(1)(i) of this
section with respect to the account during that period.
(2) Fees not subject to limitations. Paragraph (a) of this section
does not apply to:
(i) Late payment fees, over-the-limit fees, and returned-payment
fees; or
(ii) Fees that the consumer is not required to pay with respect to
the account.
(3) Rule of construction. Paragraph (a) of this section does not
authorize the imposition or payment of fees or charges otherwise
prohibited by law.
Sec. 226.53 Allocation of payments.
(a) General rule. Except as provided in paragraph (b) of this
section, when a consumer makes a payment in excess of the required
minimum periodic payment for a credit card account under an open-end
(not home-secured) consumer credit plan, the card issuer must allocate
the excess amount first to the balance with the highest annual
percentage rate and any remaining portion to the other balances in
descending order based on the applicable annual percentage rate.
(b) Special rule for balances subject to deferred interest or
similar programs. When a balance on a credit card account under an
open-end (not home-secured) consumer credit plan is subject to a
deferred interest or similar program that provides that a consumer will
not be obligated to pay interest that accrues on the balance if the
balance is paid in full prior to the expiration of a specified period
of time, the card issuer must allocate any amount 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 any other balances
consistent with paragraph (a) of this section.
Sec. 226.54 Limitations on the imposition of finance charges.
(a) Limitations on imposing finance charges as a result of the loss
of a grace period. (1) General rule. Except as provided in paragraph
(b) of this section, a card issuer must not impose finance charges as a
result of the loss of a grace period on a credit card account under an
open-end (not home-secured) consumer credit plan if those finance
charges are based on:
(i) Balances for days in billing cycles that precede the most
recent billing cycle; or
(ii) Any portion of a balance subject to a grace period that was
repaid prior to the expiration of the grace period.
(2) Definition of grace period. For purposes of paragraph (a)(1) of
this section, ``grace period'' has the same meaning as in Sec.
226.5(b)(2)(ii).
(b) Exceptions. Paragraph (a) of this section does not apply to:
(1) Adjustments to finance charges as a result of the resolution of
a dispute under Sec. 226.12 or Sec. 226.13; or
(2) Adjustments to finance charges as a result of the return of a
payment.
Sec. 226.55 Limitations on increasing annual percentage rates, fees,
and charges.
(a) General rule. Except as provided in paragraph (b) of this
section, a card issuer must not increase an annual percentage rate or a
fee or charge required to be disclosed under Sec. 226.6(b)(2)(ii),
(b)(2)(iii), or (b)(2)(xii) on a credit card account under an open-end
(not home-secured) consumer credit plan.
(b) Exceptions. A card issuer may increase an annual percentage
rate or a fee or charge required to be disclosed under Sec.
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) pursuant to an exception
set forth in this paragraph even if that increase would not be
permitted under a different exception.
(1) Temporary rate exception. A card issuer may increase an annual
percentage rate upon the expiration of a specified period of six months
or longer, provided that:
(i) Prior to the commencement of that period, the card issuer
disclosed in writing to the consumer, in a clear and conspicuous
manner, the length of the period and the annual percentage rate that
would apply after expiration of the period; and
(ii) Upon expiration of the specified period:
(A) The card issuer must not apply an annual percentage rate to
transactions that occurred prior to the period that exceeds the annual
percentage rate that applied to those transactions prior to the period;
(B) If the disclosures required by paragraph (b)(1)(i) of this
section are provided pursuant to Sec. 226.9(c), the card issuer must
not apply an annual percentage rate to transactions that occurred
within 14 days after provision of the notice that exceeds the annual
percentage rate that applied to that category of transactions prior to
provision of the notice; and
(C) The card issuer must not apply an annual percentage rate to
transactions that occurred during the period that exceeds the increased
annual percentage rate disclosed pursuant to paragraph (b)(1)(i) of
this section.
(2) Variable rate exception. A card issuer may increase an annual
percentage rate when:
(i) The annual percentage rate varies according to an index that is
not under
[[Page 54227]]
the card issuer's control and is available to the general public; and
(ii) The increase in the annual percentage rate is due to an
increase in the index.
(3) Advance notice exception. A card issuer may increase an annual
percentage rate or a fee or charge required to be disclosed under Sec.
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) after complying with the
applicable notice requirements in Sec. 226.9(b), (c), or (g), provided
that:
(i) If a card issuer discloses an increased annual percentage rate,
fee, or charge pursuant to Sec. 226.9(b), the card issuer must not
apply that rate, fee, or charge to transactions that occurred prior to
provision of the notice;
(ii) If a card issuer discloses an increased annual percentage
rate, fee, or charge pursuant to Sec. 226.9(c) or (g), the card issuer
must not apply that rate, fee, or charge to transactions that occurred
prior to or within 14 days after provision of the notice; and
(iii) This exception does not permit a card issuer to increase an
annual percentage rate or a fee or charge required to be disclosed
under Sec. 226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) during the
first year after the credit card account is opened.
(4) Delinquency exception. A card issuer may increase an annual
percentage rate or a fee or charge required to be disclosed under Sec.
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) due to the card issuer not
receiving the consumer's required minimum periodic payment within 60
days after the due date for that payment, provided that:
(i) The card issuer must disclose in a clear and conspicuous manner
in the notice of the increase pursuant to Sec. 226.9(c) or (g):
(A) A statement of the reason for the increase; and
(B) That the increased annual percentage rate, fee, or charge will
cease to apply if the card issuer receives six consecutive required
minimum periodic payments on or before the payment due date beginning
with the first payment due following the effective date of the
increase; and
(ii) If the card issuer receives six consecutive required minimum
periodic payments on or before the payment due date beginning with the
first payment due following the effective date of the increase, the
card issuer must reduce any annual percentage rate, fee, or charge
increased pursuant to this exception to the annual percentage rate,
fee, or charge that applied prior to the increase with respect to
transactions that occurred prior to or within 14 days after provision
of the Sec. 226.9(c) or (g) notice.
(5) Workout and temporary hardship arrangement exception. A card
issuer may increase an annual percentage rate or a fee or charge
required to be disclosed under Sec. 226.6(b)(2)(ii), (b)(2)(iii), or
(b)(2)(xii) due to the consumer's completion of a workout or temporary
hardship arrangement or the consumer's failure to comply with the terms
of such an arrangement, provided that:
(i) Prior to commencement of the arrangement, the card issuer has
provided the consumer with a clear and conspicuous written disclosure
of the terms of the arrangement (including any increases due to the
completion or failure of the arrangement); and
(ii) Upon the completion or failure of the arrangement, the card
issuer must not apply to any transactions that occurred prior to
commencement of the arrangement an annual percentage rate, fee, or
charge that exceeds the annual percentage rate, fee, or charge that
applied to those transactions prior to commencement of the arrangement.
(6) Servicemembers Civil Relief Act exception. If an annual
percentage rate has been decreased pursuant to 50 U.S.C. app. 527, a
card issuer may increase that annual percentage rate once 50 U.S.C.
app. 527 no longer applies, provided that the card issuer must not
apply to any transactions that occurred prior to the decrease an annual
percentage rate that exceeds the annual percentage rate that applied to
those transactions prior to the decrease.
(c) Treatment of protected balances. (1) Definition of protected
balance. For purposes of this paragraph, ``protected balance'' means
the amount owed for a category of transactions to which an increased
annual percentage rate or an increased fee or charge required to be
disclosed under Sec. 226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii)
cannot be applied after the annual percentage rate, fee, or charge for
that category of transactions has been increased pursuant to paragraph
(b)(3) of this section.
(2) Repayment of protected balance. The card issuer must not
require repayment of the protected balance using a method that is less
beneficial to the consumer than one of the following methods:
(i) The method of repayment for the account before the effective
date of the increase;
(ii) An amortization period of not less than five years, beginning
no earlier than the effective date of the increase; or
(iii) A required minimum periodic payment that includes a
percentage of the balance that is equal to no more than twice the
percentage required before the effective date of the increase.
(d) Continuing application. This section continues to apply to a
balance on a credit card account after:
(1) The account is closed or acquired by another creditor; or
(2) The balance is transferred from a credit card account issued by
a creditor to another credit account issued by the same creditor or its
affiliate or subsidiary (unless the account to which the balance is
transferred is subject to Sec. 226.5b).
Sec. 226.56 Requirements for over-the-limit transactions.
(a) Definition. For purposes of this section, the term ``over-the-
limit transaction'' means any extension of credit by a creditor to
complete a transaction that causes a consumer's credit card account
balance to exceed the credit limit.
(b) Opt-in requirement. (1) General. A creditor shall not assess a
fee or charge on a consumer's credit card account under an open-end
(not home-secured) consumer credit plan for an over-the-limit
transaction unless the creditor:
(i) Provides the consumer with an oral, written or electronic
notice explaining the consumer's right to affirmatively consent, or opt
in, to the creditor's payment of an over-the-limit transaction;
(ii) Provides a reasonable opportunity for the consumer to
affirmatively consent, or opt in, to the creditor's payment of over-
the-limit transactions;
(iii) Obtains the consumer's affirmative consent, or opt-in, to the
creditor's payment of such transactions; and
(iv) If the consumer affirmatively consents, or opts in, provides
the consumer notice of the right to revoke that consent following the
assessment of an over-the-limit fee or charge.
(2) Completion of over-the-limit transactions without consumer
consent. Notwithstanding the absence of a consumer's affirmative
consent under paragraph (b)(1)(iii) of this section, a creditor may pay
any over-the-limit transaction on a consumer's account provided that
the creditor does not impose any fee or charge on the account for
paying that over-the-limit transaction.
(c) Method of election. A creditor may permit a consumer to consent
to the creditor's payment of any over-the-limit transaction in writing,
orally, or electronically. The creditor must also permit the consumer
to revoke his or
[[Page 54228]]
her consent using the same methods available to the consumer for
providing consent.
(d) Timing of notices. (1) Initial notice. (i) General. The notice
required by paragraph (b)(1)(i) of this section shall be provided prior
to the assessment of any over-the-limit fee or charge on a consumer's
account;
(ii) Oral or written consent. If a consumer elects to consent to
the creditor's payment of any over-the-limit transaction by oral or
electronic means, the creditor must provide the notice required by
paragraph (b)(1)(i) of this section immediately prior to and
contemporaneously with obtaining that consent.
(2) Subsequent notice. The notice required by paragraph (b)(1)(iv)
of this section shall be provided on the front of any page of each
periodic statement that reflects the assessment of an over-the-limit
fee or charge on a consumer's account.
(e) Content. (1) Initial notice. The notice required by paragraph
(b)(1)(i) of this section shall include:
(i) Fees. The dollar amount of any fees or charges assessed by the
creditor on a consumer's account for an over-the-limit transaction;
(ii) APRs. Any increased periodic rate(s) (expressed as an annual
percentage rate(s)) that may be imposed on the account as a result of
an over-the-limit transaction; and
(iii) Disclosure of opt-in right. An explanation of the consumer's
right to affirmatively consent to the creditor's payment of over-the-
limit transactions, including the method(s) by which the consumer may
consent to the service.
(2) Subsequent notice. The notice required by paragraph (b)(1)(iv)
of this section shall describe the consumer's right to revoke any
consent provided under paragraph (b)(1)(iii) of this section, including
the method(s) by which the consumer may revoke the service.
(3) Safe harbor. Use of Model Forms G-25(A) or G-25(B) of Appendix
G to this part, or substantially similar notices, constitutes
compliance with the notice content requirements of paragraph (e) of
this section.
(f) Joint relationships. If two or more consumers are jointly
liable on a credit card account under an open-end (not home-secured)
consumer credit plan, the creditor shall treat the affirmative consent
of any of the joint consumers as affirmative consent for that account.
Similarly, the creditor shall treat a revocation of consent by any of
the joint consumers as revocation of consent for that account.
(g) Continuing right to opt in or revoke opt-in. A consumer may
affirmatively consent to the creditor's payment of over-the-limit
transactions at any time in the manner described in the notice required
by paragraph (b)(1)(i) of this section. Similarly, the consumer may
revoke the consent at any time in the manner described in the notice
required by paragraph (b)(1)(iv) of this section.
(h) Duration of opt-in. A consumer's affirmative consent to the
creditor's payment of over-the-limit transactions is effective until
revoked by the consumer, or until the creditor decides for any reason
to cease paying over-the-limit transactions for the consumer.
(i) Time to comply with revocation request. A creditor must comply
with a consumer's revocation request as soon as reasonably practicable
after the creditor receives it.
(j) Prohibited practices. Notwithstanding a consumer's affirmative
consent to a creditor's payment of over-the-limit transactions, a
creditor is prohibited from engaging in the following practices:
(1) Fees or charges imposed per cycle.
(i) General rule. A creditor may not impose more than one over-the-
limit fee or charge on a consumer's credit card account per billing
cycle, and, except as provided in paragraph (j)(1)(ii) of this section,
may not impose an over-the-limit fee or charge on the consumer's credit
card account for more than three billing cycles for the same over-the-
limit transaction where the consumer has not reduced the account
balance below the credit limit by the payment due date for either of
the last two billing cycles.
(ii) Exception. The prohibition in paragraph (j)(1)(i) of this
section on imposing an over-the-limit fee or charge in more than three
billing cycles for the same over-the-limit transaction(s) does not
apply if an over-the-limit transaction occurs during either of the last
two billing cycles.
(2) Failure to promptly replenish. A creditor may not impose an
over-the-limit fee or charge solely because of creditor's failure to
promptly replenish the consumer's available credit following the
crediting of the consumer's payment under Sec. 226.10.
(3) Conditioning. A creditor may not condition the amount of a
consumer's credit limit on the consumer affirmatively consenting to the
creditor's payment of over-the-limit transactions if the creditor
assesses a fee or charge for such service.
(4) Over-the-limit fees attributed to fees or interest. A creditor
may not impose an over-the-limit fee or charge if a consumer exceeds a
credit limit solely because of fees or interest charged by the creditor
to the consumer's account during the billing cycle. For purposes of
this paragraph (j)(4), fees or interest charges that may not trigger an
over-the-limit fee or charge are charges imposed as part of the plan
under Sec. 226.6(b)(3).
Sec. 226.57 Special rules for marketing open-end credit to college
students.
(a) Definitions:
(1) College student credit card. The term ``college student credit
card'' in this section means a credit card issued under a credit card
account under an open-end (not home-secured) consumer credit plan to
any college student.
(2) College student. The term ``college student'' as used in this
section means an individual who is a full-time or part-time student of
an institution of higher education.
(3) Institution of higher education. The term ``institution of
higher education'' as used in this section has the same meaning as in
sections 101 and 102 of the Higher Education Act of 1965 (20 U.S.C.
1001 and 1002).
(4) Affiliated organization. The term ``affiliated organization''
in this section means an alumni organization or foundation affiliated
with or related to an institution of higher education.
(5) College credit card agreement. The term ``college credit card
agreement'' in this section means any business, marketing or
promotional agreement between a card issuer and an institution of
higher education or an affiliated organization in connection with which
college student credit cards are issued to college students currently
enrolled at that institution.
(b) Public disclosure of agreements. An institution of higher
education shall publicly disclose any contract or other agreement made
with a card issuer or creditor for the purpose of marketing a credit
card.
(c) Prohibited inducements. No card issuer or creditor may offer a
college student any tangible item to induce such student to apply for
or open an open-end consumer credit plan offered by such card issuer or
creditor, if such offer is made:
(1) On the campus of an institution of higher education;
(2) Near the campus of an institution of higher education; or
(3) At an event sponsored by or related to an institution of higher
education.
(d) Annual report to the Board. (1) Requirement to register. A card
issuer subject to the requirement to report under Sec. 226.57(d)(2)
with regard to calendar year 2009 must register with the Board in the
form and manner prescribed by the Board no later than
[[Page 54229]]
February 1, 2010. A card issuer that becomes subject to the requirement
to report under Sec. 226.57(d)(2) after December 31, 2009, must
register with the Board in the form and manner prescribed by the Board
no later than February 1 following the calendar year in which the
issuer becomes subject.
(2) Requirement to report. Any card issuer that was a party to one
or more college credit card agreements in effect at any time during a
calendar year must submit to the Board an annual report regarding those
agreements in the form and manner prescribed by the Board.
(3) Contents of report. The annual report to the Board must include
the following:
(i) A copy of any college credit card agreement to which the card
issuer was a party that was in effect at any time during the period
covered by the report;
(ii) A copy of any memorandum of understanding in effect at any
time during the period covered by the report between the card issuer
and an institution of higher education or affiliated organization that
directly or indirectly relates to the college credit card agreement or
that controls or directs any obligations or distribution of benefits
between any such entities;
(iii) The total dollar amount of any payments pursuant to a college
credit card agreement from the card issuer to an institution of higher
education or affiliated organization during the period covered by the
report, and how such amounts are determined;
(iv) The number of credit card accounts opened pursuant to any
college credit card agreement during the period covered by the report;
and
(v) The total number of credit card accounts opened pursuant to any
such agreement that were open at the end of the period covered by the
report.
(4) Timing of reports. Except for the initial report described
below, a card issuer must submit its annual report for each calendar
year to the Board by the first business day on or after March 31 of the
following year. Card issuers must submit the first report following the
effective date of this section, providing information for the 2009
calendar year, to the Board by February 22, 2010.
Sec. 226.58 Internet posting of credit card agreements.
(a) Applicability. The requirements of this section apply to any
card issuer that issues credit cards under a credit card account under
an open-end (not home-secured) consumer credit plan.
(b) Definitions. (1) Agreement. For purposes of this section,
``agreement'' or ``credit card agreement'' means a written document or
documents evidencing the terms of the legal obligation, or the
prospective legal obligation, between a card issuer and a consumer
under a credit card account for an open-end (not home-secured) consumer
credit plan. The ``agreement'' or ``credit card agreement'' also
includes the pricing information, as defined in Sec. 226.58(b)(4).
(2) Business day. For purposes of this section, ``business day''
means a day on which the creditor's offices are open to the public for
carrying on substantially all of its business functions.
(3) Offers. For purposes of this section, an issuer ``offers'' or
``offers to the public'' an agreement if the issuer is soliciting or
accepting applications for accounts that would be subject to that
agreement.
(4) Pricing information. For purposes of this section, ``pricing
information'' means:
(i) The information under Sec. 226.6(b)(2)(i) through (b)(2)(xii),
(b)(3) and (b)(4) required to be disclosed in writing pursuant to Sec.
226.5(a)(1)(ii);
(ii) The credit limit; and
(iii) The method used to calculate required minimum payments.
(c) Registration with Board. (1) Initial registration. A card
issuer that offered one or more credit card agreements as of December
31, 2009, must register with the Board, in the form and manner
prescribed by the Board, no later than February 1, 2010, unless the
card issuer would have qualified for the de minimis exception under
Sec. 226.58(e) as of December 31, 2009.
(2) Subsequent registrations. A card issuer that that is required
to make a submission to the Board under Sec. 226.58(d) that has not
previously registered with the Board must register with the Board, in
the form and manner prescribed by the Board, at least 21 days before
the quarterly submission deadline specified in Sec. 226.58(d)(1) on
which the card issuer's first submission to the Board is due.
(3) Updates. If information contained in a card issuer's
registration under Sec. 226.58(c)(1) or (c)(2) changes, the issuer
must provide to the Board updated registration information, in the form
and manner prescribed by the Board, no later than the first quarterly
submission deadline specified in Sec. 226.58(d)(1) following the
change.
(d) Submission of agreements to Board. (1) Timing and content of
submissions. A card issuer must make quarterly submissions to the
Board, in the form and manner specified by the Board, that contain:
(i) The credit card agreements, as described in Appendix N, that
the card issuer offered to the public as of the last business day of
the preceding calendar quarter that the card issuer has not previously
submitted to the Board;
(ii) Any credit card agreement previously submitted to the Board
that was modified or amended during the preceding calendar quarter, as
described in Sec. 226.58(d)(3); and
(iii) Notification regarding any credit card agreement previously
submitted to the Board that the issuer is withdrawing, as described in
Sec. 226.58(d)(4) and (e). Except as provided in Sec. 226.58(d)(2),
quarterly submissions to the Board are due no later than the first
business day on or after January 31, April 30, July 31, and October 31
of each year.
(2) Timing of first two submissions. The first submission following
the effective date of this section must be sent to the Board no later
than February 22, 2010, and must contain the credit card agreements
that the card issuer offered to the public as of December 31, 2009. The
next submission must be sent to the Board no later than August 2, 2010,
and must contain:
(i) The credit card agreements that the card issuer offered to the
public as of June 30, 2010, that the card issuer has not previously
submitted to the Board;
(ii) Any credit card agreement previously submitted to the Board
that was modified or amended after December 31, 2009, and on or before
June 30, 2010, as described in Sec. 226.58(d)(3); and
(iii) Notification regarding any credit card agreement previously
submitted to the Board that the issuer is withdrawing as of June 30,
2010, as described in Sec. 226.58(d)(4) and (e).
(3) Changes to agreements. If a credit card agreement has been
submitted to the Board, no changes have been made to the agreement, and
the card issuer continues to offer the agreement to the public, no
additional submission of that agreement is required. If a change is
made to a credit card agreement that previously has been submitted to
the Board, including a change to any provisions of the agreement or to
the pricing information, the card issuer must submit the entire revised
agreement to the Board, in the form and manner specified by the Board,
by the first quarterly submission deadline after the last day of the
calendar quarter in which the change became effective.
(4) Withdrawal of agreements. If a card issuer no longer offers to
the public a credit card agreement that previously has been submitted
to the Board, the card issuer must notify the Board, in the form and
manner specified by the Board, by the first quarterly submission
deadline after the last day of the
[[Page 54230]]
calendar quarter in which the issuer ceased to offer the agreement that
the agreement is being withdrawn.
(e) De minimis exception. (1) A card issuer is not required to
submit any credit card agreements to the Board under Sec. 226.58(d) if
the card issuer had fewer than 10,000 open credit card accounts under
open-end (not home-secured) consumer credit plans as of the last
business day of the calendar quarter.
(2) If an issuer that previously qualified for the de minimis
exception ceases to qualify, the card issuer must begin making
quarterly submissions to the Board under Sec. 226.58(d) no later than
the first quarterly submission deadline after the date as of which the
issuer ceased to qualify.
(3) If a card issuer that did not previously qualify comes within
the de minimis exception, the card issuer may notify the Board that the
card issuer is withdrawing each agreement the card issuer previously
submitted to the Board. Until the card issuer notifies the Board, in
the form and manner specified by the Board, that each agreement the
card issuer previously submitted to the Board is being withdrawn, the
card issuer must continue to make quarterly submissions to the Board
under Sec. 226.58(d) and to provide updated registration information
under Sec. 226.58(c)(3).
(f) Agreements posted on card issuer's Web site. A card issuer must
establish and maintain a publicly available Web site and make its
credit card agreements available through the Web site, as specified in
Appendix N, as follows:
(1) Agreements offered to the public. A card issuer must post and
maintain on its publicly available Web site the credit card agreements
that the issuer is required to submit to the Board as provided in Sec.
226.58(d).
(2) Agreements for all open accounts. With respect to any open
credit card account under an open-end (not home-secured) consumer
credit plan, a card issuer must either:
(i) Post and maintain the cardholder's agreement on its Web site;
or
(ii) Promptly provide a copy of the cardholder's agreement to the
cardholder upon the cardholder's request. If the card issuer makes an
agreement available upon request, the issuer must provide the
cardholder with the ability to request a copy of the agreement both:
(A) By using the issuer's Web site (such as by clicking on a
clearly identified box to make the request); and
(B) By calling a toll-free telephone number that is displayed on
the issuer's Web site and clearly identified as to purpose. The card
issuer must send to the cardholder or otherwise make available to the
cardholder a copy of the cardholder's agreement no later than 10
business days after the issuer receives the cardholder's request.
(3) E-Sign Act requirements. Card issuers may provide credit card
agreements in electronic form under Sec. 226.58(f)(1) and (f)(2)
without regard to the consumer notice and consent requirements of
section 101(c) of the Electronic Signatures in Global and National
Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.).
20. Appendix E to part 226 is revised to read as follows:
Appendix E to Part 226--Rules for Card Issuers that Bill on a
Transaction-by-Transaction Basis
The following provisions of Subpart B apply if credit cards are
issued and the card issuer and the seller are the same or related
persons; no finance charge is imposed; consumers are billed in full
for each use of the card on a transaction-by-transaction basis, by
means of an invoice or other statement reflecting each use of the
card; and no cumulative account is maintained which reflects the
transactions by each consumer during a period of time, such as a
month. The term ``related person'' refers to, for example, a
franchised or licensed seller of a creditor's product or service or
a seller who assigns or sells sales accounts to a creditor or
arranges for credit under a plan that allows the consumer to use the
credit only in transactions with that seller. A seller is not
related to the creditor merely because the seller and the creditor
have an agreement authorizing the seller to honor the creditor's
credit card.
1. Section 226.6(a)(5) or Sec. 226.6(b)(5)(iii).
2. Section 226.6(a)(2) or Sec. 226.6(b)(3)(ii)(B), as
applicable. The disclosure required by Sec. 226.6(a)(2) or Sec.
226.6(b)(3)(ii)(B) shall be limited to those charges that are or may
be imposed as a result of the deferral of payment by use of the
card, such as late payment or delinquency charges. A tabular format
is not required.
3. Section 226.6(a)(4) or Sec. 226.6(b)(5)(ii).
4. Section 226.7(a)(2) or Sec. 226.7(b)(2), as applicable;
Sec. 226.7(a)(9) or Sec. 226.7(b)(9), as applicable. Creditors may
comply by placing the required disclosures on the invoice or
statement sent to the consumer for each transaction.
5. Section 226.9(a). Creditors may comply by mailing or
delivering the statement required by Sec. 226.6(a)(5) or Sec.
226.6(b)(5)(iii) (see appendix G-3 and G-3(A) to this part) to each
consumer receiving a transaction invoice during a one-month period
chosen by the card issuer or by sending either the statement
prescribed by Sec. 226.6(a)(5) or Sec. 226.6(b)(5)(iii), or an
alternative billing error rights statement substantially similar to
that in appendix G-4 and G-4(A) to this part, with each invoice sent
to a consumer.
6. Section 226.9(c). A tabular format is not required.
7. Section 226.10.
8. Section 226.11(a). This section applies when a card issuer
receives a payment or other credit that exceeds by more than $1 the
amount due, as shown on the transaction invoice. The requirement to
credit amounts to an account may be complied with by other
reasonable means, such as by a credit memorandum. Since no periodic
statement is provided, a notice of the credit balance shall be sent
to the consumer within a reasonable period of time following its
occurrence unless a refund of the credit balance is mailed or
delivered to the consumer within seven business days of its receipt
by the card issuer.
9. Section 226.12 including Sec. 226.12(c) and (d), as
applicable. Section 226.12(e) is inapplicable.
10. Section 226.13, as applicable. All references to ``periodic
statement'' shall be read to indicate the invoice or other statement
for the relevant transaction. All actions with regard to correcting
and adjusting a consumer's account may be taken by issuing a refund
or a new invoice, or by other appropriate means consistent with the
purposes of the section.
11. Section 226.15, as applicable.
21. Appendix F to part 226 is revised to read as follows:
Appendix F to Part 226--Optional Annual Percentage Rate Computations
for Creditors Offering Open-End Plans Subject to the Requirements of
Sec. 226.5b
In determining the denominator of the fraction under Sec.
226.14(c)(3), no amount will be used more than once when adding the
sum of the balances \1\ subject to periodic rates to the sum of the
amounts subject to specific transaction charges. (Where a portion of
the finance charge is determined by application of one or more daily
periodic rates, the phrase ``sum of the balances'' shall also mean
the ``average of daily balances.'') In every case, the full amount
of transactions subject to specific transaction charges shall be
included in the denominator. Other balances or parts of balances
shall be included according to the manner of determining the balance
subject to a periodic rate, as illustrated in the following examples
of accounts on monthly billing cycles:
---------------------------------------------------------------------------
\1\ [Reserved].
---------------------------------------------------------------------------
1. Previous balance--none.
A specific transaction of $100 occurs on the first day of the
billing cycle. The average daily balance is $100. A specific
transaction charge of 3 percent is applicable to the specific
transaction. The periodic rate is 1\1/2\ percent applicable to the
average daily balance. The numerator is the amount of the finance
charge, which is $4.50. The denominator is the amount of the
transaction (which is $100), plus the amount by which the balance
subject to the periodic rate exceeds the amount of the specific
transactions (such excess in this case is 0), totaling $100.
The annual percentage rate is the quotient (which is 4\1/2\
percent) multiplied by 12 (the number of months in a year), i.e., 54
percent.
2. Previous balance--$100.
A specific transaction of $100 occurs at the midpoint of the
billing cycle. The average
[[Page 54231]]
daily balance is $150. A specific transaction charge of 3 percent is
applicable to the specific transaction. The periodic rate is 1\1/2\
percent applicable to the average daily balance. The numerator is
the amount of the finance charge which is $5.25. The denominator is
the amount of the transaction (which is $100), plus the amount by
which the balance subject to the periodic rate exceeds the amount of
the specific transaction (such excess in this case is $50), totaling
$150. As explained in example 1, the annual percentage rate is 3\1/
2\ percent x 12 = 42 percent.
3. If, in example 2, the periodic rate applies only to the
previous balance, the numerator is $4.50 and the denominator is $200
(the amount of the transaction, $100, plus the balance subject only
to the periodic rate, the $100 previous balance). As explained in
example 1, the annual percentage rate is 2\1/4\ percent x 12 = 27
percent.
4. If, in example 2, the periodic rate applies only to an
adjusted balance (previous balance less payments and credits) and
the consumer made a payment of $50 at the midpoint of the billing
cycle, the numerator is $3.75 and the denominator is $150 (the
amount of the transaction, $100, plus the balance subject to the
periodic rate, the $50 adjusted balance). As explained in example 1,
the annual percentage rate is 2\1/2\ percent x 12 = 30 percent.
5. Previous balance--$100.
A specific transaction (check) of $100 occurs at the midpoint of
the billing cycle. The average daily balance is $150. The specific
transaction charge is $.25 per check. The periodic rate is 1\1/2\
percent applied to the average daily balance. The numerator is the
amount of the finance charge, which is $2.50 and includes the $.25
check charge and the $2.25 resulting from the application of the
periodic rate. The denominator is the full amount of the specific
transaction (which is $100) plus the amount by which the average
daily balance exceeds the amount of the specific transaction (which
in this case is $50), totaling $150. As explained in example 1, the
annual percentage rate would be 1\2/3\ percent x 12 = 20 percent.
6. Previous balance--none.
A specific transaction of $100 occurs at the midpoint of the
billing cycle. The average daily balance is $50. The specific
transaction charge is 3 percent of the transaction amount or $3.00.
The periodic rate is 1\1/2\; percent per month applied to the
average daily balance. The numerator is the amount of the finance
charge, which is $3.75, including the $3.00 transaction charge and
$.75 resulting from application of the periodic rate. The
denominator is the full amount of the specific transaction ($100)
plus the amount by which the balance subject to the periodic rate
exceeds the amount of the transaction ($0). Where the specific
transaction amount exceeds the balance subject to the periodic rate,
the resulting number is considered to be zero rather than a negative
number ($50 - $100 = -$50). The denominator, in this case, is $100.
As explained in example 1, the annual percentage rate is 3\3/4\
percent x 12 = 45 percent.
22. Appendix G to part 226 is amended by:
A. Revising the table of contents at the beginning of the appendix;
B. Revising Forms G-1, G-2, G-3, G-4, G-10(A), G-10(B), G-10(C), G-
11, and G-13(A) and (B);
C. Adding new Forms G-1(A), G-2(A), G-3(A), G-4(A), G-10(D) and
(E), G-16(A) and (B), G-17(A) through (D), G-18(A) through (D), and G-
18(F) through (H), G-19, G-20, G-21, G-22, G-23, G-24, G-25(A) and (B)
in numerical order; and
D. Removing and reserving Form G-12.
E. Reserving Form G-18(E).
Appendix G to Part 226--Open-End Model Forms and Clauses
G-1 Balance Computation Methods Model Clauses (Home-equity Plans)
(Sec. Sec. 226.6 and 226.7)
G-1(A) Balance Computation Methods Model Clauses (Plans other than
Home-equity Plans) (Sec. Sec. 226.6 and 226.7)
G-2 Liability for Unauthorized Use Model Clause (Home-equity Plans)
(Sec. 226.12)
G-2(A) Liability for Unauthorized Use Model Clause (Plans Other Than
Home-equity Plans) (Sec. 226.12)
G-3 Long-Form Billing-Error Rights Model Form (Home-equity Plans)
(Sec. Sec. 226.6 and 226.9)
G-3(A) Long-Form Billing-Error Rights Model Form (Plans Other Than
Home-equity Plans) (Sec. Sec. 226.6 and 226.9)
G-4 Alternative Billing-Error Rights Model Form (Home-equity Plans)
(Sec. 226.9)
G-4(A) Alternative Billing-Error Rights Model Form (Plans Other Than
Home-equity Plans) (Sec. 226.9)
G-5 Rescission Model Form (When Opening an Account) (Sec. 226.15)
G-6 Rescission Model Form (For Each Transaction) (Sec. 226.15)
G-7 Rescission Model Form (When Increasing the Credit Limit) (Sec.
226.15)
G-8 Rescission Model Form (When Adding a Security Interest) (Sec.
226.15)
G-9 Rescission Model Form (When Increasing the Security) (Sec.
226.15)
G-10(A) Applications and Solicitations Model Form (Credit Cards)
(Sec. 226.5a(b))
G-10(B) Applications and Solicitations Sample (Credit Cards) (Sec.
226.5a(b))
G-10(C) Applications and Solicitations Sample (Credit Cards) (Sec.
226.5a(b))
G-10(D) Applications and Solicitations Model Form (Charge Cards)
(Sec. 226.5a(b))
G-10(E) Applications and Solicitations Sample (Charge Cards) (Sec.
226.5a(b))
G-11 Applications and Solicitations Made Available to General Public
Model Clauses (Sec. 226.5a(e))
G-12 Reserved
G-13(A) Change in Insurance Provider Model Form (Combined Notice)
(Sec. 226.9(f))
G-13(B) Change in Insurance Provider Model Form (Sec. 226.9(f)(2))
G-14(A) Home-equity Sample
G-14(B) Home-equity Sample
G-15 Home-equity Model Clauses
G-16(A) Debt Suspension Model Clause (Sec. 226.4(d)(3))
G-16(B) Debt Suspension Sample (Sec. 226.4(d)(3))
G-17(A) Account-opening Model Form (Sec. 226.6(b)(2))
G-17(B) Account-opening Sample (Sec. 226.6(b)(2))
G-17(C) Account-opening Sample (Sec. 226.6(b)(2))
G-17(D) Account-opening Sample (Sec. 226.6(b)(2))
G-18(A) Transactions; Interest Charges; Fees Sample (Sec. 226.7(b))
G-18(B) Late Payment Fee Sample (Sec. 226.7(b))
G-18(C)(1) Minimum Payment Warning (When Amortization Occurs and
Minimum Payment Repayment Estimate is Greater than Three Years)
(Sec. 226.7(b))
G-18(C)(2) Minimum Payment Warning (When Amortization Occurs and
Minimum Payment Repayment Estimate is Equal to or Less than Three
Years) (Sec. 226.7(b))
G-18(C)(3) Minimum Payment Warning (When Negative or No Amortization
Occurs) (Sec. 226.7(b))
G-18(D) Periodic Statement New Balance, Due Date, Late Payment and
Minimum Payment Sample (Credit cards) (Sec. 226.7(b))
G-18(E) [Reserved]
G-18(F) Periodic Statement Form
G-18(G) Periodic Statement Form
G-18(H) Deferred Interest Periodic Statement Clause
G-19 Checks Accessing a Credit Card Account Sample (Sec.
226.9(b)(3))
G-20 Change-in-Terms Sample (Increase in Annual Percentage Rate)
(Sec. 226.9(c)(2))
G-21 Change-in-Terms Sample (Increase in Fees) (Sec. 226.9(c)(2))
G-22 Penalty Rate Increase Sample (Payment 60 or Fewer Days Late)
(Sec. 226.9(g)(3))
G-23 Penalty Rate Increase Sample (Payment More Than 60 Days Late)
(Sec. 226.9(g)(3))
G-24 Deferred Interest Offer Clauses (Sec. 226.16(h))
G-25(A) Consent Form for Over-the-Limit Transactions (Sec. 226.56)
G-25(B) Revocation Notice for Periodic Statement Regarding Over-the-
Limit Transactions (Sec. 226.56)
G-1--Balance Computation Methods Model Clauses (Home-Equity Plans)
(a) Adjusted balance method
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the ``adjusted balance'' of your
account. We get the ``adjusted balance'' by taking the balance you
owed at the end of the previous billing cycle and subtracting [any
unpaid finance charges and] any payments and credits received during
the present billing cycle.
(b) Previous balance method
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the amount you owe at the beginning of
each billing cycle [minus any unpaid finance charges]. We do not
subtract any payments or credits received during the billing cycle.
[The amount of payments and credits to your account this billing
cycle was $ ------.]
[[Page 54232]]
(c) Average daily balance method (excluding current transactions)
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the ``average daily balance'' of your
account (excluding current transactions). To get the ``average daily
balance'' we take the beginning balance of your account each day and
subtract any payments or credits [and any unpaid finance charges].
We do not add in any new [purchases/advances/loans]. This gives us
the daily balance. Then, we add all the daily balances for the
billing cycle together and divide the total by the number of days in
the billing cycle. This gives us the ``average daily balance.''
(d) Average daily balance method (including current transactions)
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the ``average daily balance'' of your
account (including current transactions). To get the ``average daily
balance'' we take the beginning balance of your account each day,
add any new [purchases/advances/loans], and subtract any payments or
credits, [and unpaid finance charges]. This gives us the daily
balance. Then, we add up all the daily balances for the billing
cycle and divide the total by the number of days in the billing
cycle. This gives us the ``average daily balance.''
(e) Ending balance method
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the amount you owe at the end of each
billing cycle (including new purchases and deducting payments and
credits made during the billing cycle).
(f) Daily balance method (including current transactions)
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the ``daily balance'' of your account
for each day in the billing cycle. To get the ``daily balance'' we
take the beginning balance of your account each day, add any new
[purchases/advances/fees], and subtract [any unpaid finance charges
and] any payments or credits. This gives us the daily balance.
G-1(A)--Balance Computation Methods Model Clauses (Plans Other Than
Home-Equity Plans)
(a) Adjusted balance method
We figure the interest charge on your account by applying the
periodic rate to the ``adjusted balance'' of your account. We get
the ``adjusted balance'' by taking the balance you owed at the end
of the previous billing cycle and subtracting [any unpaid interest
or other finance charges and] any payments and credits received
during the present billing cycle.
(b) Previous balance method
We figure the interest charge on your account by applying the
periodic rate to the amount you owe at the beginning of each billing
cycle. We do not subtract any payments or credits received during
the billing cycle.
(c) Average daily balance method (excluding current transactions)
We figure the interest charge on your account by applying the
periodic rate to the ``average daily balance'' of your account. To
get the ``average daily balance'' we take the beginning balance of
your account each day and subtract [any unpaid interest or other
finance charges and] any payments or credits. We do not add in any
new [purchases/advances/fees]. This gives us the daily balance.
Then, we add all the daily balances for the billing cycle together
and divide the total by the number of days in the billing cycle.
This gives us the ``average daily balance.''
(d) Average daily balance method (including current transactions)
We figure the interest charge on your account by applying the
periodic rate to the ``average daily balance'' of your account. To
get the ``average daily balance'' we take the beginning balance of
your account each day, add any new [purchases/advances/fees], and
subtract [any unpaid interest or other finance charges and] any
payments or credits. This gives us the daily balance. Then, we add
up all the daily balances for the billing cycle and divide the total
by the number of days in the billing cycle. This gives us the
``average daily balance.''
(e) Ending balance method
We figure the interest charge on your account by applying the
periodic rate to the amount you owe at the end of each billing cycle
(including new [purchases/advances/fees] and deducting payments and
credits made during the billing cycle).
(f) Daily balance method (including current transactions)
We figure the interest charge on your account by applying the
periodic rate to the ``daily balance'' of your account for each day
in the billing cycle. To get the ``daily balance'' we take the
beginning balance of your account each day, add any new [purchases/
advances/fees], and subtract [any unpaid interest or other finance
charges and] any payments or credits. This gives us the daily
balance.
G-2--Liability for Unauthorized Use Model Clause (Home-Equity Plans)
You may be liable for the unauthorized use of your credit card
[or other term that describes the credit card]. You will not be
liable for unauthorized use that occurs after you notify [name of
card issuer or its designee] at [address], orally or in writing, of
the loss, theft, or possible unauthorized use. [You may also contact
us on the Web: [Creditor Web or e-mail address]] In any case, your
liability will not exceed [insert $50 or any lesser amount under
agreement with the cardholder].
G-2(A)--Liability for Unauthorized Use Model Clause (Plans Other Than
Home-Equity Plans)
If you notice the loss or theft of your credit card or a
possible unauthorized use of your card, you should write to us
immediately at: [address] [address listed on your bill], or call us
at [telephone number].
[You may also contact us on the Web: [Creditor Web or e-mail
address]]
You will not be liable for any unauthorized use that occurs
after you notify us. You may, however, be liable for unauthorized
use that occurs before your notice to us. In any case, your
liability will not exceed [insert $50 or any lesser amount under
agreement with the cardholder].
G-3--Long-Form Billing-Error Rights Model Form (Home-Equity Plans)
YOUR BILLING RIGHTS
KEEP THIS NOTICE FOR FUTURE USE
This notice contains important information about your rights and
our responsibilities under the Fair Credit Billing Act.
Notify Us in Case of Errors or Questions About Your Bill
If you think your bill is wrong, or if you need more information
about a transaction on your bill, write us [on a separate sheet] at
[address] [the address listed on your bill]. Write to us as soon as
possible. We must hear from you no later than 60 days after we sent
you the first bill on which the error or problem appeared. [You may
also contact us on the Web: [Creditor Web or e-mail address]] You
can telephone us, but doing so will not preserve your rights.
In your letter, give us the following information:
Your name and account number.
The dollar amount of the suspected error.
Describe the error and explain, if you can, why you
believe there is an error. If you need more information, describe
the item you are not sure about.
If you have authorized us to pay your credit card bill
automatically from your savings or checking account, you can stop
the payment on any amount you think is wrong. To stop the payment
your letter must reach us three business days before the automatic
payment is scheduled to occur.
Your Rights and Our Responsibilities After We Receive Your Written
Notice
We must acknowledge your letter within 30 days, unless we have
corrected the error by then. Within 90 days, we must either correct
the error or explain why we believe the bill was correct.
After we receive your letter, we cannot try to collect any
amount you question, or report you as delinquent. We can continue to
bill you for the amount you question, including finance charges, and
we can apply any unpaid amount against your credit limit. You do not
have to pay any questioned amount while we are investigating, but
you are still obligated to pay the parts of your bill that are not
in question.
If we find that we made a mistake on your bill, you will not
have to pay any finance charges related to any questioned amount. If
we didn't make a mistake, you may have to pay finance charges, and
you will have to make up any missed payments on the questioned
amount. In either case, we will send you a statement of the amount
you owe and the date that it is due.
If you fail to pay the amount that we think you owe, we may
report you as delinquent.
[[Page 54233]]
However, if our explanation does not satisfy you and you write to us
within ten days telling us that you still refuse to pay, we must
tell anyone we report you to that you have a question about your
bill. And, we must tell you the name of anyone we reported you to.
We must tell anyone we report you to that the matter has been
settled between us when it finally is.
If we don't follow these rules, we can't collect the first $50
of the questioned amount, even if your bill was correct.
Special Rule for Credit Card Purchases
If you have a problem with the quality of property or services
that you purchased with a credit card, and you have tried in good
faith to correct the problem with the merchant, you may have the
right not to pay the remaining amount due on the property or
services.
There are two limitations on this right:
(a) You must have made the purchase in your home State or, if
not within your home State within 100 miles of your current mailing
address; and
(b) The purchase price must have been more than $50.
These limitations do not apply if we own or operate the
merchant, or if we mailed you the advertisement for the property or
services.
G-3(A)--Long-Form Billing-Error Rights Model Form (Plans Other Than
Home-Equity Plans)
Your Billing Rights: Keep this Document for Future Use
This notice tells you about your rights and our responsibilities
under the Fair Credit Billing Act.
What To Do If You Find A Mistake On Your Statement
If you think there is an error on your statement, write to us
at:
[Creditor Name]
[Creditor Address]
[You may also contact us on the Web: [Creditor Web or e-mail
address]]
In your letter, give us the following information:
Account information: Your name and account number.
Dollar amount: The dollar amount of the suspected
error.
Description of problem: If you think there is an error
on your bill, describe what you believe is wrong and why you believe
it is a mistake.
You must contact us:
Within 60 days after the error appeared on your
statement.
At least 3 business days before an automated payment is
scheduled, if you want to stop payment on the amount you think is
wrong.
You must notify us of any potential errors in writing [or
electronically]. You may call us, but if you do we are not required
to investigate any potential errors and you may have to pay the
amount in question.
What Will Happen After We Receive Your Letter
When we receive your letter, we must do two things:
1. Within 30 days of receiving your letter, we must tell you
that we received your letter. We will also tell you if we have
already corrected the error.
2. Within 90 days of receiving your letter, we must either
correct the error or explain
While we investigate whether or not there has been an error:
We cannot try to collect the amount in question, or
report you as delinquent on that amount.
The charge in question may remain on your statement,
and we may continue to charge you interest on that amount.
While you do not have to pay the amount in question,
you are responsible for the remainder of your balance.
We can apply any unpaid amount against your credit
limit.
After we finish our investigation, one of two things will
happen:
If we made a mistake: You will not have to pay the
amount in question or any interest or other fees related to that
amount.
If we do not believe there was a mistake: You will have
to pay the amount in question, along with applicable interest and
fees. We will send you a statement of the amount you owe and the
date payment is due. We may then report you as delinquent if you do
not pay the amount we think you owe.
If you receive our explanation but still believe your bill is
wrong, you must write to us within 10 days telling us that you still
refuse to pay. If you do so, we cannot report you as delinquent
without also reporting that you are questioning your bill. We must
tell you the name of anyone to whom we reported you as delinquent,
and we must let those organizations know when the matter has been
settled between us.
If we do not follow all of the rules above, you do not have to
pay the first $50 of the amount you question even if your bill is
correct.
Your Rights if You Are Dissatisfied With Your Credit Card Purchases
If you are dissatisfied with the goods or services that you have
purchased with your credit card, and you have tried in good faith to
correct the problem with the merchant, you may have the right not to
pay the remaining amount due on the purchase.
To use this right, all of the following must be true:
1. The purchase must have been made in your home State or within
100 miles of your current mailing address, and the purchase price
must have been more than $50. (Note: Neither of these are necessary
if your purchase was based on an advertisement we mailed to you, or
if we own the company that sold you the goods or services.)
2. You must have used your credit card for the purchase.
Purchases made with cash advances from an ATM or with a check that
accesses your credit card account do not qualify.
3. You must not yet have fully paid for the purchase.
If all of the criteria above are met and you are still
dissatisfied with the purchase, contact us in writing [or
electronically] at:
[Creditor Name]
[Creditor Address]
[[Creditor Web or e-mail address]]
While we investigate, the same rules apply to the disputed
amount as discussed above. After we finish our investigation, we
will tell you our decision. At that point, if we think you owe an
amount and you do not pay, we may report you as delinquent.
G-4--Alternative Billing-Error Rights Model Form (Home-Equity Plans)
BILLING RIGHTS SUMMARY
In Case of Errors or Questions About Your Bill
If you think your bill is wrong, or if you need more information
about a transaction on your bill, write us [on a separate sheet] at
[address] [the address shown on your bill] as soon as possible. [You
may also contact us on the Web: [Creditor Web or e-mail address]] We
must hear from you no later than 60 days after we sent you the first
bill on which the error or problem appeared. You can telephone us,
but doing so will not preserve your rights.
In your letter, give us the following information:
Your name and account number.
The dollar amount of the suspected error.
Describe the error and explain, if you can, why you
believe there is an error. If you need more information, describe
the item you are unsure about.
You do not have to pay any amount in question while we are
investigating, but you are still obligated to pay the parts of your
bill that are not in question. While we investigate your question,
we cannot report you as delinquent or take any action to collect the
amount you question.
Special Rule for Credit Card Purchases
If you have a problem with the quality of goods or services that
you purchased with a credit card, and you have tried in good faith
to correct the problem with the merchant, you may not have to pay
the remaining amount due on the goods or services. You have this
protection only when the purchase price was more than $50 and the
purchase was made in your home State or within 100 miles of your
mailing address. (If we own or operate the merchant, or if we mailed
you the advertisement for the property or services, all purchases
are covered regardless of amount or location of purchase.)
G-4(A)--Alternative Billing-Error Rights Model Form (Plans Other Than
Home-Equity Plans)
What To Do if You Think You Find a Mistake on Your Statement
If you think there is an error on your statement, write to us
at:
[Creditor Name]
[Creditor Address]
[You may also contact us on the Web: [Creditor Web or e-mail
address]]
In your letter, give us the following information:
[[Page 54234]]
Account information: Your name and account number.
Dollar amount: The dollar amount of the suspected
error.
Description of Problem: If you think there is an error
on your bill, describe what you believe is wrong and why you believe
it is a mistake.
You must contact us within 60 days after the error appeared on
your statement.
You must notify us of any potential errors in writing [or
electronically] . You may call us, but if you do we are not required
to investigate any potential errors and you may have to pay the
amount in question.
While we investigate whether or not there has been an error, the
following are true:
We cannot try to collect the amount in question, or
report you as delinquent on that amount.
The charge in question may remain on your statement,
and we may continue to charge you interest on that amount. But, if
we determine that we made a mistake, you will not have to pay the
amount in question or any interest or other fees related to that
amount.
While you do not have to pay the amount in question,
you are responsible for the remainder of your balance.
We can apply any unpaid amount against your credit
limit.
Your Rights if You Are Dissatisfied With Your Credit Card Purchases
If you are dissatisfied with the goods or services that you have
purchased with your credit card, and you have tried in good faith to
correct the problem with the merchant, you may have the right not to
pay the remaining amount due on the purchase.
To use this right, all of the following must be true:
1. The purchase must have been made in your home State or within
100 miles of your current mailing address, and the purchase price
must have been more than $50. (Note: Neither of these are necessary
if your purchase was based on an advertisement we mailed to you, or
if we own the company that sold you the goods or services.)
2. You must have used your credit card for the purchase.
Purchases made with cash advances from an ATM or with a check that
accesses your credit card account do not qualify.
3. You must not yet have fully paid for the purchase.
If all of the criteria above are met and you are still
dissatisfied with the purchase, contact us in writing [or
electronically] at:
[Creditor Name]
[Creditor Address]
[[Creditor Web address]]
While we investigate, the same rules apply to the disputed
amount as discussed above. After we finish our investigation, we
will tell you our decision. At that point, if we think you owe an
amount and you do not pay we may report you as delinquent.
* * * * *
BILLING CODE 6210-01-P
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BILLING CODE 6210-01-C
G-11--Applications and Solicitations Made Available to the General
Public Model Clauses
(a) Disclosure of Required Credit Information
The information about the costs of the card described in this
[application]/[solicitation] is accurate as of (month/year). This
information may have changed after that date. To find out what may
have changed, [call us at (telephone number)][write to us at
(address)].
(b) No Disclosure of Credit Information
There are costs associated with the use of this card. To obtain
information about these costs, call us at (telephone number) or
write to us at (address).
G-12 [Reserved]
G-13(A)--Change in Insurance Provider Model Form (Combined Notice)
The credit card account you have with us is insured. This is to
notify you that we plan to replace your current coverage with
insurance coverage from a different insurer. If we obtain insurance
for your account from a different insurer, you may cancel the
insurance.
[Your premium rate will increase to $ -- per --.]
[Your coverage will be affected by the following:
[ ] The elimination of a type of coverage previously provided to
you. [(explanation)] [See -- of the attached policy for details.]
[ ] A lowering of the age at which your coverage will terminate
or will become more restrictive. [(explanation)] [See -- of the
attached policy or certificate for details.]
[ ] A decrease in your maximum insurable loan balance, maximum
periodic benefit payment, maximum number of payments, or any other
decrease in the dollar amount of your coverage or benefits.
[(explanation)] [See -- of the attached policy or certificate for
details.]
[ ] A restriction on the eligibility for benefits for you or
others. [(explanation)] [See -- of the attached policy or
certificate for details.]
[ ] A restriction in the definition of ``disability'' or other
key term of coverage. [(explanation)] [See -- of the attached policy
or certificate for details.]
[ ] The addition of exclusions or limitations that are broader
or other than those under the current coverage. [(explanation)] [See
-- of the attached policy or certificate for details.]
[ ] An increase in the elimination (waiting) period or a change
to nonretroactive coverage. [(explanation)] [See -- of the attached
policy or certificate for details).] [The name and mailing address
of the new
[[Page 54239]]
insurer providing the coverage for your account is (name and
address).]
G-13(B)--Change in Insurance Provider Model Form
We have changed the insurer providing the coverage for your
account. The new insurer's name and address are (name and address).
A copy of the new policy or certificate is attached.
You may cancel the insurance for your account.
* * * * *
G-16(A) Debt Suspension Model Clause
Please enroll me in the optional [insert name of program], and
bill my account the fee of [how cost is determined]. I understand
that enrollment is not required to obtain credit. I also understand
that depending on the event, the protection may only temporarily
suspend my duty to make minimum payments, not reduce the balance I
owe. I understand that my balance will actually grow during the
suspension period as interest continues to accumulate.
[To Enroll, Sign Here]/[To Enroll, Initial Here]. X ----------------
----
G-16(B) Debt Suspension Sample
Please enroll me in the optional [name of program], and bill my
account the fee of $.83 per $100 of my month-end account balance. I
understand that enrollment is not required to obtain credit. I also
understand that depending on the event, the protection may only
temporarily suspend my duty to make minimum payments, not reduce the
balance I owe. I understand that my balance will actually grow
during the suspension period as interest continues to accumulate.
[To Enroll, Initial Here]. X --------------------
BILLING CODE 6210-01-P
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[[Page 54241]]
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[[Page 54242]]
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[[Page 54243]]
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Form G-18(A) Periodic Statement Transactions; Interest Charges; Fees
Sample
[[Page 54244]]
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G-18(B)--Late Payment Fee Sample
Late Payment Warning: If we do not receive your minimum payment
by the date listed above, you may have to pay a $35 late fee and
your APRs may be increased up to the Penalty APR of 28.99%.
Form G-18(C)(1) Minimum Payment Warming (When Amortization Occurs and
Minimum Payment Repayment is Greater than Three Years)
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[[Page 54245]]
Form G-18(C)(2) Minimum Payment Warning (When Amortization Occurs and
Minimum Payment Repayment Estimate is Equal to or less than Three
Years);
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Form G-18(C)(3) Minimum Payment Warning (When Negative or No
Amortization Occurs);
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[[Page 54246]]
Form G-18(D) Periodic Statement New Balance, Due Date, late Payment and
Minimum Payment Sample (Credit Cards)
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G-18(E) [Reserved.]
[[Page 54247]]
G-18(F) Periodic Statement Form
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[[Page 54248]]
G-18(F) Periodic Statement Form (contd.)
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[[Page 54249]]
G-18(G) Periodic Statement Form
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[[Page 54250]]
G-18(G) Periodic Statement Form (contd.)
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[[Page 54251]]
G-18(H)--Deferred Interest Periodic Statement Clause
[You must pay your promotional balance in full by [date] to
avoid paying accrued interest charges.]
Form G-19 Checks Accessing a Credit Card Sample
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Form G-20 Change- in-Terms Sample (Increase Annual Percentage Rate)
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Form G-21 Change-in-Terms Sample (Increase in Fees)
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[[Page 54252]]
Form G-22 Penalty Rate Increase Sample (Payment 60 or Fewer Days Late)
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Form G-23 Penalty Rate Increase Sample (Payment More Than 60 Days Late)
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BILLING CODE 6210-01-C
G-24--Deferred Interest Offer Clauses
(a) For Credit Card Accounts Under an Open-End (Not Home-Secured)
Consumer Credit Plan
[Interest will be charged to your account from the purchase date
if the purchase balance is not paid in full within the/by [deferred
interest period/date] or if you make a late payment.]
(b) For Other Open-End Plans
[Interest will be charged to your account from the purchase date
if the purchase balance is not paid in full within the/by [deferred
interest period/date] or if your account is otherwise in default.]
G-25(A)--Consent Form for Over-the-Credit Limit Transactions
Your Right to Request Over-the-Credit Limit Coverage
Unless you tell us otherwise, we will decline any transaction
that causes you to go over your credit limit. If you want us to
authorize these transactions, you can request over-the-credit limit
coverage.
If you have over-the-credit limit coverage and you go over your
credit limit, we will charge you a fee of $XX and may increase your
APRs to the Penalty APR of XX.XX%. You will only pay one fee per
billing cycle, even if you go over your limit multiple times in the
same cycle.
Even if you request over-the-credit limit coverage, in some
cases we may still decline a transaction that would cause you to go
over your limit, such as if you are past due or significantly over
your credit limit.
If you want us to authorize transactions that go over your
credit limit, please:
--Call us at [telephone number];
--Visit [Web site]; or
--Check the box below, and return the form to us at [address].
----I want you to authorize transactions that exceed my credit
limit. I understand that if I go over my credit limit, I will be
charged a fee of $---- and my APRs may be increased.
G-25(B)--Revocation Notice for Periodic Statement Regarding Over-the-
Credit Limit Transactions
You currently have over-the-credit limit coverage on your
account, which means that we will pay transactions that cause you to
go over your credit limit. If you do go over your credit limit, we
will charge you a fee of $XX and your APRs may be increased. To
remove over-the-credit-limit coverage from your account, call us at
1-800-xxxxxxx or visit http://www.xxxxxxx.com. You may also write us
at: [insert address].
23. Appendix H to part 226 is amended by revising the table of
contents, and adding new forms H-17(A) and H-17(B) to read as follows:
Appendix H to Part 226--Closed-End Model Forms and Clauses
H-1 Credit Sale Model Form (Sec. 226.18)
H-2 Loan Model Form (Sec. 226.18)
H-3 Amount Financed Itemization Model Form (Sec. 226.18(c))
H-4(A) Variable-Rate Model Clauses (Sec. 226.18(f)(1))
H-4(B) Variable-Rate Model Clauses (Sec. 226.18(f)(2))
H-4(C) Variable-Rate Model Clauses (Sec. 226.19(b))
H-4(D) Variable-Rate Model Clauses (Sec. 226.20(c))
H-5 Demand Feature Model Clauses (Sec. 226.18(i))
H-6 Assumption Policy Model Clause (Sec. 226.18(q))
H-7 Required Deposit Model Clause (Sec. 226.18(r))
H-8 Rescission Model Form (General) (Sec. 226.23)
H-9 Rescission Model Form (Refinancing (with Original Creditor))
(Sec. 226.23)
H-10 Credit Sale Sample
H-11 Installment Loan Sample
H-12 Refinancing Sample
H-13 Mortgage with Demand Feature Sample
H-14 Variable-Rate Mortgage Sample (Sec. 226.19(b))
H-15 Graduated-Payment Mortgage Sample
H-16 Mortgage Sample
H-17(A) Debt Suspension Model Clause
H-17(B) Debt Suspension Sample
* * * * *
H-17(A) Debt Suspension Model Clause
Please enroll me in the optional [insert name of program], and
bill my account the fee of [insert charge for the initial term of
coverage]. I understand that enrollment is not required to obtain
credit. I also understand that depending on the event, the
protection may only temporarily suspend my duty to make minimum
payments, not reduce the balance I owe. I understand that my balance
will actually grow during the suspension period as interest
continues to accumulate.
[To Enroll, Sign Here]/[To Enroll, Initial Here]. X------------
----------------------------
H-17(B) Debt Suspension Sample
Please enroll me in the optional [name of program], and bill my
account the fee of $200.00. I understand that enrollment is not
required to obtain credit. I also understand that depending on the
event, the protection may only temporarily suspend my duty to make
minimum payments, not reduce the
[[Page 54253]]
balance I owe. I understand that my balance will actually grow
during the suspension period as interest continues to accumulate.
To Enroll, Initial Here. X--------------------------------------
--
24. Appendix M1 is added to part 226 to read as follows:
Appendix M1 to Part 226--Repayment Disclosures
(a) Definitions. (1) ``Promotional terms'' means terms of a
cardholder's account that will expire in a fixed period of time, as
set forth by the card issuer.
(2) ``Deferred interest or similar plan'' means a plan where a
consumer will not be obligated to pay interest that accrues on
balances or transactions if those balances or transactions are paid
in full prior to the expiration of a specified period of time.
(b) Calculating minimum payment repayment estimates.
(1) Minimum payment formulas. When calculating the minimum
payment repayment estimate, credit card issuers must use the minimum
payment formula(s) that apply to a cardholder's account. If more
than one minimum payment formula applies to an account, the issuer
must apply each minimum payment formula to the portion of the
balance to which the formula applies. In this case, the issuer must
disclose the longest repayment period calculated. For example,
assume that an issuer uses one minimum payment formula to calculate
the minimum payment amount for a general revolving feature, and
another minimum payment formula to calculate the minimum payment
amount for special purchases, such as a ``club plan purchase.''
Also, assume that based on a consumer's balances in these features
and the annual percentage rates that apply to such features, the
repayment period calculated pursuant to this Appendix for the
general revolving feature is 5 years, while the repayment period
calculated for the special purchase feature is 3 years. This issuer
must disclose 5 years as the repayment period for the entire balance
to the consumer. If any promotional terms related to payments apply
to a cardholder's account, such as a deferred billing plan where
minimum payments are not required for 12 months, credit card issuers
may assume no promotional terms apply to the account.
(2) Annual percentage rate. When calculating the minimum payment
repayment estimate, a credit card issuer must use the annual
percentage rates that apply to a cardholder's account, based on the
portion of the balance to which the rate applies. If any promotional
terms related to annual percentage rates apply to a cardholder's
account, other than deferred interest or similar plans, a credit
card issuer in calculating the minimum payment repayment estimate
must apply the promotional annual percentage rate(s) until it
expires and then must apply the rate that applies after the
promotional rate(s) expires. If the rate that applies after the
promotional rate(s) expires is a variable rate, a card issuer must
calculate that rate based on the applicable index or formula. This
variable rate is accurate if it was in effect within the last 30
days before the minimum payment repayment estimate is provided. For
deferred interest plans or similar plans, if minimum payments under
the deferred interest or similar plan will repay the balances or
transactions in full prior to the expiration of the specified period
of time, a card issuer must assume that the consumer will not be
obligated to pay the accrued interest. This means, in calculating
the minimum payment repayment estimate, the card issuer must apply a
zero percent annual percentage rate to the balance subject to the
deferred interest or similar plan. If, however, minimum payments
under the deferred interest plan or similar plan may not repay the
balances or transactions in full prior to the expiration of the
specified period of time, a credit card issuer must assume that a
consumer will not repay the balances or transactions in full prior
to the expiration of the specified period of time and thus the
consumer will be obligated to pay the accrued interest. This means,
in calculating the minimum payment repayment estimate, the card
issuer must apply the annual percentage rate at which interest is
accruing to the balance subject to the deferred interest or similar
plan.
(3) Beginning balance. When calculating the minimum payment
repayment estimate, a credit card issuer must use as the beginning
balance the outstanding balance on a consumer's account as of the
closing date of the last billing cycle. When calculating the minimum
payment repayment estimate, a credit card issuer may round the
beginning balance as described above to the nearest whole dollar.
(4) Assumptions. When calculating the minimum payment repayment
estimate, a credit card issuer for each of the terms below, may
either make the following assumption about that term, or use the
account term that applies to a consumer's account.
(i) Only minimum monthly payments are made each month. In
addition, minimum monthly payments are made each month--for example,
a debt cancellation or suspension agreement, or skip payment feature
does not apply to the account.
(ii) No additional extensions of credit are obtained, such as
new purchases, transactions, fees, charges or other activity. No
refunds or rebates are given.
(iii) The annual percentage rate or rates that apply to a
cardholder's account will not change, through either the operation
of a variable rate or the change to a rate, except as provided in
paragraph (b)(2) of this Appendix. For example, if a penalty annual
percentage rate currently applies to a consumer's account, an issuer
may assume that the penalty annual percentage rate will apply to the
consumer's account indefinitely, even if the consumer may
potentially return to a non-penalty annual percentage rate in the
future under the account agreement.
(iv) There is no grace period.
(v) The final payment pays the account in full (i.e., there is
no residual finance charge after the final month in a series of
payments).
(vi) The average daily balance method is used to calculate the
balance.
(vii) All months are the same length and leap year is ignored. A
monthly or daily periodic rate may be assumed. If a daily periodic
rate is assumed, the issuer may either assume (1) a year is 365 days
long, and all months are 30.41667 days long, or (2) a year is 360
days long, and all months are 30 days long.
(viii) Payments are credited on the last day of the month.
(ix) Payments are allocated to lower annual percentage rate
balances before higher annual percentage rate balances.
(x) The account is not past due and the account balance does not
exceed the credit limit.
(xi) When calculating the minimum payment repayment estimate,
the assumed payments, current balance and interest charges for each
month may be rounded to the nearest cent, as shown in Appendix M2 to
this part.
(5) Tolerance. A minimum payment repayment estimate shall be
considered accurate if it is not more than 2 months above or below
the minimum payment repayment estimate determined in accordance with
the guidance in this Appendix (prior to rounding described in Sec.
226.7(b)(12)(i)(B)). For example, assume the minimum payment
repayment estimate calculated using the guidance in this Appendix is
28 months (2 years, 4 months), and the minimum payment repayment
estimate calculated by the issuer is 30 months (2 years, 6 months).
The minimum payment repayment estimate should be disclosed as 2
years, due to the rounding rule set forth in Sec.
226.7(b)(12)(i)(B). Nonetheless, based on the 30 month estimate, the
issuer disclosed 3 years, based on that rounding rule. The issuer
would be in compliance with this guidance by disclosing 3 years,
instead of 2 years, because the issuer's estimate is within the 2
months' tolerance, prior to rounding. In addition, even if an
issuer's estimate is more than 2 months above or below the minimum
payment repayment estimate calculated using the guidance in this
Appendix, so long as the issuer discloses the correct number of
years to the consumer based on the rounding rule set forth in Sec.
226.7(b)(12)(i)(B), the issuer would be in compliance with this
guidance. For example, assume the minimum payment repayment estimate
calculated using the guidance in this Appendix is 32 months (2
years, 8 months), and the minimum payment repayment estimate
calculated by the issuer is 38 months (3 years, 2 months). Under the
rounding rule set forth in Sec. 226.7(b)(12)(i)(B), both of these
estimates would be rounded and disclosed to the consumer as 3 years.
Thus, if the issuer disclosed 3 years to the consumer, the issuer
would be in compliance with this guidance even though the minimum
payment repayment estimate calculated by the issuer is outside the 2
months' tolerance amount.
(c) Calculating the minimum payment total cost estimate. When
calculating the minimum payment total cost estimate, a credit card
issuer must total the dollar amount of the interest and principal
that the consumer would pay if he or she made minimum payments for
the length of time calculated as the minimum payment repayment
estimate under paragraph (b) of this Appendix. The minimum payment
total cost estimate is deemed to be accurate if it
[[Page 54254]]
is based on a minimum payment repayment estimate that is within the
tolerance guidance set forth in paragraph (b)(5) of this Appendix.
For example, assume the minimum payment repayment estimate
calculated using the guidance in this Appendix is 28 months (2
years, 4 months), and the minimum payment repayment estimate
calculated by the issuer is 30 months (2 years, 6 months). The
minimum payment total cost estimate will be deemed accurate even if
it is based on the 30 month estimate for length of repayment,
because the issuer's minimum payment repayment estimate is within
the 2 months' tolerance, prior to rounding. In addition, assume the
minimum payment repayment estimate calculated under this Appendix is
32 months (2 years, 8 months), and the minimum payment repayment
estimate calculated by the issuer is 38 months (3 years, 2 months).
Under the rounding rule set forth in Sec. 226.7(b)(12)(i)(B), both
of these estimates would be rounded and disclosed to the consumer as
3 years. If the issuer based the minimum payment total cost estimate
on 38 months (or any other minimum payment repayment estimate that
would be rounded to 3 years), the minimum payment total cost
estimate would be deemed to be accurate.
(d) Calculating the estimated monthly payment for repayment in
36 months. (1) In general. When calculating the estimated monthly
payment for repayment in 36 months, a credit card issuer must
calculate the estimated monthly payment amount that would be
required to pay off the outstanding balance shown on the statement
within 36 months, assuming the consumer paid the same amount each
month for 36 months.
(2) Weighted annual percentage rate. In calculating the
estimated monthly payment for repayment in 36 months, an issuer must
use a weighted annual percentage rate that is based on the annual
percentage rates that apply to a cardholder's account and the
portion of the balance to which the rate applies, as shown in
Appendix M2 to this part. If any promotional terms related to annual
percentage rates apply to a cardholder's account, other than
deferred interest plans or similar plans, in calculating the
weighted annual percentage rate, the issuer must calculate a
weighted average of the promotional rate and the rate that will
apply after the promotional rate expires based on the percentage of
36 months each rate will apply, as shown in Appendix M2 to this
part. For deferred interest plans or similar plans, if minimum
payments under the deferred interest or similar plan will repay the
balances or transactions in full prior to the expiration of the
specified period of time, a card issuer must assume that the
consumer will not be obligated to pay the accrued interest. This
means, in calculating the weighted annual percentage rate, the card
issuer must apply a zero percent annual percentage rate to the
balance subject to the deferred interest or similar plan. If,
however, minimum payments under the deferred interest plan or
similar plan may not repay the balances or transactions in full
prior to the expiration of the specified period of time, a credit
card issuer in calculating the weighted annual percentage rate must
assume that a consumer will not repay the balances or transactions
in full prior to the expiration of the specified period of time and
thus the consumer will be obligated to pay the accrued interest.
This means, in calculating the weighted annual percentage rate, the
card issuer must apply the annual percentage rate at which interest
is accruing to the balance subject to the deferred interest or
similar plan.
(3) Assumptions. In calculating the estimated monthly payment
for repayment in 36 months, a card issuer must use the same terms
described in paragraph (b) of this Appendix, as appropriate.
(e) Calculating the total cost estimate for repayment in 36
months. When calculating the total cost estimate for repayment in 36
months, a credit card issuer must total the dollar amount of the
interest and principal that the consumer would pay if he or she made
the estimated monthly payment calculated under paragraph (d) of this
Appendix each month for 36 months.
(f) Calculating the savings estimate for repayment in 36 months.
When calculating the saving estimate for repayment in 36 months, a
credit card issuer must subtract the total cost estimate for
repayment in 36 months calculated under paragraph (e) of this
Appendix (rounded to the nearest whole dollar as set forth in Sec.
226.7(b)(12)(i)(F)(3)) from the minimum payment total cost estimate
calculated under paragraph (c) of this Appendix (rounded to the
nearest whole dollar as set forth in Sec. 226.7(b)(12)(i)(C)).
24a. Appendix M2 is added to part 226 to read as follows:
Appendix M2 to Part 226--Sample Calculations of Repayment Disclosures
The following is an example of how to calculate the minimum
payment repayment estimate, the minimum payment total cost estimate,
the estimated monthly payment for repayment in 36 months, the total
cost estimate for repayment in 36 months, and the savings estimate
for repayment in 36 month using the guidance in Appendix M1 to this
part where three annual percentage rates apply (where one of the
rates is a promotional APR), the total outstanding balance is $1000,
and the minimum payment formula is 2 percent of the outstanding
balance or $20, whichever is greater. The following calculation is
written in SAS code.
data one;
/*
Note: pmt01 = estimated monthly payment to repay balance in 36
months
sumpmts36 = sum of payments for repayment in 36 months
month = number of months to repay total balance if making only
minimum payments
pmt = minimum monthly payment
fc = monthly finance charge
sumpmts = sum of payments for minimum payments
*/
* inputs;
* annual percentage rates; apr1= 0.0; apr2=0.17; apr3=0.21; * insert
in ascending order;
* outstanding balances; cbal1=500; cbal2=250; cbal3=250;
* dollar minimum payment; dmin=20;
* percent minimum payment; pmin=0.02; * (0.02+perrate);
* promotional rate information;
* last month for promotional rate; expm=6; * = 0 if no promotional
rate;
* regular rate; rrate=.17; * = 0 if no promotional rate;
array apr(3); array perrate(3);
days=365/12; * calculate days in month;
* calculate estimated monthly payment to pay off balances in 36
months, and total cost of repaying balance in 36 months;
array xperrate(3);
do I=1 to 3;
xperrate(I)=(apr(I)/365)*days; * calculate periodic rate; end;
if expm gt 0 then xperrate1a=(expm/36)*xperrate1+(1-(expm/
36))*(rrate/365)*days; else xperrate1a=xperrate1;
tbal=cbal1+cbal2+cbal3;
perrate36=(cbal1*xperrate1a+cbal2*xperrate2+cbal3*xperrate3)/
(cbal1+cbal2+cbal3);
* months to repay; dmonths=36;
* initialize counters for sum of payments for repayment in 36
months;
Sumpmts36=0;
pvaf=(1-(1+perrate36)**-dmonths)/perrate36; * calculate present
value of annuity factor;
pmt01=round(tbal/pvaf,0.01); * calculate monthly payment for
designated number of months;
sumpmts36 = pmt01 * 36;
* calculate time to repay and total cost of making minimum payments
each month;
* initialize counter for months, and sum of payments;
month=0;
sumpmts=0;
do I=1 to 3;
perrate(I)=(apr(I)/365)*days; * calculate periodic rate; end;
put perrate1= perrate2= perrate3=;
eins:
month=month+1; * increment month counter;
pmt=round(pmin*tbal,0.01); * calculate payment as percentage of
balance;
if month ge expm and expm ne 0 then perrate1=(rrate/365)*days;
if pmt lt dmin then pmt=dmin; * set dollar minimum payment;
array xxxbal(3); array cbal(3);
do I=1 to 3;
xxxbal(I)=round(cbal(I)*(1+perrate(I)),0.01);
end;
fc=xxxbal1+xxxbal2+xxxbal3-tbal;
if pmt gt (tbal+fc) then do;
do I=1 to 3;
if cbal(I) gt 0 then pmt=round(cbal(I)*(1+perrate(I)),0.01); * set
final payment amount;
end;
end;
if pmt le xxxbal1 then do;
cbal1=xxxbal1-pmt;
cbal2=xxxbal2;
cbal3=xxxbal3;
end;
if pmt gt xxxbal1 and xxxbal2 gt 0 and pmt le (xxxbal1+xxxbal2) then
do;
[[Page 54255]]
cbal2=xxxbal2-(pmt-xxxbal1);
cbal1=0;
cbal3=xxxbal3;
end;
if pmt gt xxxbal2 and xxxbal3 gt 0 then do;
cbal3=xxxbal3-(pmt-xxxbal1-xxxbal2);
cbal2=0;
end;
sumpmts=sumpmts+pmt; * increment sum of payments;
tbal=cbal1+cbal2+cbal3; * calculate new total balance;
* print month, balance, payment amount, and finance charge;
put month= tbal= cbal1= cbal2= cbal3= pmt= fc= ;
if tbal gt 0 then go to eins; * go to next month if balance is
greater than zero;
* initialize total cost savings;
savtot=0;
savtot= round(sumpmts,1)-round (sumpmts36,1);
* print number of months to repay debt if minimum payments made,
final balance (zero), total cost if minimum payments made, estimated
monthly payment for repayment in 36 months, total cost for repayment
in 36 months, and total savings if repaid in 36 months;
put title=' ';
put title='number of months to repay debt if minimum payment made,
final balance, total cost if minimum payments made, estimated
monthly payment for repayment in 36 months, total cost for repayment
in 36 months, and total savings if repaid in 36 months';
put month= tbal= sumpmts= pmt01= sumpmts36= savtot=;
put title=' ';
run;
25. Appendix N to part 226 is added to read as follows:
Appendix N--Internet Posting of Credit Card Agreements
1. Credit Card Agreements Submitted to the Board Under Sec. 226.58(d)
(a) Each agreement submitted to the Board must contain the
provisions of the agreement and the pricing information in effect as
of the last business day of the preceding calendar quarter.
(b) Information that is not uniform for all cardholders under an
agreement, but that instead may vary from one cardholder to another
depending upon a cardholder's creditworthiness, State of residence,
or other factors, such as the pricing information, must be set forth
in an addendum to the agreement. The addendum must provide the
information either by setting forth all the possible variations
(such as purchase APRs of 6.9 percent, 8.9 percent, 10.9 percent, or
12.9 percent), or by providing a range (such as purchase APR ranging
from 6.9 percent to 12.9 percent).
(c) Card issuers are not required to submit any disclosures
required by State or Federal law, such as affiliate marketing
notices, privacy policies, or disclosures under the E-Sign Act,
except to the extent that those disclosures are included in the
provisions of the agreement or the pricing information. Similarly,
card issuers are not required to submit solicitation materials or
periodic statements.
(d) Agreements must not include any personally identifiable
information relating to any cardholder, such as name, address,
telephone number, or account number.
(e) Issuers may not provide provisions of the agreement or
pricing information in the form of change-in-terms notices or riders
(other than the single addendum described above, if applicable).
Changes in provisions or pricing information must be integrated into
the body of the agreement (or into the single addendum described
above, if applicable).
2. Posting of Agreements Offered to the Public on Card Issuer's Web
Site Under Proposed Sec. 226.58(f)(1)
(a) Agreements may be posted in any electronic format that is
readily usable by the general public.
(b) The content of the agreements posted on the issuer's Web
site must the same as those submitted to the Board, as specified in
paragraph 1. above.
(c) The card issuer must update the agreements posted on its Web
site at least as frequently as the quarterly schedule required for
submission of agreements to the Board under Sec. 226.58(d). If the
issuer chooses to update the agreements on its Web site more
frequently, the agreements posted on the issuer's Web site may
contain the provisions of the agreement and the pricing information
in effect as of a date other than the last business day of the
preceding calendar quarter.
(d) The agreements posted on the issuer's Web site must be
placed in a location that is prominent and easily accessible by the
public and must be presented in a clear and legible typeface.
3. Availability of Agreements for All Open Accounts under Sec.
226.58(f)(2)
(a) If the card issuer posts an agreement on its Web site under
Sec. 226.58(f)(2)(i), the agreement may be posted in any electronic
format this is readily usable by the general public and must be
placed in a location that is prominent and easily accessible to the
cardholder.
(b) The content of such agreements (whether posted on the card
issuer's Web site under Sec. 226.58(f)(2)(i) or made available upon
the cardholder's request under Sec. 226.58(f)(2)(ii)) must conform
to the content requirements for agreements submitted to the Board,
as specified in paragraph 1. above, except that each agreement: (1)
Must set forth the specific provisions and pricing information
applicable to the particular cardholder; and (2) may contain
personally identifiable information relating to the cardholder, such
as name, address, telephone number, or account number, provided that
the issuer takes appropriate measures to make the agreement
accessible only to the cardholder or other authorized persons.
Pricing information may be integrated into the text of the agreement
or provided in a single attached addendum. All agreements must be
presented in a clear and legible typeface.
(c) Agreements must contain provisions and pricing information
that is complete and accurate as of a date no more than 60 days
prior to: (1) The date on which the agreement is posted on the card
issuer's Web site under Sec. 226.58(f)(2)(i); or (2) the date the
cardholder's request is received under Sec. 226.58(f)(2)(ii).
(d) Issuers may not provide provisions of the agreement or
pricing information in the form of change-in-terms notices or riders
(other than the single addendum described above, if applicable).
Changes in provisions or pricing information must be integrated into
the body of the agreement (or into the single addendum described
above, if applicable).
26. In Supplement I to Part 226:
A. Revise the Introduction.
B. Revise Subpart A.
C. In Subpart B, revise sections 226.5 and 226.5a and sections
226.6 through 226.14 and section 226.16.
D. Under Section 226.5b--Requirements for Home-equity Plans, under
5b(a) Form of Disclosures, under 5b(a)(1) General, paragraph 1. is
revised.
E. Under Section 226.5b--Requirements for Home-equity Plans, under
5b(f) Limitations on Home-equity Plans, under 5b(f)(3)(vi), paragraph
4. is revised.
F. Under Section 226.26--Use of Annual Percentage Rate in Oral
Disclosures, under 26(a) Open-end credit., paragraph 1. is revised.
G. Under Section 226.27--Language of Disclosures, paragraph 1. is
revised.
H. Under Section 226.28--Effect on State Laws, under 28(a)
Inconsistent disclosure requirements., paragraph 6. is revised.
I. Under Section 226.30--Limitation on Rates, paragraph 8. is
revised and paragraph 13. is deleted.
J. Add a new Subpart G, consisting of sections 226.51 through
226.58.
K. Revise Appendix F.
L. Amend Appendix G by revising paragraphs 1. through 3. and 5.
through 6. and adding paragraphs 8. through 12.
M. Remove the References paragraph at the end of sections 226.1,
226.2, 226.3, 226.4, 226.5, 226.6, 226.7, 226.8, 226.9, 226.10, 226.11,
226.12, 226.13, 226.14, 226.16, and Appendix F.
Supplement I to Part 226--Official Staff Interpretations
Introduction
1. Official status. This commentary is the vehicle by which the
staff of the Division of Consumer and Community Affairs of the Federal
Reserve Board issues official staff interpretations of Regulation Z.
Good faith compliance with this commentary affords protection from
liability under 130(f) of the Truth in Lending Act. Section 130(f) (15
U.S.C. 1640) protects creditors from
[[Page 54256]]
civil liability for any act done or omitted in good faith in conformity
with any interpretation issued by a duly authorized official or
employee of the Federal Reserve System.
2. Procedure for requesting interpretations. Under appendix C of
the regulation, anyone may request an official staff interpretation.
Interpretations that are adopted will be incorporated in this
commentary following publication in the Federal Register. No official
staff interpretations are expected to be issued other than by means of
this commentary.
3. Rules of construction. (a) Lists that appear in the commentary
may be exhaustive or illustrative; the appropriate construction should
be clear from the context. In most cases, illustrative lists are
introduced by phrases such as ``including, but not limited to,''
``among other things,'' ``for example,'' or ``such as.''
(b) Throughout the commentary, reference to ``this section'' or
``this paragraph'' means the section or paragraph in the regulation
that is the subject of the comment.
4. Comment designations. Each comment in the commentary is
identified by a number and the regulatory section or paragraph which it
interprets. The comments are designated with as much specificity as
possible according to the particular regulatory provision addressed.
For example, some of the comments to Sec. 226.18(b) are further
divided by subparagraph, such as comment 18(b)(1)-1 and comment
18(b)(2)-1. In other cases, comments have more general application and
are designated, for example, as comment 18-1 or comment 18(b)-1. This
introduction may be cited as comments I-1 through I-4. Comments to the
appendices may be cited, for example, as comment app. A-1.
Subpart A--General
Sec. 226.1 Authority, Purpose, Coverage, Organization, Enforcement
and Liability.
1(c) Coverage.
1. Foreign applicability. Regulation Z applies to all persons
(including branches of foreign banks and sellers located in the United
States) that extend consumer credit to residents (including resident
aliens) of any State as defined in Sec. 226.2. If an account is
located in the United States and credit is extended to a U.S. resident,
the transaction is subject to the regulation. This will be the case
whether or not a particular advance or purchase on the account takes
place in the United States and whether or not the extender of credit is
chartered or based in the United States or a foreign country. For
example, if a U.S. resident has a credit card account located in the
consumer's State issued by a bank (whether U.S. or foreign-based), the
account is covered by the regulation, including extensions of credit
under the account that occur outside the United States. In contrast, if
a U.S. resident residing or visiting abroad, or a foreign national
abroad, opens a credit card account issued by a foreign branch of a
U.S. bank, the account is not covered by the regulation.
1(d) Organization.
Paragraph (1)(d)(5).
1. Effective dates. The Board's revisions to Regulation Z published
on July 30, 2008 (the ``final rules''), apply to covered loans
(including refinance loans and assumptions considered new transactions
under Sec. 226.20), for which the creditor receives an application on
or after October 1, 2009, except for the final rules on advertising,
escrows, and loan servicing. The final rules on escrows in Sec.
226.35(b)(3) are effective for covered loans, (including refinancings
and assumptions in Sec. 226.20) for which the creditor receives an
application on or after April 1, 2010; but for such loans secured by
manufactured housing on or after October 1, 2010. The final rules
applicable to servicers in Sec. 226.36(c) apply to all covered loans
serviced on or after October 1, 2009. The final rules on advertising
apply to advertisements occurring on or after October 1, 2009. For
example, a radio ad occurs on the date it is first broadcast; a
solicitation occurs on the date it is mailed to the consumer. The
following examples illustrate the application of the effective dates
for the final rules.
i. General. A refinancing or assumption as defined in Sec.
226.20(a) or (b) is a new transaction and is covered by a provision of
the final rules if the creditor receives an application for the
transaction on or after that provision's effective date. For example,
if a creditor receives an application for a refinance loan covered by
Sec. 226.35(a) on or after October 1, 2009, and the refinance loan is
consummated on October 15, 2009, the provision restricting prepayment
penalties in Sec. 226.35(b)(2) applies. However, if the transaction
were a modification of an existing obligation's terms that does not
constitute a refinance loan under Sec. 226.20(a), the final rules,
including for example the restriction on prepayment penalties would not
apply.
ii. Escrows. Assume a consumer applies for a refinance loan to be
secured by a dwelling (that is not a manufactured home) on March 15,
2010, and the loan is consummated on April 2, 2010, the escrow rule in
Sec. 226.35(b)(3) does not apply.
iii. Servicing. Assume that a consumer applies for a new loan on
August 1, 2009. The loan is consummated on September 1, 2009. The
servicing rules in Sec. 226.36(c) apply to the servicing of that loan
as of October 1, 2009.
Paragraph 1(d)(6).
1. Mandatory compliance dates. Compliance with the Board's
revisions to Regulation Z published on August 14, 2009 is mandatory for
private education loans for which the creditor receives an application
on or after February 14, 2010. Compliance with the final rules on co-
branding in Sec. 226.48(a) and (b) is mandatory for marketing occurring
on or after February 14, 2010. Compliance with the final rules is
optional for private education loan transactions for which an
application was received prior to February 14, 2010, even if
consummated after the mandatory compliance date.
2. Optional compliance. A creditor may, at its option, provide the
approval and final disclosures required under Sec. Sec. 226.47(b) or
(c) for private education loans where an application was received prior
to the mandatory compliance date. If the creditor opts to provide the
disclosures, the creditor must also comply with the applicable timing
and other rules in Sec. Sec. 226.46 and 226.48 (including providing
the consumer with the 30-day acceptance period under Sec. 226.48(c),
and the right to cancel under Sec. 226.48(d)). For example if the
creditor receives an application on January 25, 2010 and approves the
consumer's application on or after February 14, 2010, the creditor may,
at its option, provide the approval disclosures under Sec. 226.47(b),
the final disclosures under Sec. 226.47(c) and comply with the
applicable requirements Sec. Sec. 226.46 and 226.48. The creditor must
also obtain the self-certification form as required in Sec. 226.48(e),
if applicable. Or, for example, if the creditor receives an application
on January 25, 2010 and approves the consumer's application before
February 14, 2010, the creditor may, at its option, provide the final
disclosure under Sec. 226.47(c) and comply with the applicable timing
and other requirements of Sec. Sec. 226.46 and 226.48, including
providing the consumer with the right to cancel under Sec. 226.48(d).
The creditor must also obtain the self-certification form as required
in Sec. 226.48(e), if applicable.
Paragraph 1(d)(7).
1. [Reserved.]
[[Page 54257]]
Sec. 226.2 Definitions and Rules of Construction.
2(a)(2) Advertisement.
1. Coverage. Only commercial messages that promote consumer credit
transactions requiring disclosures are advertisements. Messages
inviting, offering, or otherwise announcing generally to prospective
customers the availability of credit transactions, whether in visual,
oral, or print media, are covered by Regulation Z (12 CFR part 226).
i. Examples include:
A. Messages in a newspaper, magazine, leaflet, promotional flyer,
or catalog.
B. Announcements on radio, television, or public address system.
C. Electronic advertisements, such as on the Internet.
D. Direct mail literature or other printed material on any exterior
or interior sign.
E. Point of sale displays.
F. Telephone solicitations.
G. Price tags that contain credit information.
H. Letters sent to customers or potential customers as part of an
organized solicitation of business.
I. Messages on checking account statements offering auto loans at a
stated annual percentage rate.
J. Communications promoting a new open-end plan or closed-end
transaction.
ii. The term does not include:
A. Direct personal contacts, such as follow-up letters, cost
estimates for individual consumers, or oral or written communication
relating to the negotiation of a specific transaction.
B. Informational material, for example, interest-rate and loan-term
memos, distributed only to business entities.
C. Notices required by Federal or State law, if the law mandates
that specific information be displayed and only the information so
mandated is included in the notice.
D. News articles the use of which is controlled by the news medium.
E. Market-research or educational materials that do not solicit
business.
F. Communications about an existing credit account (for example, a
promotion encouraging additional or different uses of an existing
credit card account.)
2. Persons covered. All persons must comply with the advertising
provisions in Sec. Sec. 226.16 and 226.24, not just those that meet
the definition of creditor in Sec. 226.2(a)(17). Thus, home builders,
merchants, and others who are not themselves creditors must comply with
the advertising provisions of the regulation if they advertise consumer
credit transactions. However, under section 145 of the act, the owner
and the personnel of the medium in which an advertisement appears, or
through which it is disseminated, are not subject to civil liability
for violations.
2(a)(3) Reserved.
2(a)(4) Billing cycle or cycle.
1. Intervals. In open-end credit plans, the billing cycle
determines the intervals for which periodic disclosure statements are
required; these intervals are also used as measuring points for other
duties of the creditor. Typically, billing cycles are monthly, but they
may be more frequent or less frequent (but not less frequent than
quarterly).
2. Creditors that do not bill. The term cycle is interchangeable
with billing cycle for definitional purposes, since some creditors'
cycles do not involve the sending of bills in the traditional sense but
only statements of account activity. This is commonly the case with
financial institutions when periodic payments are made through payroll
deduction or through automatic debit of the consumer's asset account.
3. Equal cycles. Although cycles must be equal, there is a
permissible variance to account for weekends, holidays, and differences
in the number of days in months. If the actual date of each statement
does not vary by more than four days from a fixed ``day'' (for example,
the third Thursday of each month) or ``date'' (for example, the 15th of
each month) that the creditor regularly uses, the intervals between
statements are considered equal. The requirement that cycles be equal
applies even if the creditor applies a daily periodic rate to determine
the finance charge. The requirement that intervals be equal does not
apply to the first billing cycle on an open-end account (i.e., the time
period between account opening and the generation of the first periodic
statement) or to a transitional billing cycle that can occur if the
creditor occasionally changes its billing cycles so as to establish a
new statement day or date. (See comments 9(c)(1)-3 and 9(c)(2)-3.)
4. Payment reminder. The sending of a regular payment reminder
(rather than a late payment notice) establishes a cycle for which the
creditor must send periodic statements.
2(a)(6) Business day.
1. Business function test. Activities that indicate that the
creditor is open for substantially all of its business functions
include the availability of personnel to make loan disbursements, to
open new accounts, and to handle credit transaction inquiries.
Activities that indicate that the creditor is not open for
substantially all of its business functions include a retailer's merely
accepting credit cards for purchases or a bank's having its customer-
service windows open only for limited purposes such as deposits and
withdrawals, bill paying, and related services.
2. Rule for rescission, disclosures for certain mortgage
transactions, and private education loans. A more precise rule for what
is a business day (all calendar days except Sundays and the Federal
legal holidays specified in 5 U.S.C. 6103(a)) applies when the right of
rescission, the receipt of disclosures for certain dwelling-secured
mortgage transactions under Sec. Sec. 226.19(a)(1)(ii), 226.19(a)(2),
226.31(c), or the receipt of disclosures for private education loans
under Sec. 226.46(d)(4) is involved. Four Federal legal holidays are
identified in 5 U.S.C. 6103(a) by a specific date: New Year's Day,
January 1; Independence Day, July 4; Veterans Day, November 11; and
Christmas Day, December 25. When one of these holidays (July 4, for
example) falls on a Saturday, Federal offices and other entities might
observe the holiday on the preceding Friday (July 3). In cases where
the more precise rule applies, the observed holiday (in the example,
July 3) is a business day.
2(a)(7) Card issuer.
1. Agent. An agent of a card issuer is considered a card issuer.
Because agency relationships are traditionally defined by contract and
by State or other applicable law, the regulation does not define agent.
Merely providing services relating to the production of credit cards or
data processing for others, however, does not make one the agent of the
card issuer. In contrast, a financial institution may become the agent
of the card issuer if an agreement between the institution and the card
issuer provides that the cardholder may use a line of credit with the
financial institution to pay obligations incurred by use of the credit
card.
2(a)(8) Cardholder.
1. General rule. A cardholder is a natural person at whose request
a card is issued for consumer credit purposes or who is a co-obligor or
guarantor for such a card issued to another. The second category does
not include an employee who is a co-obligor or guarantor on a card
issued to the employer for business purposes, nor does it include a
person who is merely the authorized user of a card issued to another.
2. Limited application of regulation. For the limited purposes of
the rules on issuance of credit cards and liability for unauthorized
use, a cardholder includes any person, including an organization,
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to whom a card is issued for any purpose--including a business,
agricultural, or commercial purpose.
3. Issuance. See the commentary to Sec. 226.12(a).
4. Dual-purpose cards and dual-card systems. Some card issuers
offer dual-purpose cards that are for business as well as consumer
purposes. If a card is issued to an individual for consumer purposes,
the fact that an organization has guaranteed to pay the debt does not
make it business credit. On the other hand, if a card is issued for
business purposes, the fact that an individual sometimes uses it for
consumer purchases does not subject the card issuer to the provisions
on periodic statements, billing-error resolution, and other protections
afforded to consumer credit. Some card issuers offer dual-card
systems--that is, they issue two cards to the same individual, one
intended for business use, the other for consumer or personal use. With
such a system, the same person may be a cardholder for general purposes
when using the card issued for consumer use, and a cardholder only for
the limited purposes of the restrictions on issuance and liability when
using the card issued for business purposes.
2(a)(9) Cash price.
1. Components. This amount is a starting point in computing the
amount financed and the total sale price under Sec. 226.18 for credit
sales. Any charges imposed equally in cash and credit transactions may
be included in the cash price, or they may be treated as other amounts
financed under Sec. 226.18(b)(2).
2. Service contracts. Service contracts include contracts for the
repair or the servicing of goods, such as mechanical breakdown
coverage, even if such a contract is characterized as insurance under
State law.
3. Rebates. The creditor has complete flexibility in the way it
treats rebates for purposes of disclosure and calculation. (See the
commentary to Sec. 226.18(b).)
2(a)(10) Closed-end credit.
1. General. The coverage of this term is defined by exclusion. That
is, it includes any credit arrangement that does not fall within the
definition of open-end credit. Subpart C contains the disclosure rules
for closed-end credit when the obligation is subject to a finance
charge or is payable by written agreement in more than four
installments.
2(a)(11) Consumer.
1. Scope. Guarantors, endorsers, and sureties are not generally
consumers for purposes of the regulation, but they may be entitled to
rescind under certain circumstances and they may have certain rights if
they are obligated on credit card plans.
2. Rescission rules. For purposes of rescission under Sec. Sec.
226.15 and 226.23, a consumer includes any natural person whose
ownership interest in his or her principal dwelling is subject to the
risk of loss. Thus, if a security interest is taken in A's ownership
interest in a house and that house is A's principal dwelling, A is a
consumer for purposes of rescission, even if A is not liable, either
primarily or secondarily, on the underlying consumer credit
transaction. An ownership interest does not include, for example,
leaseholds or inchoate rights, such as dower.
3. Land trusts. Credit extended to land trusts, as described in the
commentary to Sec. 226.3(a), is considered to be extended to a natural
person for purposes of the definition of consumer.
2(a)(12) Consumer credit.
1. Primary purpose. There is no precise test for what constitutes
credit offered or extended for personal, family, or household purposes,
nor for what constitutes the primary purpose. (See, however, the
discussion of business purposes in the commentary to Sec. 226.3(a).)
2(a)(13) Consummation.
1. State law governs. When a contractual obligation on the
consumer's part is created is a matter to be determined under
applicable law; Regulation Z does not make this determination. A
contractual commitment agreement, for example, that under applicable
law binds the consumer to the credit terms would be consummation.
Consummation, however, does not occur merely because the consumer has
made some financial investment in the transaction (for example, by
paying a nonrefundable fee) unless, of course, applicable law holds
otherwise.
2. Credit v. sale. Consummation does not occur when the consumer
becomes contractually committed to a sale transaction, unless the
consumer also becomes legally obligated to accept a particular credit
arrangement. For example, when a consumer pays a nonrefundable deposit
to purchase an automobile, a purchase contract may be created, but
consummation for purposes of the regulation does not occur unless the
consumer also contracts for financing at that time.
2(a)(14) Credit.
1. Exclusions. The following situations are not considered credit
for purposes of the regulation:
i. Layaway plans, unless the consumer is contractually obligated to
continue making payments. Whether the consumer is so obligated is a
matter to be determined under applicable law. The fact that the
consumer is not entitled to a refund of any amounts paid towards the
cash price of the merchandise does not bring layaways within the
definition of credit.
ii. Tax liens, tax assessments, court judgments, and court
approvals of reaffirmation of debts in bankruptcy. However, third-party
financing of such obligations (for example, a bank loan obtained to pay
off a tax lien) is credit for purposes of the regulation.
iii. Insurance premium plans that involve payment in installments
with each installment representing the payment for insurance coverage
for a certain future period of time, unless the consumer is
contractually obligated to continue making payments.
iv. Home improvement transactions that involve progress payments,
if the consumer pays, as the work progresses, only for work completed
and has no contractual obligation to continue making payments.
v. Borrowing against the accrued cash value of an insurance policy
or a pension account, if there is no independent obligation to repay.
vi. Letters of credit.
vii. The execution of option contracts. However, there may be an
extension of credit when the option is exercised, if there is an
agreement at that time to defer payment of a debt.
viii. Investment plans in which the party extending capital to the
consumer risks the loss of the capital advanced. This includes, for
example, an arrangement with a home purchaser in which the investor
pays a portion of the downpayment and of the periodic mortgage payments
in return for an ownership interest in the property, and shares in any
gain or loss of property value.
ix. Mortgage assistance plans administered by a government agency
in which a portion of the consumer's monthly payment amount is paid by
the agency. No finance charge is imposed on the subsidy amount, and
that amount is due in a lump-sum payment on a set date or upon the
occurrence of certain events. (If payment is not made when due, a new
note imposing a finance charge may be written, which may then be
subject to the regulation.)
2. Payday loans; deferred presentment. Credit includes a
transaction in which a cash advance is made to a consumer in exchange
for the consumer's personal check, or in exchange for the consumer's
authorization to debit the consumer's deposit account, and where the
parties agree either that the check will not be cashed or deposited, or
that the
[[Page 54259]]
consumer's deposit account will not be debited, until a designated
future date. This type of transaction is often referred to as a
``payday loan'' or ``payday advance'' or ``deferred-presentment loan.''
A fee charged in connection with such a transaction may be a finance
charge for purposes of Sec. 226.4, regardless of how the fee is
characterized under State law. Where the fee charged constitutes a
finance charge under Sec. 226.4 and the person advancing funds
regularly extends consumer credit, that person is a creditor and is
required to provide disclosures consistent with the requirements of
Regulation Z. (See Sec. 226.2(a)(17).)
2(a)(15) Credit card.
1. Usable from time to time. A credit card must be usable from time
to time. Since this involves the possibility of repeated use of a
single device, checks and similar instruments that can be used only
once to obtain a single credit extension are not credit cards.
2. Examples. i. Examples of credit cards include:
A. A card that guarantees checks or similar instruments, if the
asset account is also tied to an overdraft line or if the instrument
directly accesses a line of credit.
B. A card that accesses both a credit and an asset account (that
is, a debit-credit card).
C. An identification card that permits the consumer to defer
payment on a purchase.
D. An identification card indicating loan approval that is
presented to a merchant or to a lender, whether or not the consumer
signs a separate promissory note for each credit extension.
E. A card or device that can be activated upon receipt to access
credit, even if the card has a substantive use other than credit, such
as a purchase-price discount card. Such a card or device is a credit
card notwithstanding the fact that the recipient must first contact the
card issuer to access or activate the credit feature.
ii. In contrast, credit card does not include, for example:
A. A check-guarantee or debit card with no credit feature or
agreement, even if the creditor occasionally honors an inadvertent
overdraft.
B. Any card, key, plate, or other device that is used in order to
obtain petroleum products for business purposes from a wholesale
distribution facility or to gain access to that facility, and that is
required to be used without regard to payment terms.
3. Charge card. Generally, charge cards are cards used in
connection with an account on which outstanding balances cannot be
carried from one billing cycle to another and are payable when a
periodic statement is received. Under the regulation, a reference to
credit cards generally includes charge cards. The term charge card is,
however, distinguished from credit card in Sec. Sec. 226.5a,
226.7(b)(11), 226.7(b)(12), 226.9(e), 226.9(f) and 226.28(d), and
appendices G-10 through G-13. When the term credit card is used in
those provisions, it refers to credit cards other than charge cards.
2(a)(16) Credit sale.
1. Special disclosure. If the seller is a creditor in the
transaction, the transaction is a credit sale and the special credit
sale disclosures (that is, the disclosures under Sec. 226.18(j)) must
be given. This applies even if there is more than one creditor in the
transaction and the creditor making the disclosures is not the seller.
(See the commentary to Sec. 226.17(d).)
2. Sellers who arrange credit. If the seller of the property or
services involved arranged for financing but is not a creditor as to
that sale, the transaction is not a credit sale. Thus, if a seller
assists the consumer in obtaining a direct loan from a financial
institution and the consumer's note is payable to the financial
institution, the transaction is a loan and only the financial
institution is a creditor.
3. Refinancings. Generally, when a credit sale is refinanced within
the meaning of Sec. 226.20(a), loan disclosures should be made.
However, if a new sale of goods or services is also involved, the
transaction is a credit sale.
4. Incidental sales. Some lenders sell a product or service--such
as credit, property, or health insurance--as part of a loan
transaction. Section 226.4 contains the rules on whether the cost of
credit life, disability or property insurance is part of the finance
charge. If the insurance is financed, it may be disclosed as a separate
credit-sale transaction or disclosed as part of the primary
transaction; if the latter approach is taken, either loan or credit-
sale disclosures may be made. (See the commentary to Sec. 226.17(c)(1)
for further discussion of this point.)
5. Credit extensions for educational purposes. A credit extension
for educational purposes in which an educational institution is the
creditor may be treated as either a credit sale or a loan, regardless
of whether the funds are given directly to the student, credited to the
student's account, or disbursed to other persons on the student's
behalf. The disclosure of the total sale price need not be given if the
transaction is treated as a loan.
2(a)(17) Creditor.
1. General. The definition contains four independent tests. If any
one of the tests is met, the person is a creditor for purposes of that
particular test.
Paragraph 2(a)(17)(i).
1. Prerequisites. This test is composed of two requirements, both
of which must be met in order for a particular credit extension to be
subject to the regulation and for the credit extension to count towards
satisfaction of the numerical tests mentioned in Sec. 226.2(a)(17)(v).
i. First, there must be either or both of the following:
A. A written (rather than oral) agreement to pay in more than four
installments. A letter that merely confirms an oral agreement does not
constitute a written agreement for purposes of the definition.
B. A finance charge imposed for the credit. The obligation to pay
the finance charge need not be in writing.
ii. Second, the obligation must be payable to the person in order
for that person to be considered a creditor. If an obligation is made
payable to bearer, the creditor is the one who initially accepts the
obligation.
2. Assignees. If an obligation is initially payable to one person,
that person is the creditor even if the obligation by its terms is
simultaneously assigned to another person. For example:
i. An auto dealer and a bank have a business relationship in which
the bank supplies the dealer with credit sale contracts that are
initially made payable to the dealer and provide for the immediate
assignment of the obligation to the bank. The dealer and purchaser
execute the contract only after the bank approves the creditworthiness
of the purchaser. Because the obligation is initially payable on its
face to the dealer, the dealer is the only creditor in the transaction.
3. Numerical tests. The examples below illustrate how the numerical
tests of Sec. 226.2(a)(17)(v) are applied. The examples assume that
consumer credit with a finance charge or written agreement for more
than 4 installments was extended in the years in question and that the
person did not extend such credit in 2006.
4. Counting transactions. For purposes of closed-end credit, the
creditor counts each credit transaction. For open-end credit,
transactions means accounts, so that outstanding accounts are counted
instead of individual credit extensions. Normally the number of
transactions is measured by the preceding calendar year; if the
requisite number is met, then the person is a
[[Page 54260]]
creditor for all transactions in the current year. However, if the
person did not meet the test in the preceding year, the number of
transactions is measured by the current calendar year. For example, if
the person extends consumer credit 26 times in 2007, it is a creditor
for purposes of the regulation for the last extension of credit in 2007
and for all extensions of consumer credit in 2008. On the other hand,
if a business begins in 2007 and extends consumer credit 20 times, it
is not a creditor for purposes of the regulation in 2007. If it extends
consumer credit 75 times in 2008, however, it becomes a creditor for
purposes of the regulation (and must begin making disclosures) after
the 25th extension of credit in that year and is a creditor for all
extensions of consumer credit in 2009.
5. Relationship between consumer credit in general and credit
secured by a dwelling. Extensions of credit secured by a dwelling are
counted towards the 25-extensions test. For example, if in 2007 a
person extends unsecured consumer credit 23 times and consumer credit
secured by a dwelling twice, it becomes a creditor for the succeeding
extensions of credit, whether or not they are secured by a dwelling. On
the other hand, extensions of consumer credit not secured by a dwelling
are not counted towards the number of credit extensions secured by a
dwelling. For example, if in 2007 a person extends credit not secured
by a dwelling 8 times and credit secured by a dwelling 3 times, it is
not a creditor.
6. Effect of satisfying one test. Once one of the numerical tests
is satisfied, the person is also a creditor for the other type of
credit. For example, in 2007 a person extends consumer credit secured
by a dwelling 5 times. That person is a creditor for all succeeding
credit extensions, whether they involve credit secured by a dwelling or
not.
7. Trusts. In the case of credit extended by trusts, each
individual trust is considered a separate entity for purposes of
applying the criteria. For example:
i. A bank is the trustee for three trusts. Trust A makes 15
extensions of consumer credit annually; Trust B makes 10 extensions of
consumer credit annually; and Trust C makes 30 extensions of consumer
credit annually. Only Trust C is a creditor for purposes of the
regulation.
Paragraph 2(a)(17)(ii). [Reserved]
Paragraph 2(a)(17)(iii).
1. Card issuers subject to Subpart B. Section 226.2(a)(17)(iii)
makes certain card issuers creditors for purposes of the open-end
credit provisions of the regulation. This includes, for example, the
issuers of so-called travel and entertainment cards that expect
repayment at the first billing and do not impose a finance charge.
Since all disclosures are to be made only as applicable, such card
issuers would omit finance charge disclosures. Other provisions of the
regulation regarding such areas as scope, definitions, determination of
which charges are finance charges, Spanish language disclosures, record
retention, and use of model forms, also apply to such card issuers.
Paragraph 2(a)(17)(iv).
1. Card issuers subject to Subparts B and C. Section
226.2(a)(17)(iv) includes as creditors card issuers extending closed-
end credit in which there is a finance charge or an agreement to pay in
more than four installments. These card issuers are subject to the
appropriate provisions of Subparts B and C, as well as to the general
provisions.
2(a)(18) Downpayment.
1. Allocation. If a consumer makes a lump-sum payment, partially to
reduce the cash price and partially to pay prepaid finance charges,
only the portion attributable to reducing the cash price is part of the
downpayment. (See the commentary to Sec. 226.2(a)(23).)
2. Pick-up payments. i. Creditors may treat the deferred portion of
the downpayment, often referred to as pick-up payments, in a number of
ways. If the pick-up payment is treated as part of the downpayment:
A. It is subtracted in arriving at the amount financed under Sec.
226.18(b).
B. It may, but need not, be reflected in the payment schedule under
Sec. 226.18(g).
ii. If the pick-up payment does not meet the definition (for
example, if it is payable after the second regularly scheduled payment)
or if the creditor chooses not to treat it as part of the downpayment:
A. It must be included in the amount financed.
B. It must be shown in the payment schedule.
iii. Whichever way the pick-up payment is treated, the total of
payments under Sec. 226.18(h) must equal the sum of the payments
disclosed under Sec. 226.18(g).
3. Effect of existing liens.
i. No cash payment. In a credit sale, the ``downpayment'' may only
be used to reduce the cash price. For example, when a trade-in is used
as the downpayment and the existing lien on an automobile to be traded
in exceeds the value of the automobile, creditors must disclose a zero
on the downpayment line rather than a negative number. To illustrate,
assume a consumer owes $10,000 on an existing automobile loan and that
the trade-in value of the automobile is only $8,000, leaving a $2,000
deficit. The creditor should disclose a downpayment of $0, not -$2,000.
ii. Cash payment. If the consumer makes a cash payment, creditors
may, at their option, disclose the entire cash payment as the
downpayment, or apply the cash payment first to any excess lien amount
and disclose any remaining cash as the downpayment. In the above
example:
A. If the downpayment disclosed is equal to the cash payment, the
$2,000 deficit must be reflected as an additional amount financed under
Sec. 226.18(b)(2).
B. If the consumer provides $1,500 in cash (which does not
extinguish the $2,000 deficit), the creditor may disclose a downpayment
of $1,500 or of $0.
C. If the consumer provides $3,000 in cash, the creditor may
disclose a downpayment of $3,000 or of $1,000.
2(a)(19) Dwelling.
1. Scope. A dwelling need not be the consumer's principal residence
to fit the definition, and thus a vacation or second home could be a
dwelling. However, for purposes of the definition of residential
mortgage transaction and the right to rescind, a dwelling must be the
principal residence of the consumer. (See the commentary to Sec. Sec.
226.2(a)(24), 226.15, and 226.23.)
2. Use as a residence. Mobile homes, boats, and trailers are
dwellings if they are in fact used as residences, just as are
condominium and cooperative units. Recreational vehicles, campers, and
the like not used as residences are not dwellings.
3. Relation to exemptions. Any transaction involving a security
interest in a consumer's principal dwelling (as well as in any real
property) remains subject to the regulation despite the general
exemption in Sec. 226.3(b) for credit extensions over $25,000.
2(a)(20) Open-end credit.
1. General. This definition describes the characteristics of open-
end credit (for which the applicable disclosure and other rules are
contained in Subpart B), as distinct from closed-end credit. Open-end
credit is consumer credit that is extended under a plan and meets all 3
criteria set forth in the definition.
2. Existence of a plan. The definition requires that there be a
plan, which connotes a contractual arrangement between the creditor and
the consumer. Some creditors offer programs containing a number of
different credit features. The consumer has a single
[[Page 54261]]
account with the institution that can be accessed repeatedly via a
number of sub-accounts established for the different program features
and rate structures. Some features of the program might be used
repeatedly (for example, an overdraft line) while others might be used
infrequently (such as the part of the credit line available for secured
credit). If the program as a whole is subject to prescribed terms and
otherwise meets the definition of open-end credit, such a program would
be considered a single, multifeatured plan.
3. Repeated transactions. Under this criterion, the creditor must
reasonably contemplate repeated transactions. This means that the
credit plan must be usable from time to time and the creditor must
legitimately expect that there will be repeat business rather than a
one-time credit extension. The creditor must expect repeated dealings
with consumers under the credit plan as a whole and need not believe a
consumer will reuse a particular feature of the plan. The determination
of whether a creditor can reasonably contemplate repeated transactions
requires an objective analysis. Information that much of the creditor's
customer base with accounts under the plan make repeated transactions
over some period of time is relevant to the determination, particularly
when the plan is opened primarily for the financing of infrequently
purchased products or services. A standard based on reasonable belief
by a creditor necessarily includes some margin for judgmental error.
The fact that particular consumers do not return for further credit
extensions does not prevent a plan from having been properly
characterized as open-end. For example, if much of the customer base of
a clothing store makes repeat purchases, the fact that some consumers
use the plan only once would not affect the characterization of the
store's plan as open-end credit. The criterion regarding repeated
transactions is a question of fact to be decided in the context of the
creditor's type of business and the creditor's relationship with its
customers. For example, it would be more reasonable for a bank or
depository institution to contemplate repeated transactions with a
customer than for a seller of aluminum siding to make the same
assumption about its customers.
4. Finance charge on an outstanding balance. The requirement that a
finance charge may be computed and imposed from time to time on the
outstanding balance means that there is no specific amount financed for
the plan for which the finance charge, total of payments, and payment
schedule can be calculated. A plan may meet the definition of open-end
credit even though a finance charge is not normally imposed, provided
the creditor has the right, under the plan, to impose a finance charge
from time to time on the outstanding balance. For example, in some
plans, a finance charge is not imposed if the consumer pays all or a
specified portion of the outstanding balance within a given time
period. Such a plan could meet the finance charge criterion, if the
creditor has the right to impose a finance charge, even though the
consumer actually pays no finance charges during the existence of the
plan because the consumer takes advantage of the option to pay the
balance (either in full or in installments) within the time necessary
to avoid finance charges.
5. Reusable line. The total amount of credit that may be extended
during the existence of an open-end plan is unlimited because available
credit is generally replenished as earlier advances are repaid. A line
of credit is self-replenishing even though the plan itself has a fixed
expiration date, as long as during the plan's existence the consumer
may use the line, repay, and reuse the credit. The creditor may
occasionally or routinely verify credit information such as the
consumer's continued income and employment status or information for
security purposes but, to meet the definition of open-end credit, such
verification of credit information may not be done as a condition of
granting a consumer's request for a particular advance under the plan.
In general, a credit line is self-replenishing if the consumer can take
further advances as outstanding balances are repaid without being
required to separately apply for those additional advances. A credit
card account where the plan as a whole replenishes meets the self-
replenishing criterion, notwithstanding the fact that a credit card
issuer may verify credit information from time to time in connection
with specific transactions. This criterion of unlimited credit
distinguishes open-end credit from a series of advances made pursuant
to a closed-end credit loan commitment. For example:
i. Under a closed-end commitment, the creditor might agree to lend
a total of $10,000 in a series of advances as needed by the consumer.
When a consumer has borrowed the full $10,000, no more is advanced
under that particular agreement, even if there has been repayment of a
portion of the debt. (See Sec. 226.2(a)(17)(iv) for disclosure
requirements when a credit card is used to obtain the advances.)
ii. This criterion does not mean that the creditor must establish a
specific credit limit for the line of credit or that the line of credit
must always be replenished to its original amount. The creditor may
reduce a credit limit or refuse to extend new credit in a particular
case due to changes in the creditor's financial condition or the
consumer's creditworthiness. (The rules in Sec. 226.5b(f), however,
limit the ability of a creditor to suspend credit advances for home
equity plans.) While consumers should have a reasonable expectation of
obtaining credit as long as they remain current and within any preset
credit limits, further extensions of credit need not be an absolute
right in order for the plan to meet the self-replenishing criterion.
6. Verifications of collateral value. Creditors that otherwise meet
the requirements of Sec. 226.2(a)(20) extend open-end credit
notwithstanding the fact that the creditor must verify collateral
values to comply with Federal, State, or other applicable law or
verifies the value of collateral in connection with a particular
advance under the plan.
7. Open-end real estate mortgages. Some credit plans call for
negotiated advances under so-called open-end real estate mortgages.
Each such plan must be independently measured against the definition of
open-end credit, regardless of the terminology used in the industry to
describe the plan. The fact that a particular plan is called an open-
end real estate mortgage, for example, does not, by itself, mean that
it is open-end credit under the regulation.
2(a)(21) Periodic rate.
1. Basis. The periodic rate may be stated as a percentage (for
example, 1[frac12]% per month) or as a decimal equivalent (for example,
.015 monthly). It may be based on any portion of a year the creditor
chooses. Some creditors use \1/360\ of an annual rate as their periodic
rate. These creditors:
i. May disclose a \1/360\ rate as a daily periodic rate, without
further explanation, if it is in fact only applied 360 days per year.
But if the creditor applies that rate for 365 days, the creditor must
note that fact and, of course, disclose the true annual percentage
rate.
ii. Would have to apply the rate to the balance to disclose the
annual percentage rate with the degree of accuracy required in the
regulation (that is, within \1/8\th of 1 percentage point of the rate
based on the actual 365 days in the year).
[[Page 54262]]
2. Transaction charges. Periodic rate does not include initial one-
time transaction charges, even if the charge is computed as a
percentage of the transaction amount.
2(a)(22) Person.
1. Joint ventures. A joint venture is an organization and is
therefore a person.
2. Attorneys. An attorney and his or her client are considered to
be the same person for purposes of this regulation when the attorney is
acting within the scope of the attorney-client relationship with regard
to a particular transaction.
3. Trusts. A trust and its trustee are considered to be the same
person for purposes of this regulation.
2(a)(23) Prepaid finance charge.
1. General. Prepaid finance charges must be taken into account
under Sec. 226.18(b) in computing the disclosed amount financed, and
must be disclosed if the creditor provides an itemization of the amount
financed under Sec. 226.18(c).
2. Examples. i. Common examples of prepaid finance charges include:
A. Buyer's points.
B. Service fees.
C. Loan fees.
D. Finder's fees.
E. Loan-guarantee insurance.
F. Credit-investigation fees.
ii. However, in order for these or any other finance charges to be
considered prepaid, they must be either paid separately in cash or
check or withheld from the proceeds. Prepaid finance charges include
any portion of the finance charge paid prior to or at closing or
settlement.
3. Exclusions. Add-on and discount finance charges are not prepaid
finance charges for purposes of this regulation. Finance charges are
not prepaid merely because they are precomputed, whether or not a
portion of the charge will be rebated to the consumer upon prepayment.
(See the commentary to Sec. 226.18(b).)
4. Allocation of lump-sum payments. In a credit sale transaction
involving a lump-sum payment by the consumer and a discount or other
item that is a finance charge under Sec. 226.4, the discount or other
item is a prepaid finance charge to the extent the lump-sum payment is
not applied to the cash price. For example, a seller sells property to
a consumer for $10,000, requires the consumer to pay $3,000 at the time
of the purchase, and finances the remainder as a closed-end credit
transaction. The cash price of the property is $9,000. The seller is
the creditor in the transaction and therefore the $1,000 difference
between the credit and cash prices (the discount) is a finance charge.
(See the commentary to Sec. 226.4(b)(9) and (c)(5).) If the creditor
applies the entire $3,000 to the cash price and adds the $1,000 finance
charge to the interest on the $6,000 to arrive at the total finance
charge, all of the $3,000 lump-sum payment is a downpayment and the
discount is not a prepaid finance charge. However, if the creditor only
applies $2,000 of the lump-sum payment to the cash price, then $2,000
of the $3,000 is a downpayment and the $1,000 discount is a prepaid
finance charge.
2(a)(24) Residential mortgage transaction.
1. Relation to other sections. This term is important in five
provisions in the regulation:
i. Section 226.4(c)(7)--exclusions from the finance charge.
ii. Section 226.15(f)--exemption from the right of rescission.
iii. Section 226.18(q)--whether or not the obligation is assumable.
iv. Section 226.20(b)--disclosure requirements for assumptions.
v. Section 226.23(f)--exemption from the right of rescission.
2. Lien status. The definition is not limited to first lien
transactions. For example, a consumer might assume a paid-down first
mortgage (or borrow part of the purchase price) and borrow the balance
of the purchase price from a creditor who takes a second mortgage. The
second mortgage transaction is a residential mortgage transaction if
the dwelling purchased is the consumer's principal residence.
3. Principal dwelling. A consumer can have only one principal
dwelling at a time. Thus, a vacation or other second home would not be
a principal dwelling. However, if a consumer buys or builds a new
dwelling that will become the consumer's principal dwelling within a
year or upon the completion of construction, the new dwelling is
considered the principal dwelling for purposes of applying this
definition to a particular transaction. (See the commentary to
Sec. Sec. 226.15(a) and 226.23(a).)
4. Construction financing. If a transaction meets the definition of
a residential mortgage transaction and the creditor chooses to disclose
it as several transactions under Sec. 226.17(c)(6), each one is
considered to be a residential mortgage transaction, even if different
creditors are involved. For example:
i. The creditor makes a construction loan to finance the initial
construction of the consumer's principal dwelling, and the loan will be
disbursed in five advances. The creditor gives six sets of disclosures
(five for the construction phase and one for the permanent phase). Each
one is a residential mortgage transaction.
ii. One creditor finances the initial construction of the
consumer's principal dwelling and another creditor makes a loan to
satisfy the construction loan and provide permanent financing. Both
transactions are residential mortgage transactions.
5. Acquisition. i. A residential mortgage transaction finances the
acquisition of a consumer's principal dwelling. The term does not
include a transaction involving a consumer's principal dwelling if the
consumer had previously purchased and acquired some interest to the
dwelling, even though the consumer had not acquired full legal title.
ii. Examples of new transactions involving a previously acquired
dwelling include the financing of a balloon payment due under a land
sale contract and an extension of credit made to a joint owner of
property to buy out the other joint owner's interest. In these
instances, disclosures are not required under Sec. 226.18(q)
(assumability policies). However, the rescission rules of Sec. Sec.
226.15 and 226.23 do apply to these new transactions.
iii. In other cases, the disclosure and rescission rules do not
apply. For example, where a buyer enters into a written agreement with
the creditor holding the seller's mortgage, allowing the buyer to
assume the mortgage, if the buyer had previously purchased the property
and agreed with the seller to make the mortgage payments, Sec.
226.20(b) does not apply (assumptions involving residential mortgages).
6. Multiple purpose transactions. A transaction meets the
definition of this section if any part of the loan proceeds will be
used to finance the acquisition or initial construction of the
consumer's principal dwelling. For example, a transaction to finance
the initial construction of the consumer's principal dwelling is a
residential mortgage transaction even if a portion of the funds will be
disbursed directly to the consumer or used to satisfy a loan for the
purchase of the land on which the dwelling will be built.
7. Construction on previously acquired vacant land. A residential
mortgage transaction includes a loan to finance the construction of a
consumer's principal dwelling on a vacant lot previously acquired by
the consumer.
2(a)(25) Security interest.
1. Threshold test. The threshold test is whether a particular
interest in property is recognized as a security interest under
applicable law. The regulation does not determine whether a particular
interest is a security interest under applicable law. If the creditor
is unsure whether a particular interest is a
[[Page 54263]]
security interest under applicable law (for example, if statutes and
case law are either silent or inconclusive on the issue), the creditor
may at its option consider such interests as security interests for
Truth in Lending purposes. However, the regulation and the commentary
do exclude specific interests, such as after-acquired property and
accessories, from the scope of the definition regardless of their
categorization under applicable law, and these named exclusions may not
be disclosed as security interests under the regulation. (But see the
discussion of exclusions elsewhere in the commentary to Sec.
226.2(a)(25).)
2. Exclusions. The general definition of security interest excludes
three groups of interests: incidental interests, interests in after-
acquired property, and interests that arise solely by operation of law.
These interests may not be disclosed with the disclosures required
under Sec. 226.18, but the creditor is not precluded from preserving
these rights elsewhere in the contract documents, or invoking and
enforcing such rights, if it is otherwise lawful to do so. If the
creditor is unsure whether a particular interest is one of the excluded
interests, the creditor may, at its option, consider such interests as
security interests for Truth in Lending purposes.
3. Incidental interests. i. Incidental interests in property that
are not security interests include, among other things:
A. Assignment of rents.
B. Right to condemnation proceeds.
C. Interests in accessories and replacements.
D. Interests in escrow accounts, such as for taxes and insurance.
E. Waiver of homestead or personal property rights.
ii. The notion of an incidental interest does not encompass an
explicit security interest in an insurance policy if that policy is the
primary collateral for the transaction--for example, in an insurance
premium financing transaction.
4. Operation of law. Interests that arise solely by operation of
law are excluded from the general definition. Also excluded are
interests arising by operation of law that are merely repeated or
referred to in the contract. However, if the creditor has an interest
that arises by operation of law, such as a vendor's lien, and takes an
independent security interest in the same property, such as a UCC
security interest, the latter interest is a disclosable security
interest unless otherwise provided.
5. Rescission rules. Security interests that arise solely by
operation of law are security interests for purposes of rescission.
Examples of such interests are mechanics' and materialmen's liens.
6. Specificity of disclosure. A creditor need not separately
disclose multiple security interests that it may hold in the same
collateral. The creditor need only disclose that the transaction is
secured by the collateral, even when security interests from prior
transactions remain of record and a new security interest is taken in
connection with the transaction. In disclosing the fact that the
transaction is secured by the collateral, the creditor also need not
disclose how the security interest arose. For example, in a closed-end
credit transaction, a rescission notice need not specifically state
that a new security interest is ``acquired'' or an existing security
interest is ``retained'' in the transaction. The acquisition or
retention of a security interest in the consumer's principal dwelling
instead may be disclosed in a rescission notice with a general
statement such as the following: ``Your home is the security for the
new transaction.''
2(b) Rules of construction.
1. Footnotes. Footnotes are used extensively in the regulation to
provide special exceptions and more detailed explanations and examples.
Material that appears in a footnote has the same legal weight as
material in the body of the regulation.
2. Amount. The numerical amount must be a dollar amount unless
otherwise indicated. For example, in a closed-end transaction (Subpart
C), the amount financed and the amount of any payment must be expressed
as a dollar amount. In some cases, an amount should be expressed as a
percentage. For example, in disclosures provided before the first
transaction under an open-end plan (Subpart B), creditors are permitted
to explain how the amount of any finance charge will be determined;
where a cash-advance fee (which is a finance charge) is a percentage of
each cash advance, the amount of the finance charge for that fee is
expressed as a percentage.
Sec. 226.3 Exempt Transactions.
1. Relationship to Sec. 226.12. The provisions in Sec. 226.12(a)
and (b) governing the issuance of credit cards and the limitations on
liability for their unauthorized use apply to all credit cards, even if
the credit cards are issued for use in connection with extensions of
credit that otherwise are exempt under this section.
3(a) Business, commercial, agricultural, or organizational credit.
1. Primary purposes. A creditor must determine in each case if the
transaction is primarily for an exempt purpose. If some question exists
as to the primary purpose for a credit extension, the creditor is, of
course, free to make the disclosures, and the fact that disclosures are
made under such circumstances is not controlling on the question of
whether the transaction was exempt. (See comment 3(a)-2, however, with
respect to credit cards.)
2. Business purpose purchases.
i. Business-purpose credit cards--extensions of credit for consumer
purposes. If a business-purpose credit card is issued to a person, the
provisions of the regulation do not apply, other than as provided in
Sec. Sec. 226.12(a) and 226.12(b), even if extensions of credit for
consumer purposes are occasionally made using that business-purpose
credit card. For example, the billing error provisions set forth in
Sec. 226.13 do not apply to consumer-purpose extensions of credit
using a business-purpose credit card.
ii. Consumer-purpose credit cards--extensions of credit for
business purposes. If a consumer-purpose credit card is issued to a
person, the provisions of the regulation apply, even to occasional
extensions of credit for business purposes made using that consumer-
purpose credit card. For example, a consumer may assert a billing error
with respect to any extension of credit using a consumer-purpose credit
card, even if the specific extension of credit on such credit card or
open-end credit plan that is the subject of the dispute was made for
business purposes.
3. Factors. In determining whether credit to finance an
acquisition--such as securities, antiques, or art--is primarily for
business or commercial purposes (as opposed to a consumer purpose), the
following factors should be considered:
i. General.
A. The relationship of the borrower's primary occupation to the
acquisition. The more closely related, the more likely it is to be
business purpose.
B. The degree to which the borrower will personally manage the
acquisition. The more personal involvement there is, the more likely it
is to be business purpose.
C. The ratio of income from the acquisition to the total income of
the borrower. The higher the ratio, the more likely it is to be
business purpose.
D. The size of the transaction. The larger the transaction, the
more likely it is to be business purpose.
E. The borrower's statement of purpose for the loan.
ii. Business-purpose examples. Examples of business-purpose credit
include:
[[Page 54264]]
A. A loan to expand a business, even if it is secured by the
borrower's residence or personal property.
B. A loan to improve a principal residence by putting in a business
office.
C. A business account used occasionally for consumer purposes.
iii. Consumer-purpose examples. Examples of consumer-purpose credit
include:
A. Credit extensions by a company to its employees or agents if the
loans are used for personal purposes.
B. A loan secured by a mechanic's tools to pay a child's tuition.
C. A personal account used occasionally for business purposes.
4. Non-owner-occupied rental property. Credit extended to acquire,
improve, or maintain rental property (regardless of the number of
housing units) that is not owner-occupied is deemed to be for business
purposes. This includes, for example, the acquisition of a warehouse
that will be leased or a single-family house that will be rented to
another person to live in. If the owner expects to occupy the property
for more than 14 days during the coming year, the property cannot be
considered non-owner-occupied and this special rule will not apply. For
example, a beach house that the owner will occupy for a month in the
coming summer and rent out the rest of the year is owner occupied and
is not governed by this special rule. (See comment 3(a)-5, however, for
rules relating to owner-occupied rental property.)
5. Owner-occupied rental property. If credit is extended to
acquire, improve, or maintain rental property that is or will be owner-
occupied within the coming year, different rules apply:
i. Credit extended to acquire the rental property is deemed to be
for business purposes if it contains more than 2 housing units.
ii. Credit extended to improve or maintain the rental property is
deemed to be for business purposes if it contains more than 4 housing
units. Since the amended statute defines dwelling to include 1 to 4
housing units, this rule preserves the right of rescission for credit
extended for purposes other than acquisition. Neither of these rules
means that an extension of credit for property containing fewer than
the requisite number of units is necessarily consumer credit. In such
cases, the determination of whether it is business or consumer credit
should be made by considering the factors listed in comment 3(a)-3.
6. Business credit later refinanced. Business-purpose credit that
is exempt from the regulation may later be rewritten for consumer
purposes. Such a transaction is consumer credit requiring disclosures
only if the existing obligation is satisfied and replaced by a new
obligation made for consumer purposes undertaken by the same obligor.
7. Credit card renewal. A consumer-purpose credit card that is
subject to the regulation may be converted into a business-purpose
credit card at the time of its renewal, and the resulting business-
purpose credit card would be exempt from the regulation. Conversely, a
business-purpose credit card that is exempt from the regulation may be
converted into a consumer-purpose credit card at the time of its
renewal, and the resulting consumer-purpose credit card would be
subject to the regulation.
8. Agricultural purpose. An agricultural purpose includes the
planting, propagating, nurturing, harvesting, catching, storing,
exhibiting, marketing, transporting, processing, or manufacturing of
food, beverages (including alcoholic beverages), flowers, trees,
livestock, poultry, bees, wildlife, fish, or shellfish by a natural
person engaged in farming, fishing, or growing crops, flowers, trees,
livestock, poultry, bees, or wildlife. The exemption also applies to a
transaction involving real property that includes a dwelling (for
example, the purchase of a farm with a homestead) if the transaction is
primarily for agricultural purposes.
9. Organizational credit. The exemption for transactions in which
the borrower is not a natural person applies, for example, to loans to
corporations, partnerships, associations, churches, unions, and
fraternal organizations. The exemption applies regardless of the
purpose of the credit extension and regardless of the fact that a
natural person may guarantee or provide security for the credit.
10. Land trusts. Credit extended for consumer purposes to a land
trust is considered to be credit extended to a natural person rather
than credit extended to an organization. In some jurisdictions, a
financial institution financing a residential real estate transaction
for an individual uses a land trust mechanism. Title to the property is
conveyed to the land trust for which the financial institution itself
is trustee. The underlying installment note is executed by the
financial institution in its capacity as trustee and payment is secured
by a trust deed, reflecting title in the financial institution as
trustee. In some instances, the consumer executes a personal guaranty
of the indebtedness. The note provides that it is payable only out of
the property specifically described in the trust deed and that the
trustee has no personal liability on the note. Assuming the
transactions are for personal, family, or household purposes, these
transactions are subject to the regulation since in substance (if not
form) consumer credit is being extended.
3(b) Credit over $25,000 not secured by real property or a
dwelling.
1. Coverage. Since a mobile home can be a dwelling under Sec.
226.2(a)(19), this exemption does not apply to a credit extension
secured by a mobile home used or expected to be used as the principal
dwelling of the consumer, even if the credit exceeds $25,000. A loan
commitment for closed-end credit in excess of $25,000 is exempt even
though the amounts actually drawn never actually reach $25,000.
2. Open-end credit. i. An open-end credit plan is exempt under
Sec. 226.3(b) (unless secured by real property or personal property
used or expected to be used as the consumer's principal dwelling) if
either of the following conditions is met:
A. The creditor makes a firm commitment to lend over $25,000 with
no requirement of additional credit information for any advances
(except as permitted from time to time pursuant to Sec. 226.2(a)(20)).
B. The initial extension of credit on the line exceeds $25,000.
ii. If a security interest is taken at a later time in any real
property, or in personal property used or expected to be used as the
consumer's principal dwelling, the plan would no longer be exempt. The
creditor must comply with all of the requirements of the regulation
including, for example, providing the consumer with an initial
disclosure statement. If the security interest being added is in the
consumer's principal dwelling, the creditor must also give the consumer
the right to rescind the security interest. (See the commentary to
Sec. 226.15 concerning the right of rescission.)
3. Closed-end credit--subsequent changes. A closed-end loan for
over $25,000 may later be rewritten for $25,000 or less, or a security
interest in real property or in personal property used or expected to
be used as the consumer's principal dwelling may be added to an
extension of credit for over $25,000. Such a transaction is consumer
credit requiring disclosures only if the existing obligation is
satisfied and replaced by a new obligation made for consumer purposes
undertaken by the same obligor. (See the commentary to Sec.
226.23(a)(1) regarding the right of rescission when a security interest
in a
[[Page 54265]]
consumer's principal dwelling is added to a previously exempt
transaction.)
3(c) Public utility credit.
1. Examples. Examples of public utility services include:
i. General.
A. Gas, water, or electrical services.
B. Cable television services.
C. Installation of new sewer lines, water lines, conduits,
telephone poles, or metering equipment in an area not already serviced
by the utility.
ii. Extensions of credit not covered. The exemption does not apply
to extensions of credit, for example:
A. To purchase appliances such as gas or electric ranges, grills,
or telephones.
B. To finance home improvements such as new heating or air
conditioning systems.
3(d) Securities or commodities accounts.
1. Coverage. This exemption does not apply to a transaction with a
broker registered solely with the State, or to a separate credit
extension in which the proceeds are used to purchase securities.
3(e) Home fuel budget plans.
1. Definition. Under a typical home fuel budget plan, the fuel
dealer estimates the total cost of fuel for the season, bills the
customer for an average monthly payment, and makes an adjustment in the
final payment for any difference between the estimated and the actual
cost of the fuel. Fuel is delivered as needed, no finance charge is
assessed, and the customer may withdraw from the plan at any time.
Under these circumstances, the arrangement is exempt from the
regulation, even if a charge to cover the billing costs is imposed.
3(f) Student loan programs.
1. Coverage. This exemption applies to loans made, insured, or
guaranteed under title IV of the Higher Education Act of 1965 (20
U.S.C. 1070 et seq.). This exemption does not apply to private
education loans as defined by Sec. 226.46(b)(5).
Sec. 226.4 Finance Charge.
4(a) Definition.
1. Charges in comparable cash transactions. Charges imposed
uniformly in cash and credit transactions are not finance charges. In
determining whether an item is a finance charge, the creditor should
compare the credit transaction in question with a similar cash
transaction. A creditor financing the sale of property or services may
compare charges with those payable in a similar cash transaction by the
seller of the property or service.
i. For example, the following items are not finance charges:
A. Taxes, license fees, or registration fees paid by both cash and
credit customers.
B. Discounts that are available to cash and credit customers, such
as quantity discounts.
C. Discounts available to a particular group of consumers because
they meet certain criteria, such as being members of an organization or
having accounts at a particular financial institution. This is the case
even if an individual must pay cash to obtain the discount, provided
that credit customers who are members of the group and do not qualify
for the discount pay no more than the nonmember cash customers.
D. Charges for a service policy, auto club membership, or policy of
insurance against latent defects offered to or required of both cash
and credit customers for the same price.
ii. In contrast, the following items are finance charges:
A. Inspection and handling fees for the staged disbursement of
construction-loan proceeds.
B. Fees for preparing a Truth in Lending disclosure statement, if
permitted by law (for example, the Real Estate Settlement Procedures
Act prohibits such charges in certain transactions secured by real
property).
C. Charges for a required maintenance or service contract imposed
only in a credit transaction.
iii. If the charge in a credit transaction exceeds the charge
imposed in a comparable cash transaction, only the difference is a
finance charge. For example:
A. If an escrow agent is used in both cash and credit sales of real
estate and the agent's charge is $100 in a cash transaction and $150 in
a credit transaction, only $50 is a finance charge.
2. Costs of doing business. Charges absorbed by the creditor as a
cost of doing business are not finance charges, even though the
creditor may take such costs into consideration in determining the
interest rate to be charged or the cash price of the property or
service sold. However, if the creditor separately imposes a charge on
the consumer to cover certain costs, the charge is a finance charge if
it otherwise meets the definition. For example:
i. A discount imposed on a credit obligation when it is assigned by
a seller-creditor to another party is not a finance charge as long as
the discount is not separately imposed on the consumer. (See Sec.
226.4(b)(6).)
ii. A tax imposed by a State or other governmental body on a
creditor is not a finance charge if the creditor absorbs the tax as a
cost of doing business and does not separately impose the tax on the
consumer. (For additional discussion of the treatment of taxes, see
other commentary to Sec. 226.4(a).)
3. Forfeitures of interest. If the creditor reduces the interest
rate it pays or stops paying interest on the consumer's deposit account
or any portion of it for the term of a credit transaction (including,
for example, an overdraft on a checking account or a loan secured by a
certificate of deposit), the interest lost is a finance charge. (See
the commentary to Sec. 226.4(c)(6).) For example:
A. A consumer borrows $5,000 for 90 days and secures it with a
$10,000 certificate of deposit paying 15% interest. The creditor
charges the consumer an interest rate of 6% on the loan and stops
paying interest on $5,000 of the $10,000 certificate for the term of
the loan. The interest lost is a finance charge and must be reflected
in the annual percentage rate on the loan.
B. However, the consumer must be entitled to the interest that is
not paid in order for the lost interest to be a finance charge. For
example:
iii. A consumer wishes to buy from a financial institution a
$10,000 certificate of deposit paying 15% interest but has only $4,000.
The financial institution offers to lend the consumer $6,000 at an
interest rate of 6% but will pay the 15% interest only on the amount of
the consumer's deposit, $4,000. The creditor's failure to pay interest
on the $6,000 does not result in an additional finance charge on the
extension of credit, provided the consumer is entitled by the deposit
agreement with the financial institution to interest only on the amount
of the consumer's deposit.
iv. A consumer enters into a combined time deposit/credit agreement
with a financial institution that establishes a time deposit account
and an open-end line of credit. The line of credit may be used to
borrow against the funds in the time deposit. The agreement provides
for an interest rate on any credit extension of, for example, 1%. In
addition, the agreement states that the creditor will pay 0% interest
on the amount of the time deposit that corresponds to the amount of the
credit extension(s). The interest that is not paid on the time deposit
by the financial institution is not a finance charge (and therefore
does not affect the annual percentage rate computation).
4. Treatment of transaction fees on credit card plans. Any
transaction charge imposed on a cardholder by a card issuer is a
finance charge, regardless of whether the issuer imposes the same,
greater, or lesser charge on
[[Page 54266]]
withdrawals of funds from an asset account such as a checking or
savings account. For example:
i. Any charge imposed on a credit cardholder by a card issuer for
the use of an automated teller machine (ATM) to obtain a cash advance
(whether in a proprietary, shared, interchange, or other system) is a
finance charge regardless of whether the card issuer imposes a charge
on its debit cardholders for using the ATM to withdraw cash from a
consumer asset account, such as a checking or savings account.
ii. Any charge imposed on a credit cardholder for making a purchase
or obtaining a cash advance outside the United States, with a foreign
merchant, or in a foreign currency is a finance charge, regardless of
whether a charge is imposed on debit cardholders for such transactions.
The following principles apply in determining what is a foreign
transaction fee and the amount of the fee:
A. Included are (1) fees imposed when transactions are made in a
foreign currency and converted to U.S. dollars; (2) fees imposed when
transactions are made in U.S. dollars outside the U.S.; and (3) fees
imposed when transactions are made (whether in a foreign currency or in
U.S. dollars) with a foreign merchant, such as via a merchant's Web
site. For example, a consumer may use a credit card to make a purchase
in Bermuda, in U.S. dollars, and the card issuer may impose a fee
because the transaction took place outside the United States.
B. Included are fees imposed by the card issuer and fees imposed by
a third party that performs the conversion, such as a credit card
network or the card issuer's corporate parent. (For example, in a
transaction processed through a credit card network, the network may
impose a 1 percent charge and the card-issuing bank may impose an
additional 2 percent charge, for a total of a 3 percentage point
foreign transaction fee being imposed on the consumer.)
C. Fees imposed by a third party are included only if they are
directly passed on to the consumer. For example, if a credit card
network imposes a 1 percent fee on the card issuer, but the card issuer
absorbs the fee as a cost of doing business (and only passes it on to
consumers in the general sense that the interest and fees are imposed
on all its customers to recover its costs), then the fee is not a
foreign transaction fee and need not be disclosed. In another example,
if the credit card network imposes a 1 percent fee for a foreign
transaction on the card issuer, and the card issuer imposes this same
fee on the consumer who engaged in the foreign transaction, then the
fee is a foreign transaction fee and a finance charge.
D. A card issuer is not required to disclose a fee imposed by a
merchant. For example, if the merchant itself performs the currency
conversion and adds a fee, this fee need not be disclosed by the card
issuer. Under Sec. 226.9(d), a card issuer is not obligated to
disclose finance charges imposed by a party honoring a credit card,
such as a merchant, although the merchant is required to disclose such
a finance charge if the merchant is subject to the Truth in Lending Act
and Regulation Z.
E. The foreign transaction fee is determined by first calculating
the dollar amount of the transaction by using a currency conversion
rate outside the card issuer's and third party's control. Any amount in
excess of that dollar amount is a foreign transaction fee. Conversion
rates outside the card issuer's and third party's control include, for
example, a rate selected from the range of rates available in the
wholesale currency exchange markets, an average of the highest and
lowest rates available in such markets, or a government-mandated or
government-managed exchange rate (or a rate selected from a range of
such rates).
F. The rate used for a particular transaction need not be the same
rate that the card issuer (or third party) itself obtains in its
currency conversion operations. In addition, the rate used for a
particular transaction need not be the rate in effect on the date of
the transaction (purchase or cash advance).
5. Taxes.
i. Generally, a tax imposed by a State or other governmental body
solely on a creditor is a finance charge if the creditor separately
imposes the charge on the consumer.
ii. In contrast, a tax is not a finance charge (even if it is
collected by the creditor) if applicable law imposes the tax:
A. Solely on the consumer;
B. On the creditor and the consumer jointly;
C. On the credit transaction, without indicating which party is
liable for the tax; or
D. On the creditor, if applicable law directs or authorizes the
creditor to pass the tax on to the consumer. (For purposes of this
section, if applicable law is silent as to passing on the tax, the law
is deemed not to authorize passing it on.)
iii. For example, a stamp tax, property tax, intangible tax, or any
other State or local tax imposed on the consumer, or on the credit
transaction, is not a finance charge even if the tax is collected by
the creditor.
iv. In addition, a tax is not a finance charge if it is excluded
from the finance charge by another provision of the regulation or
commentary (for example, if the tax is imposed uniformly in cash and
credit transactions).
4(a)(1) Charges by third parties.
1. Choosing the provider of a required service. An example of a
third-party charge included in the finance charge is the cost of
required mortgage insurance, even if the consumer is allowed to choose
the insurer.
2. Annuities associated with reverse mortgages. Some creditors
offer annuities in connection with a reverse-mortgage transaction. The
amount of the premium is a finance charge if the creditor requires the
purchase of the annuity incident to the credit. Examples include the
following:
i. The credit documents reflect the purchase of an annuity from a
specific provider or providers.
ii. The creditor assesses an additional charge on consumers who do
not purchase an annuity from a specific provider.
iii. The annuity is intended to replace in whole or in part the
creditor's payments to the consumer either immediately or at some
future date.
4(a)(2) Special rule; closing agent charges.
1. General. This rule applies to charges by a third party serving
as the closing agent for the particular loan. An example of a closing
agent charge included in the finance charge is a courier fee where the
creditor requires the use of a courier.
2. Required closing agent. If the creditor requires the use of a
closing agent, fees charged by the closing agent are included in the
finance charge only if the creditor requires the particular service,
requires the imposition of the charge, or retains a portion of the
charge. Fees charged by a third-party closing agent may be otherwise
excluded from the finance charge under Sec. 226.4. For example, a fee
that would be paid in a comparable cash transaction may be excluded
under Sec. 226.4(a). A charge for conducting or attending a closing is
a finance charge and may be excluded only if the charge is included in
and is incidental to a lump-sum fee excluded under Sec. 226.4(c)(7).
4(a)(3) Special rule; mortgage broker fees.
1. General. A fee charged by a mortgage broker is excluded from the
finance charge if it is the type of fee that is also excluded when
charged by the creditor. For example, to exclude an
[[Page 54267]]
application fee from the finance charge under Sec. 226.4(c)(1), a
mortgage broker must charge the fee to all applicants for credit,
whether or not credit is extended.
2. Coverage. This rule applies to charges paid by consumers to a
mortgage broker in connection with a consumer credit transaction
secured by real property or a dwelling.
3. Compensation by lender. The rule requires all mortgage broker
fees to be included in the finance charge. Creditors sometimes
compensate mortgage brokers under a separate arrangement with those
parties. Creditors may draw on amounts paid by the consumer, such as
points or closing costs, to fund their payment to the broker.
Compensation paid by a creditor to a mortgage broker under an agreement
is not included as a separate component of a consumer's total finance
charge (although this compensation may be reflected in the finance
charge if it comes from amounts paid by the consumer to the creditor
that are finance charges, such as points and interest).
4(b) Examples of finance charges.
1. Relationship to other provisions. Charges or fees shown as
examples of finance charges in Sec. 226.4(b) may be excludable under
Sec. 226.4(c), (d), or (e). For example:
i. Premiums for credit life insurance, shown as an example of a
finance charge under Sec. 226.4(b)(7), may be excluded if the
requirements of Sec. 226.4(d)(1) are met.
ii Appraisal fees mentioned in Sec. 226.4(b)(4) are excluded for
real property or residential mortgage transactions under Sec.
226.4(c)(7).
Paragraph 4(b)(2).
1. Checking account charges. A checking or transaction account
charge imposed in connection with a credit feature is a finance charge
under Sec. 226.4(b)(2) to the extent the charge exceeds the charge for
a similar account without a credit feature. If a charge for an account
with a credit feature does not exceed the charge for an account without
a credit feature, the charge is not a finance charge under Sec.
226.4(b)(2). To illustrate:
i. A $5 service charge is imposed on an account with an overdraft
line of credit (where the institution has agreed in writing to pay an
overdraft), while a $3 service charge is imposed on an account without
a credit feature; the $2 difference is a finance charge. (If the
difference is not related to account activity, however, it may be
excludable as a participation fee. See the commentary to Sec.
226.4(c)(4).)
ii. A $5 service charge is imposed for each item that results in an
overdraft on an account with an overdraft line of credit, while a $25
service charge is imposed for paying or returning each item on a
similar account without a credit feature; the $5 charge is not a
finance charge.
Paragraph 4(b)(3).
1. Assumption fees. The assumption fees mentioned in Sec.
226.4(b)(3) are finance charges only when the assumption occurs and the
fee is imposed on the new buyer. The assumption fee is a finance charge
in the new buyer's transaction.
Paragraph 4(b)(5).
1. Credit loss insurance. Common examples of the insurance against
credit loss mentioned in Sec. 226.4(b)(5) are mortgage guaranty
insurance, holder in due course insurance, and repossession insurance.
Such premiums must be included in the finance charge only for the
period that the creditor requires the insurance to be maintained.
2. Residual value insurance. Where a creditor requires a consumer
to maintain residual value insurance or where the creditor is a
beneficiary of a residual value insurance policy written in connection
with an extension of credit (as is the case in some forms of automobile
balloon-payment financing, for example), the premiums for the insurance
must be included in the finance charge for the period that the
insurance is to be maintained. If a creditor pays for residual value
insurance and absorbs the payment as a cost of doing business, such
costs are not considered finance charges. (See comment 4(a)-2.)
Paragraphs 4(b)(7) and (b)(8).
1. Pre-existing insurance policy. The insurance discussed in Sec.
226.4(b)(7) and (b)(8) does not include an insurance policy (such as a
life or an automobile collision insurance policy) that is already owned
by the consumer, even if the policy is assigned to or otherwise made
payable to the creditor to satisfy an insurance requirement. Such a
policy is not ``written in connection with'' the transaction, as long
as the insurance was not purchased for use in that credit extension,
since it was previously owned by the consumer.
2. Insurance written in connection with a transaction. Credit
insurance sold before or after an open-end (not home-secured) plan is
opened is considered ``written in connection with a credit
transaction.'' Insurance sold after consummation in closed-end credit
transactions or after the opening of a home-equity plan subject to the
requirements of Sec. 226.5b is not considered ``written in connection
with'' the credit transaction if the insurance is written because of
the consumer's default (for example, by failing to obtain or maintain
required property insurance) or because the consumer requests insurance
after consummation or the opening of a home-equity plan subject to the
requirements of Sec. 226.5b (although credit-sale disclosures may be
required for the insurance sold after consummation if it is financed).
3. Substitution of life insurance. The premium for a life insurance
policy purchased and assigned to satisfy a credit life insurance
requirement must be included in the finance charge, but only to the
extent of the cost of the credit life insurance if purchased from the
creditor or the actual cost of the policy (if that is less than the
cost of the insurance available from the creditor). If the creditor
does not offer the required insurance, the premium to be included in
the finance charge is the cost of a policy of insurance of the type,
amount, and term required by the creditor.
4. Other insurance. Fees for required insurance not of the types
described in Sec. 226.4(b)(7) and (b)(8) are finance charges and are
not excludable. For example:
i. The premium for a hospitalization insurance policy, if it is
required to be purchased only in a credit transaction, is a finance
charge.
Paragraph 4(b)(9).
1. Discounts for payment by other than credit. The discounts to
induce payment by other than credit mentioned in Sec. 226.4(b)(9)
include, for example, the following situation:
i. The seller of land offers individual tracts for $10,000 each. If
the purchaser pays cash, the price is $9,000, but if the purchaser
finances the tract with the seller the price is $10,000. The $1,000
difference is a finance charge for those who buy the tracts on credit.
2. Exception for cash discounts.
i. Creditors may exclude from the finance charge discounts offered
to consumers for using cash or another means of payment instead of
using a credit card or an open-end plan. The discount may be in
whatever amount the seller desires, either as a percentage of the
regular price (as defined in section 103(z) of the act, as amended) or
a dollar amount. Pursuant to section 167(b) of the act, this provision
applies only to transactions involving an open-end credit plan or a
credit card (whether open-end or closed-end credit is extended on the
card). The merchant must offer the discount to prospective buyers
whether or not they are cardholders or members of the open-end credit
plan. The merchant may, however, make other distinctions. For example:
[[Page 54268]]
A. The merchant may limit the discount to payment by cash and not
offer it for payment by check or by use of a debit card.
B. The merchant may establish a discount plan that allows a 15%
discount for payment by cash, a 10% discount for payment by check, and
a 5% discount for payment by a particular credit card. None of these
discounts is a finance charge.
ii. Pursuant to section 171(c) of the act, discounts excluded from
the finance charge under this paragraph are also excluded from
treatment as a finance charge or other charge for credit under any
State usury or disclosure laws.
3. Determination of the regular price.
i. The regular price is critical in determining whether the
difference between the price charged to cash customers and credit
customers is a discount or a surcharge, as these terms are defined in
amended section 103 of the act. The regular price is defined in section
103 of the act as--
* * * the tag or posted price charged for the property or service
if a single price is tagged or posted, or the price charged for the
property or service when payment is made by use of an open-end credit
account or a credit card if either (1) no price is tagged or posted, or
(2) two prices are tagged or posted. * * *
ii. For example, in the sale of motor vehicle fuel, the tagged or
posted price is the price displayed at the pump. As a result, the
higher price (the open-end credit or credit card price) must be
displayed at the pump, either alone or along with the cash price.
Service station operators may designate separate pumps or separate
islands as being for either cash or credit purchases and display only
the appropriate prices at the various pumps. If a pump is capable of
displaying on its meter either a cash or a credit price depending upon
the consumer's means of payment, both the cash price and the credit
price must be displayed at the pump. A service station operator may
display the cash price of fuel by itself on a curb sign, as long as the
sign clearly indicates that the price is limited to cash purchases.
4(b)(10) Debt cancellation and debt suspension fees.
1. Definition. Debt cancellation coverage provides for payment or
satisfaction of all or part of a debt when a specified event occurs.
The term ``debt cancellation coverage'' includes guaranteed automobile
protection, or ``GAP,'' agreements, which pay or satisfy the remaining
debt after property insurance benefits are exhausted. Debt suspension
coverage provides for suspension of the obligation to make one or more
payments on the date(s) otherwise required by the credit agreement,
when a specified event occurs. The term ``debt suspension'' does not
include loan payment deferral arrangements in which the triggering
event is the bank's unilateral decision to allow a deferral of payment
and the borrower's unilateral election to do so, such as by skipping or
reducing one or more payments (``skip payments'').
2. Coverage written in connection with a transaction. Coverage sold
after consummation in closed-end credit transactions or after the
opening of a home-equity plan subject to the requirements of Sec.
226.5b is not ``written in connection with'' the credit transaction if
the coverage is written because the consumer requests coverage after
consummation or the opening of a home-equity plan subject to the
requirements of Sec. 226.5b (although credit-sale disclosures may be
required for the coverage sold after consummation if it is financed).
Coverage sold before or after an open-end (not home-secured) plan is
opened is considered ``written in connection with a credit
transaction.''
4(c) Charges excluded from the finance charge.
Paragraph 4(c)(1).
1. Application fees. An application fee that is excluded from the
finance charge is a charge to recover the costs associated with
processing applications for credit. The fee may cover the costs of
services such as credit reports, credit investigations, and appraisals.
The creditor is free to impose the fee in only certain of its loan
programs, such as mortgage loans. However, if the fee is to be excluded
from the finance charge under Sec. 226.4(c)(1), it must be charged to
all applicants, not just to applicants who are approved or who actually
receive credit.
Paragraph 4(c)(2).
1. Late payment charges.
i. Late payment charges can be excluded from the finance charge
under Sec. 226.4(c)(2) whether or not the person imposing the charge
continues to extend credit on the account or continues to provide
property or services to the consumer. In determining whether a charge
is for actual unanticipated late payment on a 30-day account, for
example, factors to be considered include:
A. The terms of the account. For example, is the consumer required
by the account terms to pay the account balance in full each month? If
not, the charge may be a finance charge.
B. The practices of the creditor in handling the accounts. For
example, regardless of the terms of the account, does the creditor
allow consumers to pay the accounts over a period of time without
demanding payment in full or taking other action to collect? If no
effort is made to collect the full amount due, the charge may be a
finance charge.
ii. Section 226.4(c)(2) applies to late payment charges imposed for
failure to make payments as agreed, as well as failure to pay an
account in full when due.
2. Other excluded charges. Charges for ``delinquency, default, or a
similar occurrence'' include, for example, charges for reinstatement of
credit privileges or for submitting as payment a check that is later
returned unpaid.
Paragraph 4(c)(3).
1. Assessing interest on an overdraft balance. A charge on an
overdraft balance computed by applying a rate of interest to the amount
of the overdraft is not a finance charge, even though the consumer
agrees to the charge in the account agreement, unless the financial
institution agrees in writing that it will pay such items.
Paragraph 4(c)(4).
1. Participation fees--periodic basis. The participation fees
described in Sec. 226.4(c)(4) do not necessarily have to be formal
membership fees, nor are they limited to credit card plans. The
provision applies to any credit plan in which payment of a fee is a
condition of access to the plan itself, but it does not apply to fees
imposed separately on individual closed-end transactions. The fee may
be charged on a monthly, annual, or other periodic basis; a one-time,
non-recurring fee imposed at the time an account is opened is not a fee
that is charged on a periodic basis, and may not be treated as a
participation fee.
2. Participation fees--exclusions. Minimum monthly charges, charges
for non-use of a credit card, and other charges based on either account
activity or the amount of credit available under the plan are not
excluded from the finance charge by Sec. 226.4(c)(4). Thus, for
example, a fee that is charged and then refunded to the consumer based
on the extent to which the consumer uses the credit available would be
a finance charge. (See the commentary to Sec. 226.4(b)(2). Also, see
comment 14(c)-2 for treatment of certain types of fees excluded in
determining the annual percentage rate for the periodic statement.)
Paragraph 4(c)(5).
1. Seller's points. The seller's points mentioned in Sec.
226.4(c)(5) include any charges imposed by the creditor upon the
noncreditor seller of property for providing credit to the buyer or for
providing credit on certain terms. These charges are excluded from the
finance charge even if they are passed on to the
[[Page 54269]]
buyer, for example, in the form of a higher sales price. Seller's
points are frequently involved in real estate transactions guaranteed
or insured by governmental agencies. A commitment fee paid by a
noncreditor seller (such as a real estate developer) to the creditor
should be treated as seller's points. Buyer's points (that is, points
charged to the buyer by the creditor), however, are finance charges.
2. Other seller-paid amounts. Mortgage insurance premiums and other
finance charges are sometimes paid at or before consummation or
settlement on the borrower's behalf by a noncreditor seller. The
creditor should treat the payment made by the seller as seller's points
and exclude it from the finance charge if, based on the seller's
payment, the consumer is not legally bound to the creditor for the
charge. A creditor who gives disclosures before the payment has been
made should base them on the best information reasonably available.
Paragraph 4(c)(6).
1. Lost interest. Certain Federal and State laws mandate a
percentage differential between the interest rate paid on a deposit and
the rate charged on a loan secured by that deposit. In some situations,
because of usury limits the creditor must reduce the interest rate paid
on the deposit and, as a result, the consumer loses some of the
interest that would otherwise have been earned. Under Sec.
226.4(c)(6), such ``lost interest'' need not be included in the finance
charge. This rule applies only to an interest reduction imposed because
a rate differential is required by law and a usury limit precludes
compliance by any other means. If the creditor imposes a differential
that exceeds that required, only the lost interest attributable to the
excess amount is a finance charge. (See the commentary to Sec.
226.4(a).)
Paragraph 4(c)(7).
1. Real estate or residential mortgage transaction charges. The
list of charges in Sec. 226.4(c)(7) applies both to residential
mortgage transactions (which may include, for example, the purchase of
a mobile home) and to other transactions secured by real estate. The
fees are excluded from the finance charge even if the services for
which the fees are imposed are performed by the creditor's employees
rather than by a third party. In addition, the cost of verifying or
confirming information connected to the item is also excluded. For
example, credit-report fees cover not only the cost of the report but
also the cost of verifying information in the report. In all cases,
charges excluded under Sec. 226.4(c)(7) must be bona fide and
reasonable.
2. Lump-sum charges. If a lump sum charged for several services
includes a charge that is not excludable, a portion of the total should
be allocated to that service and included in the finance charge.
However, a lump sum charged for conducting or attending a closing (for
example, by a lawyer or a title company) is excluded from the finance
charge if the charge is primarily for services related to items listed
in Sec. 226.4(c)(7) (for example, reviewing or completing documents),
even if other incidental services such as explaining various documents
or disbursing funds for the parties are performed. The entire charge is
excluded even if a fee for the incidental services would be a finance
charge if it were imposed separately.
3. Charges assessed during the loan term. Real estate or
residential mortgage transaction charges excluded under Sec.
226.4(c)(7) are those charges imposed solely in connection with the
initial decision to grant credit. This would include, for example, a
fee to search for tax liens on the property or to determine if flood
insurance is required. The exclusion does not apply to fees for
services to be performed periodically during the loan term, regardless
of when the fee is collected. For example, a fee for one or more
determinations during the loan term of the current tax-lien status or
flood-insurance requirements is a finance charge, regardless of whether
the fee is imposed at closing, or when the service is performed. If a
creditor is uncertain about what portion of a fee to be paid at
consummation or loan closing is related to the initial decision to
grant credit, the entire fee may be treated as a finance charge.
4(d) Insurance and debt cancellation and debt suspension coverage.
1. General. Section 226.4(d) permits insurance premiums and charges
and debt cancellation and debt suspension charges to be excluded from
the finance charge. The required disclosures must be made in writing,
except as provided in Sec. 226.4(d)(4). The rules on location of
insurance and debt cancellation and debt suspension disclosures for
closed-end transactions are in Sec. 226.17(a). For purposes of Sec.
226.4(d), all references to insurance also include debt cancellation
and debt suspension coverage unless the context indicates otherwise.
2. Timing of disclosures. If disclosures are given early, for
example under Sec. 226.17(f) or Sec. 226.19(a), the creditor need not
redisclose if the actual premium is different at the time of
consummation. If insurance disclosures are not given at the time of
early disclosure and insurance is in fact written in connection with
the transaction, the disclosures under Sec. 226.4(d) must be made in
order to exclude the premiums from the finance charge.
3. Premium rate increases. The creditor should disclose the premium
amount based on the rates currently in effect and need not designate it
as an estimate even if the premium rates may increase. An increase in
insurance rates after consummation of a closed-end credit transaction
or during the life of an open-end credit plan does not require
redisclosure in order to exclude the additional premium from treatment
as a finance charge.
4. Unit-cost disclosures.
i. Open-end credit. The premium or fee for insurance or debt
cancellation or debt suspension for the initial term of coverage may be
disclosed on a unit-cost basis in open-end credit transactions. The
cost per unit should be based on the initial term of coverage, unless
one of the options under comment 4(d)-12 is available.
ii. Closed-end credit. One of the transactions for which unit-cost
disclosures (such as 50 cents per year for each $100 of the amount
financed) may be used in place of the total insurance premium involves
a particular kind of insurance plan. For example, a consumer with a
current indebtedness of $8,000 is covered by a plan of credit life
insurance coverage with a maximum of $10,000. The consumer requests an
additional $4,000 loan to be covered by the same insurance plan. Since
the $4,000 loan exceeds, in part, the maximum amount of indebtedness
that can be covered by the plan, the creditor may properly give the
insurance-cost disclosures on the $4,000 loan on a unit-cost basis.
5. Required credit life insurance; debt cancellation or suspension
coverage. Credit life, accident, health, or loss-of-income insurance,
and debt cancellation and suspension coverage described in Sec.
226.4(b)(10), must be voluntary in order for the premium or charges to
be excluded from the finance charge. Whether the insurance or coverage
is in fact required or optional is a factual question. If the insurance
or coverage is required, the premiums must be included in the finance
charge, whether the insurance or coverage is purchased from the
creditor or from a third party. If the consumer is required to elect
one of several options--such as to purchase credit life insurance, or
to assign an existing life insurance policy, or to pledge security such
as a certificate of deposit--and the consumer purchases the credit life
insurance policy, the premium must be included in the finance charge.
(If the consumer assigns a preexisting policy or pledges security
[[Page 54270]]
instead, no premium is included in the finance charge. The security
interest would be disclosed under Sec. 226.6(a)(4), Sec.
226.6(b)(5)(ii), or Sec. 226.18(m). See the commentary to Sec.
226.4(b)(7) and (b)(8).)
6. Other types of voluntary insurance. Insurance is not credit
life, accident, health, or loss-of-income insurance if the creditor or
the credit account of the consumer is not the beneficiary of the
insurance coverage. If the premium for such insurance is not imposed by
the creditor as an incident to or a condition of credit, it is not
covered by Sec. 226.4.
7. Signatures. If the creditor offers a number of insurance options
under Sec. 226.4(d), the creditor may provide a means for the consumer
to sign or initial for each option, or it may provide for a single
authorizing signature or initial with the options selected designated
by some other means, such as a check mark. The insurance authorization
may be signed or initialed by any consumer, as defined in Sec.
226.2(a)(11), or by an authorized user on a credit card account.
8. Property insurance. To exclude property insurance premiums or
charges from the finance charge, the creditor must allow the consumer
to choose the insurer and disclose that fact. This disclosure must be
made whether or not the property insurance is available from or through
the creditor. The requirement that an option be given does not require
that the insurance be readily available from other sources. The premium
or charge must be disclosed only if the consumer elects to purchase the
insurance from the creditor; in such a case, the creditor must also
disclose the term of the property insurance coverage if it is less than
the term of the obligation.
9. Single-interest insurance. Blanket and specific single-interest
coverage are treated the same for purposes of the regulation. A charge
for either type of single-interest insurance may be excluded from the
finance charge if:
i. The insurer waives any right of subrogation.
ii. The other requirements of Sec. 226.4(d)(2) are met. This
includes, of course, giving the consumer the option of obtaining the
insurance from a person of the consumer's choice. The creditor need not
ascertain whether the consumer is able to purchase the insurance from
someone else.
10. Single-interest insurance defined. The term single-interest
insurance as used in the regulation refers only to the types of
coverage traditionally included in the term vendor's single-interest
insurance (or VSI), that is, protection of tangible property against
normal property damage, concealment, confiscation, conversion,
embezzlement, and skip. Some comprehensive insurance policies may
include a variety of additional coverages, such as repossession
insurance and holder-in-due-course insurance. These types of coverage
do not constitute single-interest insurance for purposes of the
regulation, and premiums for them do not qualify for exclusion from the
finance charge under Sec. 226.4(d). If a policy that is primarily VSI
also provides coverages that are not VSI or other property insurance, a
portion of the premiums must be allocated to the nonexcludable
coverages and included in the finance charge. However, such allocation
is not required if the total premium in fact attributable to all of the
non-VSI coverages included in the policy is $1.00 or less (or $5.00 or
less in the case of a multiyear policy).
11. Initial term.
i. The initial term of insurance or debt cancellation or debt
suspension coverage determines the period for which a premium amount
must be disclosed, unless one of the options discussed under comment
4(d)-12 is available. For purposes of Sec. 226.4(d), the initial term
is the period for which the insurer or creditor is obligated to provide
coverage, even though the consumer may be allowed to cancel the
coverage or coverage may end due to nonpayment before that term
expires.
ii. For example:
A. The initial term of a property insurance policy on an automobile
that is written for one year is one year even though premiums are paid
monthly and the term of the credit transaction is four years.
B. The initial term of an insurance policy is the full term of the
credit transaction if the consumer pays or finances a single premium in
advance.
12. Initial term; alternative.
i. General. A creditor has the option of providing cost disclosures
on the basis of one year of insurance or debt cancellation or debt
suspension coverage instead of a longer initial term (provided the
premium or fee is clearly labeled as being for one year) if:
A. The initial term is indefinite or not clear, or
B. The consumer has agreed to pay a premium or fee that is assessed
periodically but the consumer is under no obligation to continue the
coverage, whether or not the consumer has made an initial payment.
ii. Open-end plans. For open-end plans, a creditor also has the
option of providing unit-cost disclosure on the basis of a period that
is less than one year if the consumer has agreed to pay a premium or
fee that is assessed periodically, for example monthly, but the
consumer is under no obligation to continue the coverage.
iii. Examples. To illustrate:
A. A credit life insurance policy providing coverage for a 30-year
mortgage loan has an initial term of 30 years, even though premiums are
paid monthly and the consumer is not required to continue the coverage.
Disclosures may be based on the initial term, but the creditor also has
the option of making disclosures on the basis of coverage for an
assumed initial term of one year.
13. Loss-of-income insurance. The loss-of-income insurance
mentioned in Sec. 226.4(d) includes involuntary unemployment
insurance, which provides that some or all of the consumer's payments
will be made if the consumer becomes unemployed involuntarily.
4(d)(3) Voluntary debt cancellation or debt suspension fees.
1. General. Fees charged for the specialized form of debt
cancellation agreement known as guaranteed automobile protection
(``GAP'') agreements must be disclosed according to Sec. 226.4(d)(3)
rather than according to Sec. 226.4(d)(2) for property insurance.
2. Disclosures. Creditors can comply with Sec. 226.4(d)(3) by
providing a disclosure that refers to debt cancellation or debt
suspension coverage whether or not the coverage is considered
insurance. Creditors may use the model credit insurance disclosures
only if the debt cancellation or debt suspension coverage constitutes
insurance under State law. (See Model Clauses and Samples at G-16 and
H-17 in appendix G and appendix H to part 226 for guidance on how to
provide the disclosure required by Sec. 226.4(d)(3)(iii) for debt
suspension products.)
3. Multiple events. If debt cancellation or debt suspension
coverage for two or more events is provided at a single charge, the
entire charge may be excluded from the finance charge if at least one
of the events is accident or loss of life, health, or income and the
conditions specified in Sec. 226.4(d)(3) or, as applicable, Sec.
226.4(d)(4), are satisfied.
4. Disclosures in programs combining debt cancellation and debt
suspension features. If the consumer's debt can be cancelled under
certain circumstances, the disclosure may be modified to reflect that
fact. The disclosure could, for example, state (in addition to the
language required by Sec. 226.4(d)(3)(iii)) that ``In some
circumstances, my debt may be cancelled.'' However, the disclosure
would not be permitted to list the specific events that would result in
debt cancellation.
[[Page 54271]]
4(d)(4) Telephone purchases.
1. Affirmative request. A creditor would not satisfy the
requirement to obtain a consumer's affirmative request if the
``request'' was a response to a script that uses leading questions or
negative consent. A question asking whether the consumer wishes to
enroll in the credit insurance or debt cancellation or suspension plan
and seeking a yes-or-no response (such as ``Do you want to enroll in
this optional debt cancellation plan?'') would not be considered
leading.
4(e) Certain security interest charges.
1. Examples.
i. Excludable charges. Sums must be actually paid to public
officials to be excluded from the finance charge under Sec.
226.4(e)(1) and (e)(3). Examples are charges or other fees required for
filing or recording security agreements, mortgages, continuation
statements, termination statements, and similar documents, as well as
intangible property or other taxes even when the charges or fees are
imposed by the State solely on the creditor and charged to the consumer
(if the tax must be paid to record a security agreement). (See comment
4(a)-5 regarding the treatment of taxes, generally.)
ii. Charges not excludable. If the obligation is between the
creditor and a third party (an assignee, for example), charges or other
fees for filing or recording security agreements, mortgages,
continuation statements, termination statements, and similar documents
relating to that obligation are not excludable from the finance charge
under this section.
2. Itemization. The various charges described in Sec. 226.4(e)(1)
and (e)(3) may be totaled and disclosed as an aggregate sum, or they
may be itemized by the specific fees and taxes imposed. If an aggregate
sum is disclosed, a general term such as security interest fees or
filing fees may be used.
3. Notary fees. In order for a notary fee to be excluded under
Sec. 226.4(e)(1), all of the following conditions must be met:
i. The document to be notarized is one used to perfect, release, or
continue a security interest.
ii. The document is required by law to be notarized.
iii. A notary is considered a public official under applicable law.
iv. The amount of the fee is set or authorized by law.
4. Nonfiling insurance. The exclusion in Sec. 226.4(e)(2) is
available only if nonfiling insurance is purchased. If the creditor
collects and simply retains a fee as a sort of ``self-insurance''
against nonfiling, it may not be excluded from the finance charge. If
the nonfiling insurance premium exceeds the amount of the fees
excludable from the finance charge under Sec. 226.4(e)(1), only the
excess is a finance charge. For example:
i. The fee for perfecting a security interest is $5.00 and the fee
for releasing the security interest is $3.00. The creditor charges
$10.00 for nonfiling insurance. Only $8.00 of the $10.00 is excludable
from the finance charge.
4(f) Prohibited offsets.
1. Earnings on deposits or investments. The rule that the creditor
shall not deduct any earnings by the consumer on deposits or
investments applies whether or not the creditor has a security interest
in the property.
Subpart B--Open-end Credit
Sec. 226.5 General Disclosure Requirements.
5(a) Form of disclosures.
5(a)(1) General.
1. Clear and conspicuous standard. The ``clear and conspicuous''
standard generally requires that disclosures be in a reasonably
understandable form. Disclosures for credit card applications and
solicitations under Sec. 226.5a, highlighted account-opening
disclosures under Sec. 226.6(b)(1), highlighted disclosure on checks
that access a credit card under Sec. 226.9(b)(3), highlighted change-
in-terms disclosures under Sec. 226.9(c)(2)(iv)(C), and highlighted
disclosures when a rate is increased due to delinquency, default or for
a penalty under Sec. 226.9(g)(3)(ii) must also be readily noticeable
to the consumer.
2. Clear and conspicuous--reasonably understandable form. Except
where otherwise provided, the reasonably understandable form standard
does not require that disclosures be segregated from other material or
located in any particular place on the disclosure statement, or that
numerical amounts or percentages be in any particular type size. For
disclosures that are given orally, the standard requires that they be
given at a speed and volume sufficient for a consumer to hear and
comprehend them. (See comment 5(b)(1)(ii)-1.) Except where otherwise
provided, the standard does not prohibit:
i. Pluralizing required terminology (``finance charge'' and
``annual percentage rate'').
ii. Adding to the required disclosures such items as contractual
provisions, explanations of contract terms, State disclosures, and
translations.
iii. Sending promotional material with the required disclosures.
iv. Using commonly accepted or readily understandable abbreviations
(such as ``mo.'' for ``month'' or ``Tx.'' for ``Texas'') in making any
required disclosures.
v. Using codes or symbols such as ``APR'' (for annual percentage
rate), ``FC'' (for finance charge), or ``Cr'' (for credit balance), so
long as a legend or description of the code or symbol is provided on
the disclosure statement.
3. Clear and conspicuous--readily noticeable standard. To meet the
readily noticeable standard, disclosures for credit card applications
and solicitations under Sec. 226.5a, highlighted account-opening
disclosures under Sec. 226.6(b)(1), highlighted disclosures on checks
that access a credit card account under Sec. 226.9(b)(3), highlighted
change-in-terms disclosures under Sec. 226.9(c)(2)(iv)(C), and
highlighted disclosures when a rate is increased due to delinquency,
default or penalty pricing under Sec. 226.9(g)(3)(ii) must be given in
a minimum of 10-point font. (See special rule for font size
requirements for the annual percentage rate for purchases under
Sec. Sec. 226.5a(b)(1) and 226.6(b)(2)(i).)
4. Integrated document. The creditor may make both the account-
opening disclosures (Sec. 226.6) and the periodic-statement
disclosures (Sec. 226.7) on more than one page, and use both the front
and the reverse sides, except where otherwise indicated, so long as the
pages constitute an integrated document. An integrated document would
not include disclosure pages provided to the consumer at different
times or disclosures interspersed on the same page with promotional
material. An integrated document would include, for example:
i. Multiple pages provided in the same envelope that cover related
material and are folded together, numbered consecutively, or clearly
labeled to show that they relate to one another; or
ii. A brochure that contains disclosures and explanatory material
about a range of services the creditor offers, such as credit, checking
account, and electronic fund transfer features.
5. Disclosures covered. Disclosures that must meet the ``clear and
conspicuous'' standard include all required communications under this
subpart. Therefore, disclosures made by a person other than the card
issuer, such as disclosures of finance charges imposed at the time of
honoring a consumer's credit card under Sec. 226.9(d), and notices,
such as the correction notice required to be sent to the consumer under
Sec. 226.13(e), must also be clear and conspicuous.
Paragraph 5(a)(1)(ii)(A).
1. Electronic disclosures. Disclosures that need not be provided in
writing under Sec. 226.5(a)(1)(ii)(A) may be provided in writing,
orally, or in
[[Page 54272]]
electronic form. If the consumer requests the service in electronic
form, such as on the creditor's Web site, the specified disclosures may
be provided in electronic form without regard to the consumer consent
or other provisions of the Electronic Signatures in Global and National
Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.).
Paragraph 5(a)(1)(iii).
1. Disclosures not subject to E-Sign Act. See the commentary to
Sec. 226.5(a)(1)(ii)(A) regarding disclosures (in addition to those
specified under Sec. 226.5(a)(1)(iii)) that may be provided in
electronic form without regard to the consumer consent or other
provisions of the E-Sign Act.
5(a)(2) Terminology.
1. When disclosures must be more conspicuous. For home-equity plans
subject to Sec. 226.5b, the terms finance charge and annual percentage
rate, when required to be used with a number, must be disclosed more
conspicuously than other required disclosures, except in the cases
provided in Sec. 226.5(a)(2)(ii). At the creditor's option, finance
charge and annual percentage rate may also be disclosed more
conspicuously than the other required disclosures even when the
regulation does not so require. The following examples illustrate these
rules:
i. In disclosing the annual percentage rate as required by Sec.
226.6(a)(1)(ii), the term annual percentage rate is subject to the more
conspicuous rule.
ii. In disclosing the amount of the finance charge, required by
Sec. 226.7(a)(6)(i), the term finance charge is subject to the more
conspicuous rule.
iii. Although neither finance charge nor annual percentage rate
need be emphasized when used as part of general informational material
or in textual descriptions of other terms, emphasis is permissible in
such cases. For example, when the terms appear as part of the
explanations required under Sec. 226.6(a)(1)(iii) and (a)(1)(iv), they
may be equally conspicuous as the disclosures required under Sec. Sec.
226.6(a)(1)(ii) and 226.7(a)(7).
2. Making disclosures more conspicuous. In disclosing the terms
finance charge and annual percentage rate more conspicuously for home-
equity plans subject to Sec. 226.5b, only the words finance charge and
annual percentage rate should be accentuated. For example, if the term
total finance charge is used, only finance charge should be emphasized.
The disclosures may be made more conspicuous by, for example:
i. Capitalizing the words when other disclosures are printed in
lower case.
ii. Putting them in bold print or a contrasting color.
iii. Underlining them.
iv. Setting them off with asterisks.
v. Printing them in larger type.
3. Disclosure of figures--exception to more conspicuous rule. For
home-equity plans subject to Sec. 226.5b, the terms annual percentage
rate and finance charge need not be more conspicuous than figures
(including, for example, numbers, percentages, and dollar signs).
4. Consistent terminology. Language used in disclosures required in
this subpart must be close enough in meaning to enable the consumer to
relate the different disclosures; however, the language need not be
identical.
5(b) Time of disclosures.
5(b)(1) Account-opening disclosures.
5(b)(1)(i) General rule.
1. Disclosure before the first transaction. When disclosures must
be furnished ``before the first transaction,'' account-opening
disclosures must be delivered before the consumer becomes obligated on
the plan. Examples include:
i. Purchases. The consumer makes the first purchase, such as when a
consumer opens a credit plan and makes purchases contemporaneously at a
retail store, except when the consumer places a telephone call to make
the purchase and opens the plan contemporaneously (see commentary to
Sec. 226.5(b)(1)(iii) below).
ii. Advances. The consumer receives the first advance. If the
consumer receives a cash advance check at the same time the account-
opening disclosures are provided, disclosures are still timely if the
consumer can, after receiving the disclosures, return the cash advance
check to the creditor without obligation (for example, without paying
finance charges).
2. Reactivation of suspended account. If an account is temporarily
suspended (for example, because the consumer has exceeded a credit
limit, or because a credit card is reported lost or stolen) and then is
reactivated, no new account-opening disclosures are required.
3. Reopening closed account. If an account has been closed (for
example, due to inactivity, cancellation, or expiration) and then is
reopened, new account-opening disclosures are required. No new account-
opening disclosures are required, however, when the account is closed
merely to assign it a new number (for example, when a credit card is
reported lost or stolen) and the ``new'' account then continues on the
same terms.
4. Converting closed-end to open-end credit. If a closed-end credit
transaction is converted to an open-end credit account under a written
agreement with the consumer, account-opening disclosures under Sec.
226.6 must be given before the consumer becomes obligated on the open-
end credit plan. (See the commentary to Sec. 226.17 on converting
open-end credit to closed-end credit.)
5. Balance transfers. A creditor that solicits the transfer by a
consumer of outstanding balances from an existing account to a new
open-end plan must furnish the disclosures required by Sec. 226.6 so
that the consumer has an opportunity, after receiving the disclosures,
to contact the creditor before the balance is transferred and decline
the transfer. For example, assume a consumer responds to a card
issuer's solicitation for a credit card account subject to Sec. 226.5a
that offers a range of balance transfer annual percentage rates, based
on the consumer's creditworthiness. If the creditor opens an account
for the consumer, the creditor would comply with the timing rules of
this section by providing the consumer with the annual percentage rate
(along with the fees and other required disclosures) that would apply
to the balance transfer in time for the consumer to contact the
creditor and withdraw the request. A creditor that permits consumers to
withdraw the request by telephone has met this timing standard if the
creditor does not effect the balance transfer until 10 days after the
creditor has sent account-opening disclosures to the consumer, assuming
the consumer has not contacted the creditor to withdraw the request.
Card issuers that are subject to the requirements of Sec. 226.5a may
establish procedures that comply with both Sec. Sec. 226.5a and 226.6
in a single disclosure statement.
6. Substitution or replacement of credit card accounts.
i. Generally. When a card issuer substitutes or replaces an
existing credit card account with another credit card account, the card
issuer must either provide notice of the terms of the new account
consistent with Sec. 226.6(b) or provide notice of the changes in the
terms of the existing account consistent with Sec. 226.9(c)(2).
Whether a substitution or replacement results in the opening of a new
account or a change in the terms of an existing account for purposes of
the disclosure requirements in Sec. Sec. 226.6(b) and 226.9(c)(2) is
determined in light of all the relevant facts and circumstances. For
additional requirements and limitations related to the substitution or
replacement of credit card accounts, see Sec. Sec. 226.12(a) and
226.55(d) and comments 12(a)(1)-1 through -8,
[[Page 54273]]
12(a)(2)-1 through -9, 55(b)(3)-3, and 55(d)-1 through -3.
ii. Relevant facts and circumstances. Listed below are facts and
circumstances that are relevant to whether a substitution or
replacement results in the opening of a new account or a change in the
terms of an existing account for purposes of the disclosure
requirements in Sec. Sec. 226.6(b) and 226.9(c)(2). When most of the
facts and circumstances listed below are present, the substitution or
replacement likely constitutes the opening of a new account for which
Sec. 226.6(b) disclosures are appropriate. When few of the facts and
circumstances listed below are present, the substitution or replacement
likely constitutes a change in the terms of an existing account for
which Sec. 226.9(c)(2) disclosures are appropriate.
A. Whether the card issuer provides the consumer with a new credit
card;
B. Whether the card issuer provides the consumer with a new account
number;
C. Whether the account provides new features or benefits after the
substitution or replacement (such as rewards on purchases);
D. Whether the account can be used to conduct transactions at a
greater or lesser number of merchants after the substitution or
replacement;
E. Whether the card issuer implemented the substitution or
replacement on an individualized basis; and
F. Whether the account becomes a different type of open-end plan
after the substitution or replacement (such as when a charge card is
replaced by a credit card).
5(b)(1)(ii) Charges imposed as part of an open-end (not home-
secured) plan.
1. Disclosing charges before the fee is imposed. Creditors may
disclose charges imposed as part of an open-end (not home-secured) plan
orally or in writing at any time before a consumer agrees to pay the
fee or becomes obligated for the charge, unless the charge is specified
under Sec. 226.6(b)(2). (Charges imposed as part of an open-end (not
home-secured plan) that are not specified under Sec. 226.6(b)(2) may
alternatively be disclosed in electronic form; see the commentary to
Sec. 226.5(a)(1)(ii)(A).) Creditors must provide such disclosures at a
time and in a manner that a consumer would be likely to notice them.
For example, if a consumer telephones a card issuer to discuss a
particular service, a creditor would meet the standard if the creditor
clearly and conspicuously discloses the fee associated with the service
that is the topic of the telephone call orally to the consumer.
Similarly, a creditor providing marketing materials in writing to a
consumer about a particular service would meet the standard if the
creditor provided a clear and conspicuous written disclosure of the fee
for that service in those same materials. A creditor that provides
written materials to a consumer about a particular service but provides
a fee disclosure for another service not promoted in such materials
would not meet the standard. For example, if a creditor provided
marketing materials promoting payment by Internet, but included the fee
for a replacement card on such materials with no explanation, the
creditor would not be disclosing the fee at a time and in a manner that
the consumer would be likely to notice the fee.
5(b)(1)(iii) Telephone purchases.
1. Return policies. In order for creditors to provide disclosures
in accordance with the timing requirements of this paragraph, consumers
must be permitted to return merchandise purchased at the time the plan
was established without paying mailing or return-shipment costs.
Creditors may impose costs to return subsequent purchases of
merchandise under the plan, or to return merchandise purchased by other
means such as a credit card issued by another creditor. A reasonable
return policy would be of sufficient duration that the consumer is
likely to have received the disclosures and had sufficient time to make
a decision about the financing plan before his or her right to return
the goods expires. Return policies need not provide a right to return
goods if the consumer consumes or damages the goods, or for installed
appliances or fixtures, provided there is a reasonable repair or
replacement policy to cover defective goods or installations. If the
consumer chooses to reject the financing plan, creditors comply with
the requirements of this paragraph by permitting the consumer to pay
for the goods with another reasonable form of payment acceptable to the
merchant and keep the goods although the creditor cannot require the
consumer to do so.
5(b)(1)(iv) Membership fees.
1. Membership fees. See Sec. 226.5a(b)(2) and related commentary
for guidance on fees for issuance or availability of a credit or charge
card.
2. Rejecting the plan. If a consumer has paid or promised to pay a
membership fee including an application fee excludable from the finance
charge under Sec. 226.4(c)(1) before receiving account-opening
disclosures, the consumer may, after receiving the disclosures, reject
the plan and not be obligated for the membership fee, application fee,
or any other fee or charge. A consumer who has received the disclosures
and uses the account, or makes a payment on the account after receiving
a billing statement, is deemed not to have rejected the plan.
3. Using the account. A consumer uses an account by obtaining an
extension of credit after receiving the account-opening disclosures,
such as by making a purchase or obtaining an advance. A consumer does
not ``use'' the account by activating the account. A consumer also does
not ``use'' the account when the creditor assesses fees on the account
(such as start-up fees or fees associated with credit insurance or debt
cancellation or suspension programs agreed to as a part of the
application and before the consumer receives account-opening
disclosures). For example, the consumer does not ``use'' the account
when a creditor sends a billing statement with start-up fees, there is
no other activity on the account, the consumer does not pay the fees,
and the creditor subsequently assesses a late fee or interest on the
unpaid fee balances. A consumer also does not ``use'' the account by
paying an application fee excludable from the finance charge under
Sec. 226.4(c)(1) prior to receiving the account-opening disclosures.
4. Home-equity plans. Creditors offering home-equity plans subject
to the requirements of Sec. 226.5b are subject to the requirements of
Sec. 226.5b(h) regarding the collection of fees.
5(b)(2) Periodic statements.
Paragraph 5(b)(2)(i).
1. Periodic statements not required. Periodic statements need not
be sent in the following cases:
i. If the creditor adjusts an account balance so that at the end of
the cycle the balance is less than $1--so long as no finance charge has
been imposed on the account for that cycle.
ii. If a statement was returned as undeliverable. If a new address
is provided, however, within a reasonable time before the creditor must
send a statement, the creditor must resume sending statements.
Receiving the address at least 20 days before the end of a cycle would
be a reasonable amount of time to prepare the statement for that cycle.
For example, if an address is received 22 days before the end of the
June cycle, the creditor must send the periodic statement for the June
cycle. (See Sec. 226.13(a)(7).)
2. Termination of draw privileges. When a consumer's ability to
draw on an open-end account is terminated without being converted to
closed-end credit under a written agreement, the creditor must continue
to provide
[[Page 54274]]
periodic statements to those consumers entitled to receive them under
Sec. 226.5(b)(2)(i), for example, when the draw period of an open-end
credit plan ends and consumers are paying off outstanding balances
according to the account agreement or under the terms of a workout
agreement that is not converted to a closed-end transaction. In
addition, creditors must continue to follow all of the other open-end
credit requirements and procedures in subpart B.
3. Uncollectible accounts. An account is deemed uncollectible for
purposes of Sec. 226.5(b)(2)(i) when a creditor has ceased collection
efforts, either directly or through a third party.
4. Instituting collection proceedings. Creditors institute a
delinquency collection proceeding by filing a court action or
initiating an adjudicatory process with a third party. Assigning a debt
to a debt collector or other third party would not constitute
instituting a collection proceeding.
Paragraph 5(b)(2)(ii).
1. Reasonable procedures. A creditor is not required to determine
the specific date on which periodic statements are mailed or delivered
to each individual consumer. A creditor complies with Sec.
226.5(b)(2)(ii) if it has adopted reasonable procedures designed to
ensure that periodic statements are mailed or delivered to consumers no
later than a certain number of days after the closing date of the
billing cycle and adds that number of days to the 21-day period
required by Sec. 226.5(b)(2)(ii) when determining the payment due date
and the date on which any grace period expires. For example, if a
creditor has adopted reasonable procedures designed to ensure that
periodic statements are mailed or delivered to consumers no later than
three days after the closing date of the billing cycle, the payment due
date and the date on which any grace period expires must be no less
than 24 days after the closing date of the billing cycle.
2. Treating a payment as late for any purpose and collecting any
finance or other charges. Treating a payment as late for any purpose
includes increasing the annual percentage rate as a penalty, reporting
the consumer as delinquent to a credit reporting agency, or assessing a
late fee or any other fee based on the consumer's failure to make a
payment within a specified amount of time or by a specified date. The
prohibition in Sec. 226.5(b)(2)(ii) on treating a payment as late for
any purpose or collecting finance or other charges applies only during
the 21-day period following mailing or delivery of the periodic
statement. When an account is not eligible for a grace period, imposing
a finance charge due to a periodic interest rate does not constitute
treating a payment as late or collecting finance or other charges as a
result of a failure to comply with Sec. 226.5(b)(2)(ii).
3. Payment due date. For purposes of Sec. 226.5(b)(2)(ii),
``payment due date'' means the date by which the creditor requires the
consumer to make the required minimum periodic payment in order to
avoid being treated as late for any purpose, except as set forth in
paragraphs i. and ii. below.
i. Courtesy period following payment due date. Although the terms
of the account agreement may require that payment be made by a certain
date, some creditors provide an additional period of time after that
date during which a late payment fee will not be assessed. In some
cases, this period is set forth in the account agreement while in
others it is provided as an informal policy or practice. Regardless,
for purposes of Sec. 226.5(b)(2)(ii), the payment due date is the due
date according to the legal obligation between the parties, not the end
of the additional period of time. For example, if an account agreement
for a home equity plan subject to the requirements of Sec. 226.5b
provides that payment is due on the first day of the month but a late
payment fee will not be assessed if the payment is received by the
fifteenth day of the month, the payment due date for purposes of Sec.
226.5(b)(2)(ii) is the first day of the month. Similarly, if a
cardholder agreement provides that payment is due on the fifteenth day
of the month but, under the creditor's informal ``courtesy'' period, a
late payment fee will not be assessed if the payment is received by the
eighteenth day of the month, the payment due date for purposes of Sec.
226.5(b)(2)(ii) is the fifteenth day of the month.
ii. Laws affecting assessment of late payment and other fees. Some
State or other laws require that a certain number of days must elapse
following a due date before a late payment or other fee may be imposed.
For example, assume that the account agreement provides that payment is
due on the fifteenth day of the month but, under State law, the
creditor is prohibited from assessing a late payment fee until the
twenty-sixth day of the month. For purposes of Sec. 226.5(b)(2)(ii),
the payment due date is the due date according to the legal obligation
between the parties (the fifteenth day of the month), not the date
before which State law prohibits the imposition of a late payment fee
(the twenty-sixth day of the month).
4. Definition of grace period. For purposes of Sec.
226.5(b)(2)(ii), ``grace period'' means a period within which any
credit extended may be repaid without incurring a finance charge due to
a periodic interest rate. A deferred interest or similar promotional
program 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 is not a grace period for
purposes of Sec. 226.5(b)(2)(ii). Similarly, a courtesy period
following the payment due date is not a grace period for purposes of
Sec. 226.5(b)(2)(ii). See comment 5(b)(2)(ii)-3.i.
5. Consumer request to pick up periodic statements. When a consumer
initiates a request, the creditor may permit, but may not require, the
consumer to pick up periodic statements. If the consumer wishes to pick
up a statement, the statement must be made available in accordance with
Sec. 226.5(b)(2)(ii).
6. Deferred interest and similar promotional programs. See comment
7(b)-1.iv.
Paragraph 5(b)(2)(iii).
1. Computer malfunction. The exceptions identified in Sec.
226.5(b)(2)(iii) of this section do not extend to the failure to
provide a periodic statement because of computer malfunction.
2. Calling for periodic statements. When the consumer initiates a
request, the creditor may permit, but may not require, consumers to
pick up their periodic statements. If the consumer wishes to pick up
the statement and the plan has a grace period, the statement must be
made available in accordance with the 14-day rule.
5(c) Basis of disclosures and use of estimates.
1. Legal obligation. The disclosures should reflect the credit
terms to which the parties are legally bound at the time of giving the
disclosures.
i. The legal obligation is determined by applicable State or other
law.
ii. The fact that a term or contract may later be deemed
unenforceable by a court on the basis of equity or other grounds does
not, by itself, mean that disclosures based on that term or contract
did not reflect the legal obligation.
iii. The legal obligation normally is presumed to be contained in
the contract that evidences the agreement. But this may be rebutted if
another agreement between the parties legally modifies that contract.
2. Estimates--obtaining information. Disclosures may be estimated
when the exact information is unknown at the time disclosures are made.
Information is unknown if it is not reasonably available to the
creditor at the time
[[Page 54275]]
disclosures are made. The reasonably available standard requires that
the creditor, acting in good faith, exercise due diligence in obtaining
information. In using estimates, the creditor is not required to
disclose the basis for the estimated figures, but may include such
explanations as additional information. The creditor normally may rely
on the representations of other parties in obtaining information. For
example, the creditor might look to insurance companies for the cost of
insurance.
3. Estimates--redisclosure. If the creditor makes estimated
disclosures, redisclosure is not required for that consumer, even
though more accurate information becomes available before the first
transaction. For example, in an open-end plan to be secured by real
estate, the creditor may estimate the appraisal fees to be charged;
such an estimate might reasonably be based on the prevailing market
rates for similar appraisals. If the exact appraisal fee is
determinable after the estimate is furnished but before the consumer
receives the first advance under the plan, no new disclosure is
necessary.
5(d) Multiple creditors; multiple consumers.
1. Multiple creditors. Under Sec. 226.5(d):
i. Creditors must choose which of them will make the disclosures.
ii. A single, complete set of disclosures must be provided, rather
than partial disclosures from several creditors.
iii. All disclosures for the open-end credit plan must be given,
even if the disclosing creditor would not otherwise have been obligated
to make a particular disclosure.
2. Multiple consumers. Disclosures may be made to either obligor on
a joint account. Disclosure responsibilities are not satisfied by
giving disclosures to only a surety or guarantor for a principal
obligor or to an authorized user. In rescindable transactions, however,
separate disclosures must be given to each consumer who has the right
to rescind under Sec. 226.15.
3. Card issuer and person extending credit not the same person.
Section 127(c)(4)(D) of the Truth in Lending Act (15 U.S.C.
1637(c)(4)(D)) contains rules pertaining to charge card issuers with
plans that allow access to an open-end credit plan that is maintained
by a person other than the charge card issuer. These rules are not
implemented in Regulation Z (although they were formerly implemented in
Sec. 226.5a(f)). However, the statutory provisions remain in effect
and may be used by charge card issuers with plans meeting the specified
criteria.
5(e) Effect of subsequent events.
1. Events causing inaccuracies. Inaccuracies in disclosures are not
violations if attributable to events occurring after disclosures are
made. For example, when the consumer fails to fulfill a prior
commitment to keep the collateral insured and the creditor then
provides the coverage and charges the consumer for it, such a change
does not make the original disclosures inaccurate. The creditor may,
however, be required to provide a new disclosure(s) under Sec.
226.9(c).
2. Use of inserts. When changes in a creditor's plan affect
required disclosures, the creditor may use inserts with outdated
disclosure forms. Any insert:
i. Should clearly refer to the disclosure provision it replaces.
ii. Need not be physically attached or affixed to the basic
disclosure statement.
iii. May be used only until the supply of outdated forms is
exhausted.
Sec. 226.5a Credit and Charge Card Applications and Solicitations.
1. General. Section 226.5a generally requires that credit
disclosures be contained in application forms and solicitations
initiated by a card issuer to open a credit or charge card account.
(See Sec. 226.5a(a)(5) and (e)(2) for exceptions; see Sec.
226.5a(a)(1) and accompanying commentary for the definition of
solicitation; see also Sec. 226.2(a)(15) and accompanying commentary
for the definition of charge card.)
2. Substitution of account-opening summary table for the
disclosures required by Sec. 226.5a. In complying with Sec.
226.5a(c), (e)(1) or (f), a card issuer may provide the account-opening
summary table described in Sec. 226.6(b)(1) in lieu of the disclosures
required by Sec. 226.5a, if the issuer provides the disclosures
required by Sec. 226.6 on or with the application or solicitation.
3. Clear and conspicuous standard. See comment 5(a)(1)-1 for the
clear and conspicuous standard applicable to Sec. 226.5a disclosures.
5a(a) General rules.
5a(a)(1) Definition of solicitation.
1. Invitations to apply. A card issuer may contact a consumer who
has not been preapproved for a card account about opening an account
(whether by direct mail, telephone, or other means) and invite the
consumer to complete an application. Such a contact does not meet the
definition of solicitation, nor is it covered by this section, unless
the contact itself includes an application form in a direct mailing,
electronic communication or ``take-one''; an oral application in a
telephone contact initiated by the card issuer; or an application in an
in-person contact initiated by the card issuer.
5a(a)(2) Form of disclosures; tabular format.
1. Location of table. i. General. Except for disclosures given
electronically, disclosures in Sec. 226.5a(b) that are required to be
provided in a table must be prominently located on or with the
application or solicitation. Disclosures are deemed to be prominently
located, for example, if the disclosures are on the same page as an
application or solicitation reply form. If the disclosures appear
elsewhere, they are deemed to be prominently located if the application
or solicitation reply form contains a clear and conspicuous reference
to the location of the disclosures and indicates that they contain
rate, fee, and other cost information, as applicable.
ii. Electronic disclosures. If the table is provided
electronically, the table must be provided in close proximity to the
application or solicitation. Card issuers have flexibility in
satisfying this requirement. Methods card issuers could use to satisfy
the requirement include, but are not limited to, the following
examples:
A. The disclosures could automatically appear on the screen when
the application or reply form appears;
B. The disclosures could be located on the same Web page as the
application or reply form (whether or not they appear on the initial
screen), if the application or reply form contains a clear and
conspicuous reference to the location of the disclosures and indicates
that the disclosures contain rate, fee, and other cost information, as
applicable;
C. Card issuers could provide a link to the electronic disclosures
on or with the application (or reply form) as long as consumers cannot
bypass the disclosures before submitting the application or reply form.
The link would take the consumer to the disclosures, but the consumer
need not be required to scroll completely through the disclosures; or
D. The disclosures could be located on the same Web page as the
application or reply form without necessarily appearing on the initial
screen, immediately preceding the button that the consumer will click
to submit the application or reply.
Whatever method is used, a card issuer need not confirm that the
consumer has read the disclosures.
2. Multiple accounts. If a tabular format is required to be used,
card issuers offering several types of accounts may disclose the
various terms
[[Page 54276]]
for the accounts in a single table or may provide a separate table for
each account.
3. Information permitted in the table. See the commentary to Sec.
226.5a(b), (d)(2)(ii) and (e)(1) for guidance on additional information
permitted in the table.
4. Deletion of inapplicable disclosures. Generally, disclosures
need only be given as applicable. Card issuers may, therefore, omit
inapplicable headings and their corresponding boxes in the table. For
example, if no foreign transaction fee is imposed on the account, the
heading Foreign transaction and disclosure may be deleted from the
table or the disclosure form may contain the heading Foreign
transaction and a disclosure showing none. There is an exception for
the grace period disclosure; even if no grace period exists, that fact
must be stated.
5. Highlighting of annual percentage rates and fee amounts. i. In
general. See Samples G-10(B) and G-10(C) for guidance on providing the
disclosures described in Sec. 226.5a(a)(2)(iv) in bold text. Other
annual percentage rates or fee amounts disclosed in the table may not
be in bold text. Samples G-10(B) and G-10(C) also provide guidance to
issuers on how to disclose the rates and fees described in Sec.
226.5a(a)(2)(iv) in a clear and conspicuous manner, by including these
rates and fees generally as the first text in the applicable rows of
the table so that the highlighted rates and fees generally are aligned
vertically in the table.
ii. Maximum limits on fees. Section 226.5a(a)(2)(iv) provides that
any maximum limits on fee amounts unrelated to fees that vary by State
may not be disclosed in bold text. For example, assume an issuer will
charge a cash advance fee of $5 or 3 percent of the cash advance
transaction amount, whichever is greater, but the fee will not exceed
$100. The maximum limit of $100 for the cash advance fee must not be
highlighted in bold. Nonetheless, assume that the amount of the late
fee varies by State, and the range of amount of late fees disclosed is
$15-$25. In this case, the maximum limit of $25 on the late fee amounts
must be highlighted in bold. In both cases, the minimum fee amount
(e.g. $5 or $15) must be disclosed in bold text.
iii. Periodic fees. Section 226.5a(a)(2)(iv) provides that any
periodic fee disclosed pursuant to Sec. 226.5a(b)(2) that is not an
annualized amount must not be disclosed in bold. For example, if an
issuer imposes a $10 monthly maintenance fee for a card account, the
issuer must disclose in the table that there is a $10 monthly
maintenance fee, and that the fee is $120 on an annual basis. In this
example, the $10 fee disclosure would not be disclosed in bold, but the
$120 annualized amount must be disclosed in bold. In addition, if an
issuer must disclose any annual fee in the table, the amount of the
annual fee must be disclosed in bold.
6. Form of disclosures. Whether disclosures must be in electronic
form depends upon the following:
i. If a consumer accesses a credit card application or solicitation
electronically (other than as described under ii. below), such as on-
line at a home computer, the card issuer must provide the disclosures
in electronic form (such as with the application or solicitation on its
Web site) in order to meet the requirement to provide disclosures in a
timely manner on or with the application or solicitation. If the issuer
instead mailed paper disclosures to the consumer, this requirement
would not be met.
ii. In contrast, if a consumer is physically present in the card
issuer's office, and accesses a credit card application or solicitation
electronically, such as via a terminal or kiosk (or if the consumer
uses a terminal or kiosk located on the premises of an affiliate or
third party that has arranged with the card issuer to provide
applications or solicitations to consumers), the issuer may provide
disclosures in either electronic or paper form, provided the issuer
complies with the timing and delivery (``on or with'') requirements of
the regulation.
7. Terminology. Section 226.5a(a)(2)(i) generally requires that the
headings, content and format of the tabular disclosures be
substantially similar, but need not be identical, to the applicable
tables in appendix G-10 to part 226; but see Sec. 226.5(a)(2) for
terminology requirements applicable to Sec. 226.5a disclosures.
5a(a)(4) Fees that vary by State.
1. Manner of disclosing range. If the card issuer discloses a range
of fees instead of disclosing the amount of the specific fee applicable
to the consumer's account, the range may be stated as the lowest
authorized fee (zero, if there are one or more states where no fee
applies) to the highest authorized fee.
5a(a)(5) Exceptions.
1. Noncoverage of consumer-initiated requests. Applications
provided to a consumer upon request are not covered by Sec. 226.5a,
even if the request is made in response to the card issuer's invitation
to apply for a card account. To illustrate, if a card issuer invites
consumers to call a toll-free number or to return a response card to
obtain an application, the application sent in response to the
consumer's request need not contain the disclosures required under
Sec. 226.5a. Similarly, if the card issuer invites consumers to call
and make an oral application on the telephone, Sec. 226.5a does not
apply to the application made by the consumer. If, however, the card
issuer calls a consumer or initiates a telephone discussion with a
consumer about opening a card account and contemporaneously takes an
oral application, such applications are subject to Sec. 226.5a,
specifically Sec. 226.5a(d). Likewise, if the card issuer initiates an
in-person discussion with a consumer about opening a card account and
contemporaneously takes an application, such applications are subject
to Sec. 226.5a, specifically Sec. 226.5a(f).
5a(b) Required disclosures.
1. Tabular format. Provisions in Sec. 226.5a(b) and its commentary
provide that certain information must appear or is permitted to appear
in a table. The tabular format is required for Sec. 226.5a(b)
disclosures given pursuant to Sec. 226.5a(c), (d)(2), (e)(1) and (f).
The tabular format does not apply to oral disclosures given pursuant to
Sec. 226.5a(d)(1). (See Sec. 226.5a(a)(2).)
2. Accuracy. Rules concerning accuracy of the disclosures required
by Sec. 226.5a(b), including variable rate disclosures, are stated in
Sec. 226.5a(c), (d), and (e), as applicable.
5a(b)(1) Annual percentage rate.
1. Variable-rate accounts--definition. For purposes of Sec.
226.5a(b)(1), a variable-rate account exists when rate changes are part
of the plan and are tied to an index or formula. (See the commentary to
Sec. 226.6(b)(4)(ii) for examples of variable-rate plans.)
2. Variable-rate accounts--fact that rate varies and how the rate
will be determined. In describing how the applicable rate will be
determined, the card issuer must identify in the table the type of
index or formula used, such as the prime rate. In describing the index,
the issuer may not include in the table details about the index. For
example, if the issuer uses a prime rate, the issuer must disclose the
rate as a ``prime rate'' and may not disclose in the table other
details about the prime rate, such as the fact that it is the highest
prime rate published in the Wall Street Journal two business days
before the closing date of the statement for each billing period. The
issuer may not disclose in the table the current value of the index
(such as that the prime rate is currently 7.5 percent) or the amount of
the margin or spread added to the index or formula in setting the
applicable rate. A card issuer
[[Page 54277]]
may not disclose any applicable limitations on rate increases or
decreases in the table, such as describing that the rate will not go
below a certain rate or higher than a certain rate. (See Samples G-
10(B) and G-10(C) for guidance on how to disclose the fact that the
applicable rate varies and how it is determined.)
3. Discounted initial rates. i. Immediate proximity. If the term
``introductory'' is in the same phrase as the introductory rate, as
that term is defined in Sec. 226.16(g)(2)(ii), it will be deemed to be
in immediate proximity of the listing. For example, an issuer that uses
the phrase ``introductory balance transfer APR X percent'' has used the
word ``introductory'' within the same phrase as the rate. (See Sample
G-10(C) for guidance on how to disclose clearly and conspicuously the
expiration date of the introductory rate and the rate that will apply
after the introductory rate expires, if an introductory rate is
disclosed in the table.)
ii. Subsequent changes in terms. The fact that an issuer may
reserve the right to change a rate subsequent to account opening,
pursuant to the notice requirements of Sec. 226.9(c) and the
limitations in Sec. 226.55, does not, by itself, make that rate an
introductory rate. For example, assume an issuer discloses an annual
percentage rate for purchases of 12.99% but does not specify a time
period during which that rate will be in effect. Even if that issuer
subsequently increases the annual percentage rate for purchases to
15.99%, pursuant to a change-in-terms notice provided under Sec.
226.9(c), the 12.99% is not an introductory rate.
iii. More than one introductory rate. If more than one introductory
rate may apply to a particular balance in succeeding periods, the term
``introductory'' need only be used to describe the first introductory
rate. For example, if an issuer offers a rate of 8.99% on purchases for
six months, 10.99% on purchases for the following six months, and
14.99% on purchases after the first year, the term ``introductory''
need only be used to describe the 8.99% rate.
4. Premium initial rates--subsequent changes in terms. The fact
that an issuer may reserve the right to change a rate subsequent to
account opening, pursuant to the notice requirements of Sec. 226.9(c)
and the limitations in Sec. 226.55 (as applicable), does not, by
itself, make that rate a premium initial rate. For example, assume an
issuer discloses an annual percentage rate for purchases of 18.99% but
does not specify a time period during which that rate will be in
effect. Even if that issuer subsequently reduces the annual percentage
rate for purchases to 15.99%, the 18.99% is not a premium initial rate.
If the rate decrease is the result of a change from a non-variable rate
to a variable rate or from a variable rate to a non-variable rate, see
comments 9(c)(2)(v)-3 and 9(c)(2)(v)-4 for guidance on the notice
requirements under Sec. 226.9(c).
5. Increased penalty rates. i. In general. For rates that are not
introductory rates, if a rate may increase as a penalty for one or more
events specified in the account agreement, such as a late payment or an
extension of credit that exceeds the credit limit, the card issuer must
disclose the increased rate that would apply, a brief description of
the event or events that may result in the increased rate, and a brief
description of how long the increased rate will remain in effect. The
description of the specific event or events that may result in an
increased rate should be brief. For example, if an issuer may increase
a rate to the penalty rate because the consumer does not make the
minimum payment by 5 p.m., Eastern Time, on its payment due date, the
issuer should describe this circumstance in the table as ``make a late
payment.'' Similarly, if an issuer may increase a rate that applies to
a particular balance because the account is more than 30 days late, the
issuer should describe this circumstance in the table as ``make a late
payment.'' An issuer may not distinguish between the events that may
result in an increased rate for existing balances and the events that
may result in an increased rate for new transactions. (See Samples G-
10(B) and G-10(C) (in the row labeled ``Penalty APR and When it
Applies'') for additional guidance on the level of detail in which the
specific event or events should be described.) The description of how
long the increased rate will remain in effect also should be brief. If
a card issuer reserves the right to apply the increased rate
indefinitely, that fact should be stated. (See Samples G-10(B) and G-
10(C) (in the row labeled ``Penalty APR and When it Applies'') for
additional guidance on the level of detail which the issuer should use
to describe how long the increased rate will remain in effect.) A card
issuer will be deemed to meet the standard to clearly and conspicuously
disclose the information required by Sec. 226.5a(b)(1)(iv)(A) if the
issuer uses the format shown in Samples G-10(B) and G-10(C) (in the row
labeled ``Penalty APR and When it Applies'') to disclose this
information.
ii. Introductory rates--general. An issuer is required to disclose
directly beneath the table the circumstances under which an
introductory rate, as that term is defined in Sec. 226.16(g)(2)(ii),
may be revoked, and the rate that will apply after the revocation. This
information about revocation of an introductory rate and the rate that
will apply after revocation must be provided even if the rate that will
apply after the introductory rate is revoked is the rate that would
have applied at the end of the promotional period. In a variable-rate
account, the rate that would have applied at the end of the promotional
period is a rate based on the applicable index or formula in accordance
with the accuracy requirements set forth in Sec. 226.5a(c) or (e). In
describing the rate that will apply after revocation of the
introductory rate, if the rate that will apply after revocation of the
introductory rate is already disclosed in the table, the issuer is not
required to repeat the rate, but may refer to that rate in a clear and
conspicuous manner. For example, if the rate that will apply after
revocation of an introductory rate is the standard rate that applies to
that type of transaction (such as a purchase or balance transfer
transaction), and the standard rates are labeled in the table as
``standard APRs,'' the issuer may refer to the ``standard APR'' when
describing the rate that will apply after revocation of an introductory
rate. (See Sample G-10(C) in the disclosure labeled ``Loss of
Introductory APR'' directly beneath the table.) The description of the
circumstances in which an introductory rate could be revoked should be
brief. For example, if an issuer may increase an introductory rate
because the account is more than 60 days late, the issuer should
describe this circumstance in the table as ``make a late payment.'' In
addition, if the circumstances in which an introductory rate could be
revoked are already listed elsewhere in the table, the issuer is not
required to repeat the circumstances again, but may refer to those
circumstances in a clear and conspicuous manner. For example, if the
circumstances in which an introductory rate could be revoked are the
same as the event or events that may trigger a ``penalty rate'' as
described in Sec. 226.5a(b)(1)(iv)(A), the issuer may refer to the
actions listed in the Penalty APR row, in describing the circumstances
in which the introductory rate could be revoked. (See Sample G-10(C) in
the disclosure labeled ``Loss of Introductory APR'' directly beneath
the table for additional guidance on the level of detail in which to
describe the circumstances in which an introductory rate could be
revoked.) A card issuer will be deemed to meet the standard to clearly
and
[[Page 54278]]
conspicuously disclose the information required by Sec.
226.5a(b)(1)(iv)(B) if the issuer uses the format shown in Sample G-
10(C) to disclose this information.
iii. Introductory rates--limitations on revocation. Issuers that
are disclosing an introductory rate are prohibited by Sec. 226.55 from
increasing or revoking the introductory rate before it expires unless
the consumer fails to make a required minimum periodic payment within
60 days after the due date for the payment. In making the required
disclosure pursuant to Sec. 226.5a(b)(1)(iv)(B), issuers should
describe this circumstance directly beneath the table as ``make a late
payment.''
6. Rates that depend on consumer's creditworthiness. i. In general.
The card issuer, at its option, may disclose the possible rates that
may apply as either specific rates, or a range of rates. For example,
if there are three possible rates that may apply (9.99, 12.99 or 17.99
percent), an issuer may disclose specific rates (9.99, 12.99 or 17.99
percent) or a range of rates (9.99 to 17.99 percent). The card issuer
may not disclose only the lowest, highest or median rate that could
apply. (See Samples G-10(B) and G-10(C) for guidance on how to disclose
a range of rates.)
ii. Penalty rates. If the rate is a penalty rate, as described in
Sec. 226.5a(b)(1)(iv), the card issuer at its option may disclose the
highest rate that could apply, instead of disclosing the specific rates
or the range of rates that could apply. For example, if the penalty
rate could be up to 28.99 percent, but the issuer may impose a penalty
rate that is less than that rate depending on factors at the time the
penalty rate is imposed, the issuer may disclose the penalty rate as
``up to'' 28.99 percent. The issuer also must include a statement that
the penalty rate for which the consumer may qualify will depend on the
consumer's creditworthiness, and other factors if applicable.
iii. Other factors. Section 226.5a(b)(1)(v) applies even if other
factors are used in combination with a consumer's creditworthiness to
determine the rate for which a consumer may qualify at account opening.
For example, Sec. 226.5a(b)(1)(v) would apply if the issuer considers
the type of purchase the consumer is making at the time the consumer
opens the account, in combination with the consumer's creditworthiness,
to determine the rate for which the consumer may qualify at account
opening. If other factors are considered, the issuer should amend the
statement about creditworthiness, to indicate that the rate for which
the consumer may qualify at account opening will depend on the
consumer's creditworthiness and other factors. Nonetheless, Sec.
226.5a(b)(1)(v) does not apply if a consumer's creditworthiness is not
one of the factors that will determine the rate for which the consumer
may qualify at account opening (for example, if the rate is based
solely on the type of purchase that the consumer is making at the time
the consumer opens the account, or is based solely on whether the
consumer has other banking relationships with the card issuer).
7. Rate based on another rate on the account. In some cases, one
rate may be based on another rate on the account. For example, assume
that a penalty rate as described in Sec. 226.5a(b)(1)(iv)(A) is
determined by adding 5 percentage points to the current purchase rate,
which is 10 percent. In this example, the card issuer in disclosing the
penalty rate must disclose 15 percent as the current penalty rate. If
the purchase rate is a variable rate, then the penalty rate also is a
variable rate. In that case, the card issuer also must disclose the
fact that the penalty rate may vary and how the rate is determined,
such as ``This APR may vary with the market based on the Prime Rate.''
In describing the penalty rate, the issuer shall not disclose in the
table the amount of the margin or spread added to the current purchase
rate to determine the penalty rate, such as describing that the penalty
rate is determined by adding 5 percentage points to the purchase rate.
(See Sec. 226.5a(b)(1)(i) and comment 5a(b)(1)-2 for further guidance
on describing a variable rate.)
8. Rates. The only rates that shall be disclosed in the table are
annual percentage rates determined under Sec. 226.14(b). Periodic
rates shall not be disclosed in the table.
9. Deferred interest or similar transactions. An issuer offering a
deferred interest or similar plan, such as a promotional program that
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, may not disclose a 0% rate as
the rate applicable to deferred interest or similar transactions if
there are any circumstances under which the consumer will be obligated
for interest on such transactions for the deferred interest or similar
period.
5a(b)(2) Fees for issuance or availability.
1. Membership fees. Membership fees for opening an account must be
disclosed under this paragraph. A membership fee to join an
organization that provides a credit or charge card as a privilege of
membership must be disclosed only if the card is issued automatically
upon membership. Such a fee shall not be disclosed in the table if
membership results merely in eligibility to apply for an account.
2. Enhancements. Fees for optional services in addition to basic
membership privileges in a credit or charge card account (for example,
travel insurance or card-registration services) shall not be disclosed
in the table if the basic account may be opened without paying such
fees. Issuing a card to each primary cardholder (not authorized users)
is considered a basic membership privilege and fees for additional
cards, beyond the first card on the account, must be disclosed as a fee
for issuance or availability. Thus, a fee to obtain an additional card
on the account beyond the first card (so that each cardholder would
have his or her own card) must be disclosed in the table as a fee for
issuance or availability under Sec. 226.5a(b)(2). This fee must be
disclosed even if the fee is optional; that is, if the fee is charged
only if the cardholder requests one or more additional cards. (See the
available credit disclosure in Sec. 226.5a(b)(14).)
3. One-time fees. Disclosure of non-periodic fees is limited to
fees related to opening the account, such as one-time membership or
participation fees, or an application fee that is excludable from the
finance charge under Sec. 226.4(c)(1). The following are examples of
fees that shall not be disclosed in the table:
i. Fees for reissuing a lost or stolen card.
ii. Statement reproduction fees.
4. Waived or reduced fees. If fees required to be disclosed are
waived or reduced for a limited time, the introductory fees or the fact
of fee waivers may be provided in the table in addition to the required
fees if the card issuer also discloses how long the reduced fees or
waivers will remain in effect.
5. Periodic fees and one-time fees. A card issuer disclosing a
periodic fee must disclose the amount of the fee, how frequently it
will be imposed, and the annualized amount of the fee. A card issuer
disclosing a non-periodic fee must disclose that the fee is a one-time
fee. (See Sample G-10(C) for guidance on how to meet these
requirements.)
5a(b)(3) Fixed finance charge; minimum interest charge.
1. Example of brief statement. See Samples G-10(B) and G-10(C) for
guidance on how to provide a brief description of a minimum interest
charge.
2. Adjustment of $1.00 threshold amount. Consistent with Sec.
226.5a(b)(3), the Board will publish adjustments to
[[Page 54279]]
the $1.00 threshold amount, as appropriate.
5a(b)(4) Transaction charges.
1. Charges imposed by person other than card issuer. Charges
imposed by a third party, such as a seller of goods, shall not be
disclosed in the table under this section; the third party would be
responsible for disclosing the charge under Sec. 226.9(d)(1).
2. Foreign transaction fees. A transaction charge imposed by the
card issuer for the use of the card for purchases includes any fee
imposed by the issuer for purchases in a foreign currency or that take
place outside the United States or with a foreign merchant. (See
comment 4(a)-4 for guidance on when a foreign transaction fee is
considered charged by the card issuer.) If an issuer charges the same
foreign transaction fee for purchases and cash advances in a foreign
currency, or that take place outside the United States or with a
foreign merchant, the issuer may disclose this foreign transaction fee
as shown in Samples G-10(B) and G-10(C). Otherwise, the issuer must
revise the foreign transaction fee language shown in Samples G-10(B)
and G-10(C) to disclose clearly and conspicuously the amount of the
foreign transaction fee that applies to purchases and the amount of the
foreign transaction fee that applies to cash advances.
5a(b)(5) Grace period.
1. How grace period disclosure is made. The card issuer must state
any conditions on the applicability of the grace period. An issuer that
offers a grace period on all purchases and conditions the grace period
on the consumer paying his or her outstanding balance in full by the
due date each billing cycle, or on the consumer paying the outstanding
balance in full by the due date in the previous and/or the current
billing cycle(s) will be deemed to meet these requirements by providing
the following disclosure, as applicable: ``Your due date is [at least]
------ days after the close of each billing cycle. We will not charge
you any interest on purchases if you pay your entire balance by the due
date each month.''
2. No grace period. The issuer may use the following language to
describe that no grace period on any purchases is offered, as
applicable: ``We will begin charging interest on purchases on the
transaction date.''
3. Grace period on some purchases. If the issuer provides a grace
period on some types of purchases but no grace period on others, the
issuer may combine and revise the language in comments 5a(b)(5)-1 and -
2 as appropriate to describe to which types of purchases a grace period
applies and to which types of purchases no grace period is offered.
5a(b)(6) Balance computation method.
1. Form of disclosure. In cases where the card issuer uses a
balance computation method that is identified by name in the
regulation, the card issuer must disclose below the table only the name
of the method. In cases where the card issuer uses a balance
computation method that is not identified by name in the regulation,
the disclosure below the table must clearly explain the method in as
much detail as set forth in the descriptions of balance methods in
Sec. 226.5a(g). The explanation need not be as detailed as that
required for the disclosures under Sec. 226.6(b)(4)(i)(D). (See the
commentary to Sec. 226.5a(g) for guidance on particular methods.)
2. Determining the method. In determining which balance computation
method to disclose for purchases, the card issuer must assume that a
purchase balance will exist at the end of any grace period. Thus, for
example, if the average daily balance method will include new purchases
only if purchase balances are not paid within the grace period, the
card issuer would disclose the name of the average daily balance method
that includes new purchases. The card issuer must not assume the
existence of a purchase balance, however, in making other disclosures
under Sec. 226.5a(b).
5a(b)(7) Statement on charge card payments.
1. Applicability and content. The disclosure that charges are
payable upon receipt of the periodic statement is applicable only to
charge card accounts. In making this disclosure, the card issuer may
make such modifications as are necessary to more accurately reflect the
circumstances of repayment under the account. For example, the
disclosure might read, ``Charges are due and payable upon receipt of
the periodic statement and must be paid no later than 15 days after
receipt of such statement.''
5a(b)(8) Cash advance fee.
1. Content. See Samples G-10(B) and G-10(C) for guidance on how to
disclose clearly and conspicuously the cash advance fee.
2. Foreign cash advances. Cash advance fees required to be
disclosed under Sec. 226.5a(b)(8) include any charge imposed by the
card issuer for cash advances in a foreign currency or that take place
outside the United States or with a foreign merchant. (See comment
4(a)-4 for guidance on when a foreign transaction fee is considered
charged by the card issuer.) If an issuer charges the same foreign
transaction fee for purchases and cash advances in a foreign currency
or that take place outside the United States or with a foreign
merchant, the issuer may disclose this foreign transaction fee as shown
in Samples G-10(B) and (C). Otherwise, the issuer must revise the
foreign transaction fee language shown in Samples G-10(B) and (C) to
disclose clearly and conspicuously the amount of the foreign
transaction fee that applies to purchases and the amount of the foreign
transaction fee that applies to cash advances.
3. ATM fees. An issuer is not required to disclose pursuant to
Sec. 226.5a(b)(8) any charges imposed on a cardholder by an
institution other than the card issuer for the use of the other
institution's ATM in a shared or interchange system.
5a(b)(9) Late payment fee.
1. Applicability. The disclosure of the fee for a late payment
includes only those fees that will be imposed for actual, unanticipated
late payments. (See the commentary to Sec. 226.4(c)(2) for additional
guidance on late payment fees. See Samples G-10(B) and G-10(C) for
guidance on how to disclose clearly and conspicuously the late payment
fee.)
5a(b)(10) Over-the-limit fee.
1. Applicability. The disclosure of fees for exceeding a credit
limit does not include fees for other types of default or for services
related to exceeding the limit. For example, no disclosure is required
of fees for reinstating credit privileges or fees for the dishonor of
checks on an account that, if paid, would cause the credit limit to be
exceeded. (See Samples G-10(B) and G-10(C) for guidance on how to
disclose clearly and conspicuously the over-the-limit fee.)
5a(b)(13) Required insurance, debt cancellation, or debt suspension
coverage.
1. Content. See Sample G-10(B) for guidance on how to comply with
the requirements in Sec. 226.5a(b)(13).
5a(b)(14) Available credit.
1. Calculating available credit. If the 15 percent threshold test
is met, the issuer must disclose the available credit excluding
optional fees, and the available credit including optional fees. In
calculating the available credit to disclose in the table, the issuer
must consider all fees for the issuance or availability of credit
described in Sec. 226.5a(b)(2), and any security deposit, that will be
imposed and charged to the account when the account is opened, such as
one-time issuance and set-up fees. For example, in calculating the
available credit, issuers must consider the first year's annual fee and
the first month's maintenance fee (as applicable)
[[Page 54280]]
if they are charged to the account on the first billing statement. In
calculating the amount of the available credit including optional fees,
if optional fees could be charged multiple times, the issuer shall
assume that the optional fee is only imposed once. For example, if an
issuer charges a fee for each additional card issued on the account,
the issuer in calculating the amount of the available credit including
optional fees may assume that the cardholder requests only one
additional card. In disclosing the available credit, the issuer shall
round down the available credit amount to the nearest whole dollar.
2. Content. See Sample G-10(C) for guidance on how to provide the
disclosure required by Sec. 226.5a(b)(14) clearly and conspicuously.
5a(b)(15) Web site reference.
1. Content. See Samples G-10(B) and G-10(C) for guidance on
disclosing a reference to the Web site established by the Board and a
statement that consumers may obtain on the Web site information about
shopping for and using credit card accounts.
5a(c) Direct mail and electronic applications and solicitations.
1. Mailed publications. Applications or solicitations contained in
generally available publications mailed to consumers (such as
subscription magazines) are subject to the requirements applicable to
take-ones in Sec. 226.5a(e), rather than the direct mail requirements
of Sec. 226.5a(c). However, if a primary purpose of a card issuer's
mailing is to offer credit or charge card accounts--for example, where
a card issuer ``prescreens'' a list of potential cardholders using
credit criteria, and then mails to the targeted group its catalog
containing an application or a solicitation for a card account--the
direct mail rules apply. In addition, a card issuer may use a single
application form as a take-one (in racks in public locations, for
example) and for direct mailings, if the card issuer complies with the
requirements of Sec. 226.5a(c) even when the form is used as a take-
one--that is, by presenting the required Sec. 226.5a disclosures in a
tabular format. When used in a direct mailing, the credit term
disclosures must be accurate as of the mailing date whether or not the
Sec. 226.5a(e)(1)(ii) and (e)(1)(iii) disclosures are included; when
used in a take-one, the disclosures must be accurate for as long as the
take-one forms remain available to the public if the Sec.
226.5a(e)(1)(ii) and (e)(1)(iii) disclosures are omitted. (If those
disclosures are included in the take-one, the credit term disclosures
need only be accurate as of the printing date.)
5a(d) Telephone applications and solicitations.
1. Coverage. i. This paragraph applies if:
A. A telephone conversation between a card issuer and consumer may
result in the issuance of a card as a consequence of an issuer-
initiated offer to open an account for which the issuer does not
require any application (that is, a prescreened telephone
solicitation).
B. The card issuer initiates the contact and at the same time takes
application information over the telephone.
ii. This paragraph does not apply to:
A. Telephone applications initiated by the consumer.
B. Situations where no card will be issued--because, for example,
the consumer indicates that he or she does not want the card, or the
card issuer decides either during the telephone conversation or later
not to issue the card.
2. Right to reject the plan. The right to reject the plan
referenced in this paragraph is the same as the right to reject the
plan described in Sec. 226.5(b)(1)(iv). If an issuer substitutes the
account-opening summary table described in Sec. 226.6(b)(1) in lieu of
the disclosures specified in Sec. 226.5a(d)(2)(ii), the disclosure
specified in Sec. 226.5a(d)(2)(ii)(B) must appear in the table, if the
issuer is required to do so pursuant to Sec. 226.6(b)(2)(xiii).
Otherwise, the disclosure specified in Sec. 226.5a(d)(2)(ii)(B) may
appear either in or outside the table containing the required credit
disclosures.
3. Substituting account-opening table for alternative written
disclosures. An issuer may substitute the account-opening summary table
described in Sec. 226.6(b)(1) in lieu of the disclosures specified in
Sec. 226.5a(d)(2)(ii).
5a(e) Applications and solicitations made available to general
public.
1. Coverage. Applications and solicitations made available to the
general public include what are commonly referred to as take-one
applications typically found at counters in banks and retail
establishments, as well as applications contained in catalogs,
magazines and other generally available publications. In the case of
credit unions, this paragraph applies to applications and solicitations
to open card accounts made available to those in the general field of
membership.
2. In-person applications and solicitations. In-person applications
and solicitations initiated by a card issuer are subject to Sec.
226.5a(f), not Sec. 226.5a(e). (See Sec. 226.5a(f) and accompanying
commentary for rules relating to in-person applications and
solicitations.)
3. Toll-free telephone number. If a card issuer, in complying with
any of the disclosure options of Sec. 226.5a(e), provides a telephone
number for consumers to call to obtain credit information, the number
must be toll-free for nonlocal calls made from an area code other than
the one used in the card issuer's dialing area. Alternatively, a card
issuer may provide any telephone number that allows a consumer to call
for information and reverse the telephone charges.
5a(e)(1) Disclosure of required credit information.
1. Date of printing. Disclosure of the month and year fulfills the
requirement to disclose the date an application was printed.
2. Form of disclosures. The disclosures specified in Sec.
226.5a(e)(1)(ii) and (e)(1)(iii) may appear either in or outside the
table containing the required credit disclosures.
5a(e)(2) No disclosure of credit information.
1. When disclosure option available. A card issuer may use this
option only if the issuer does not include on or with the application
or solicitation any statement that refers to the credit disclosures
required by Sec. 226.5a(b). Statements such as no annual fee, low
interest rate, favorable rates, and low costs are deemed to refer to
the required credit disclosures and, therefore, may not be included on
or with the solicitation or application, if the card issuer chooses to
use this option.
5a(e)(3) Prompt response to requests for information.
1. Prompt disclosure. Information is promptly disclosed if it is
given within 30 days of a consumer's request for information but in no
event later than delivery of the credit or charge card.
2. Information disclosed. When a consumer requests credit
information, card issuers need not provide all the required credit
disclosures in all instances. For example, if disclosures have been
provided in accordance with Sec. 226.5a(e)(1) and a consumer calls or
writes a card issuer to obtain information about changes in the
disclosures, the issuer need only provide the items of information that
have changed from those previously disclosed on or with the application
or solicitation. If a consumer requests information about particular
items, the card issuer need only provide the requested information. If,
however, the card issuer has made disclosures in accordance with the
option in Sec. 226.5a(e)(2) and a consumer calls or writes the card
issuer requesting information about costs, all the required disclosure
information must be given.
[[Page 54281]]
3. Manner of response. A card issuer's response to a consumer's
request for credit information may be provided orally or in writing,
regardless of the manner in which the consumer's request is received by
the issuer. Furthermore, the card issuer must provide the information
listed in Sec. 226.5a(e)(1). Information provided in writing need not
be in a tabular format.
5a(f) In-person applications and solicitations.
1. Coverage. i. This paragraph applies if:
A. An in-person conversation between a card issuer and a consumer
may result in the issuance of a card as a consequence of an issuer-
initiated offer to open an account for which the issuer does not
require any application (that is, a preapproved in-person
solicitation).
B. The card issuer initiates the contact and at the same time takes
application information in person. For example, the following are
covered:
1. A consumer applies in person for a car loan at a financial
institution and the loan officer invites the consumer to apply for a
credit or charge card account; the consumer accepts the invitation and
submits an application.
2. An employee of a retail establishment, in the course of
processing a sales transaction using a bank credit card, asks a
customer if he or she would like to apply for the retailer's credit or
charge card; the customer responds affirmatively and submits an
application.
ii. This paragraph does not apply to:
A. In-person applications initiated by the consumer.
B. Situations where no card will be issued--because, for example,
the consumer indicates that he or she does not want the card, or the
card issuer decides during the in-person conversation not to issue the
card.
Sec. 226.5b Requirements for Home-equity Plans.
* * * * *
5b(a) Form of Disclosure.
5b(a)(1) General.
1. Written disclosures. The disclosures required under this section
must be clear and conspicuous and in writing, but need not be in a form
the consumer can keep. (See the commentary to Sec. 226.6(a)(3) for
special rules when disclosures required under Sec. 226.5b(d) are given
in a retainable form.)
* * * * *
5b(f) Limitations on Home-equity Plans.
* * * * *
Paragraph 5b(f)(3)(vi).
* * * * *
4. Reinstatement of credit privileges. Creditors are responsible
for ensuring that credit privileges are restored as soon as reasonably
possible after the condition that permitted the creditor's action
ceases to exist. One way a creditor can meet this responsibility is to
monitor the line on an ongoing basis to determine when the condition
ceases to exist. The creditor must investigate the condition frequently
enough to assure itself that the condition permitting the freeze
continues to exist. The frequency with which the creditor must
investigate to determine whether a condition continues to exist depends
upon the specific condition permitting the freeze. As an alternative to
such monitoring, the creditor may shift the duty to the consumer to
request reinstatement of credit privileges by providing a notice in
accordance with Sec. 226.9(c)(1)(iii). A creditor may require a
reinstatement request to be in writing if it notifies the consumer of
this requirement on the notice provided under Sec. 226.9(c)(1)(iii).
Once the consumer requests reinstatement, the creditor must promptly
investigate to determine whether the condition allowing the freeze
continues to exist. Under this alternative, the creditor has a duty to
investigate only upon the consumer's request.
* * * * *
Sec. 226.6 Account-opening Disclosures.
6(a) Rules affecting home-equity plans.
(a) Rules affecting home-equity plans. The requirements of
paragraph (a) of this section apply only to home-equity plans subject
to the requirements of Sec. 226.5b. A creditor shall disclose the
items in this section, to the extent applicable:
(1) Finance charge. The circumstances under which a finance charge
will be imposed and an explanation of how it will be determined, as
follows.
(i) A statement of when finance charges begin to accrue, including
an explanation of whether or not any time period exists within which
any credit extended may be repaid without incurring a finance charge.
If such a time period is provided, a creditor may, at its option and
without disclosure, impose no finance charge when payment is received
after the time period's expiration.
(ii) A disclosure of each periodic rate that may be used to compute
the finance charge, the range of balances to which it is
applicable,\11\ and the corresponding annual percentage rate.\12\ If a
creditor offers a variable-rate plan, the creditor shall also disclose:
the circumstances under which the rate(s) may increase; any limitations
on the increase; and the effect(s) of an increase. When different
periodic rates apply to different types of transactions, the types of
transactions to which the periodic rates shall apply shall also be
disclosed. A creditor is not required to adjust the range of balances
disclosure to reflect the balance below which only a minimum charge
applies.
\11\ [Reserved]
\12\ [Reserved]
(iii) An explanation of the method used to determine the balance on
which the finance charge may be computed.
(iv) An explanation of how the amount of any finance charge will be
determined,\13\ including a description of how any finance charge other
than the periodic rate will be determined.
\13\ [Reserved]
(2) Other charges. The amount of any charge other than a finance
charge that may be imposed as part of the plan, or an explanation of
how the charge will be determined.
(3) Home-equity plan information. The following disclosures
described in Sec. 226.5b(d), as applicable:
(i) A statement of the conditions under which the creditor may take
certain action, as described in Sec. 226.5b(d)(4)(i), such as
terminating the plan or changing the terms.
(ii) The payment information described in Sec. 226.5b(d)(5)(i) and
(ii) for both the draw period and any repayment period.
(iii) A statement that negative amortization may occur as described
in Sec. 226.5b(d)(9).
(iv) A statement of any transaction requirements as described in
Sec. 226.5b(d)(10).
(v) A statement regarding the tax implications as described in
Sec. 226.5b(d)(11).
(vi) A statement that the annual percentage rate imposed under the
plan does not include costs other than interest as described in Sec.
226.5b(d)(6) and (d)(12)(ii).
(vii) The variable-rate disclosures described in Sec.
226.5b(d)(12)(viii), (d)(12)(x), (d)(12)(xi), and (d)(12)(xii), as well
as the disclosure described in Sec. 226.5b(d)(5)(iii), unless the
disclosures provided with the application were in a form the consumer
could keep and included a representative payment example for the
category of payment option chosen by the consumer.
(4) Security interests. The fact that the creditor has or will
acquire a security interest in the property purchased under the plan,
or in other property identified by item or type.
(5) Statement of billing rights. A statement that outlines the
consumer's rights and the creditor's responsibilities
[[Page 54282]]
under Sec. Sec. 226.12(c) and 226.13 and that is substantially similar
to the statement found in Model Form G-3 or, at the creditor's option
G-3(A), in Appendix G to this part.
6(b) Rules affecting open-end (not home-secured) plans.
6(b)(1) Form of disclosures; tabular format for open-end (not home-
secured) plans.
1. Relation to tabular summary for applications and solicitations.
See commentary to Sec. 226.5a(a), (b), and (c) regarding format and
content requirements, except for the following:
i. Creditors must use the accuracy standard for annual percentage
rates in Sec. 226.6(b)(4)(ii)(G).
ii. Generally, creditors must disclose the specific rate for each
feature that applies to the account. If the rates on an open-end (not
home-secured) plan vary by State and the creditor is providing the
account-opening table in person at the time the plan is established in
connection with financing the purchase of goods or services the
creditor may, at its option, disclose in the account-opening table (A)
the rate applicable to the consumer's account, or (B) the range of
rates, if the disclosure includes a statement that the rate varies by
State and refers the consumer to the account agreement or other
disclosure provided with the account-opening table where the rate
applicable to the consumer's account is disclosed.
iii. Creditors must explain whether or not a grace period exists
for all features on the account. The row heading ``Paying Interest''
must be used if any one feature on the account does not have a grace
period.
iv. Creditors must name the balance computation method used for
each feature of the account and state that an explanation of the
balance computation method(s) is provided in the account-opening
disclosures.
v. Creditors must state that consumers' billing rights are provided
in the account-opening disclosures.
vi. If fees on an open-end (not home-secured) plan vary by State
and the creditor is providing the account-opening table in person at
the time the plan is established in connection with financing the
purchase of goods or services the creditor may, at its option, disclose
in the account-opening table (A) the specific fee applicable to the
consumer's account, or (B) the range of fees, if the disclosure
includes a statement that the amount of the fee varies by State and
refers the consumer to the account agreement or other disclosure
provided with the account-opening table where the fee applicable to the
consumer's account is disclosed.
vii. Creditors that must disclose the amount of available credit
must state the initial credit limit provided on the account.
viii. Creditors must disclose directly beneath the table the
circumstances under which an introductory rate may be revoked and the
rate that will apply after the introductory rate is revoked. Issuers of
credit card accounts under an open-end (not home-secured) consumer
credit plan are subject to limitations on the circumstances under which
an introductory rate may be revoked. (See comment 5a(b)(1)-4 for
guidance on how a card issuer may disclose the circumstances under
which an introductory rate may be revoked.)
ix. The applicable forms providing safe harbors for account-opening
tables are under appendix G-17 to part 226.
2. Clear and conspicuous standard. See comment 5(a)(1)-1 for the
clear and conspicuous standard applicable to Sec. 226.6 disclosures.
3. Terminology. Section 226.6(b)(1) generally requires that the
headings, content, and format of the tabular disclosures be
substantially similar, but need not be identical, to the tables in
appendix G to part 226; but see Sec. 226.5(a)(2) for terminology
requirements applicable to Sec. 226.6(b).
6(b)(2) Required disclosures for account-opening table for open-end
(not home-secured) plans.
6(b)(2)(iii) Fixed finance charge; minimum interest charge.
1. Example of brief statement. See Samples G-17(B), G-17(C), and G-
17(D) for guidance on how to provide a brief description of a minimum
interest charge.
6(b)(2)(v) Grace period.
1. Grace period. Creditors must state any conditions on the
applicability of the grace period. A creditor that offers a grace
period on all types of transactions for the account and conditions the
grace period on the consumer paying his or her outstanding balance in
full by the due date each billing cycle, or on the consumer paying the
outstanding balance in full by the due date in the previous and/or the
current billing cycle(s) will be deemed to meet these requirements by
providing the following disclosure, as applicable: ``Your due date is
[at least] ------ days after the close of each billing cycle. We will
not charge you any interest on your account if you pay your entire
balance by the due date each month.''
2. No grace period. Creditors may use the following language to
describe that no grace period is offered, as applicable: ``We will
begin charging interest on [applicable transactions] on the transaction
date.''
3. Grace period on some features. See Samples G-17(B) and G-17(C)
for guidance on complying with Sec. 226.6(b)(2)(v) when a creditor
offers a grace period for purchases but no grace period on balance
transfers and cash advances.
6(b)(2)(vi) Balance computation method.
1. Content. See Samples G-17(B) and G-17(C) for guidance on how to
disclose the balance computation method where the same method is used
for all features on the account.
6(b)(2)(xiii) Available credit.
1. Right to reject the plan. Creditors may use the following
language to describe consumers' right to reject a plan after receiving
account-opening disclosures: ``You may still reject this plan, provided
that you have not yet used the account or paid a fee after receiving a
billing statement. If you do reject the plan, you are not responsible
for any fees or charges.''
6(b)(3) Disclosure of charges imposed as part of open-end (not
home-secured) plans.
1. When finance charges accrue. Creditors are not required to
disclose a specific date when a cost that is a finance charge under
Sec. 226.4 will begin to accrue.
2. Grace periods. In disclosing in the account agreement or
disclosure statement whether or not a grace period exists, the creditor
need not use any particular descriptive phrase or term. However, the
descriptive phrase or term must be sufficiently similar to the
disclosures provided pursuant to Sec. Sec. 226.5a(b)(5) and
226.6(b)(2)(v) to satisfy a creditor's duty to provide consistent
terminology under Sec. 226.5(a)(2).
3. No finance charge imposed below certain balance. Creditors are
not required to disclose the fact that no finance charge is imposed
when the outstanding balance is less than a certain amount or the
balance below which no finance charge will be imposed.
Paragraph 6(b)(3)(ii).
1. Failure to use the plan as agreed. Late payment fees, over-the-
limit fees, and fees for payments returned unpaid are examples of
charges resulting from consumers' failure to use the plan as agreed.
2. Examples of fees that affect the plan. Examples of charges the
payment, or nonpayment, of which affects the consumer's account are:
i. Access to the plan. Fees for using the card at the creditor's
ATM to obtain a cash advance, fees to obtain additional cards including
replacements for lost or stolen cards, fees to expedite delivery of
[[Page 54283]]
cards or other credit devices, application and membership fees, and
annual or other participation fees identified in Sec. 226.4(c)(4).
ii. Amount of credit extended. Fees for increasing the credit limit
on the account, whether at the consumer's request or unilaterally by
the creditor.
iii. Timing or method of billing or payment. Fees to pay by
telephone or via the Internet.
3. Threshold test. If the creditor is unsure whether a particular
charge is a cost imposed as part of the plan, the creditor may at its
option consider such charges as a cost imposed as part of the plan for
purposes of the Truth in Lending Act.
Paragraph 6(b)(3)(iii)(B).
1. Fees for package of services. A fee to join a credit union is an
example of a fee for a package of services that is not imposed as part
of the plan, even if the consumer must join the credit union to apply
for credit. In contrast, a membership fee is an example of a fee for a
package of services that is considered to be imposed as part of a plan
where the primary benefit of membership in the organization is the
opportunity to apply for a credit card, and the other benefits offered
(such as a newsletter or a member information hotline) are merely
incidental to the credit feature.
6(b)(4) Disclosure of rates for open-end (not home-secured) plans.
Paragraph 6(b)(4)(i)(B).
1. Range of balances. Creditors are not required to disclose the
range of balances:
i. If only one periodic interest rate may be applied to the entire
account balance.
ii. If only one periodic interest rate may be applied to the entire
balance for a feature (for example, cash advances), even though the
balance for another feature (purchases) may be subject to two rates (a
1.5% monthly periodic interest rate on purchase balances of $0-$500,
and a 1% periodic interest rate for balances above $500). In this
example, the creditor must give a range of balances disclosure for the
purchase feature.
Paragraph 6(b)(4)(i)(D).
1. Explanation of balance computation method. Creditors do not
provide a sufficient explanation of a balance computation method by
using a shorthand phrase such as ``previous balance method'' or the
name of a balance computation method listed in Sec. 226.5a(g). (See
Model Clauses G-1(A) in appendix G to part 226. See Sec.
226.6(b)(2)(vi) regarding balance computation descriptions in the
account-opening summary.)
2. Allocation of payments. Creditors may, but need not, explain how
payments and other credits are allocated to outstanding balances.
6(b)(4)(ii) Variable-rate accounts.
1. Variable-rate disclosures--coverage.
i. Examples. Examples of open-end plans that permit the rate to
change and are considered variable-rate plans include:
A. Rate changes that are tied to the rate the creditor pays on its
six-month certificates of deposit.
B. Rate changes that are tied to Treasury bill rates.
C. Rate changes that are tied to changes in the creditor's
commercial lending rate.
ii. Examples of open-end plans that permit the rate to change and
are not considered variable-rate include:
A. Rate changes that are invoked under a creditor's contract
reservation to increase the rate without reference to such an index or
formula (for example, a plan that simply provides that the creditor
reserves the right to raise its rates).
B. Rate changes that are triggered by a specific event such as an
open-end credit plan in which the employee receives a lower rate
contingent upon employment, and the rate increases upon termination of
employment.
2. Variable-rate plan--circumstances for increase.
i. The following are examples that comply with the requirement to
disclose circumstances under which the rate(s) may increase:
A. ``The Treasury bill rate increases.''
B. ``The Federal Reserve discount rate increases.''
ii. Disclosing the frequency with which the rate may increase
includes disclosing when the increase will take effect; for example:
A. ``An increase will take effect on the day that the Treasury bill
rate increases.''
B. ``An increase in the Federal Reserve discount rate will take
effect on the first day of the creditor's billing cycle.''
3. Variable-rate plan--limitations on increase. In disclosing any
limitations on rate increases, limitations such as the maximum increase
per year or the maximum increase over the duration of the plan must be
disclosed. When there are no limitations, the creditor may, but need
not, disclose that fact. Legal limits such as usury or rate ceilings
under State or Federal statutes or regulations need not be disclosed.
Examples of limitations that must be disclosed include:
i. ``The rate on the plan will not exceed 25% annual percentage
rate.''
ii. ``Not more than \1/2\ of 1% increase in the annual percentage
rate per year will occur.''
4. Variable-rate plan--effects of increase. Examples of effects of
rate increases that must be disclosed include:
i. Any requirement for additional collateral if the annual
percentage rate increases beyond a specified rate.
ii. Any increase in the scheduled minimum periodic payment amount.
5. Discounted variable-rate plans. In some variable-rate plans,
creditors may set an initial interest rate that is not determined by
the index or formula used to make later interest rate adjustments.
Typically, this initial rate is lower than the rate would be if it were
calculated using the index or formula.
i. For example, a creditor may calculate interest rates according
to a formula using the six-month Treasury bill rate plus a 2 percent
margin. If the current Treasury bill rate is 10 percent, the creditor
may forgo the 2 percent spread and charge only 10 percent for a limited
time, instead of setting an initial rate of 12 percent, or the creditor
may disregard the index or formula and set the initial rate at 9
percent.
ii. When creditors disclose in the account-opening disclosures an
initial rate that is not calculated using the index or formula for
later rate adjustments, the disclosure should reflect:
A. The initial rate (expressed as a periodic rate and a
corresponding annual percentage rate), together with a statement of how
long the initial rate will remain in effect;
B. The current rate that would have been applied using the index or
formula (also expressed as a periodic rate and a corresponding annual
percentage rate); and
C. The other variable-rate information required by Sec.
226.6(b)(4)(ii).
6(b)(4)(iii) Rate changes not due to index or formula.
1. Events that cause the initial rate to change.
i. Changes based on expiration of time period. If the initial rate
will change at the expiration of a time period, creditors that disclose
the initial rate in the account-opening disclosure must identify the
expiration date and the fact that the initial rate will end at that
time.
ii. Changes based on specified contract terms. If the account
agreement provides that the creditor may change the initial rate upon
the occurrence of specified event or events, the creditor must identify
the events or events. Examples include the consumer not making the
required minimum payment when due, or the termination of an
[[Page 54284]]
employee preferred rate when the employment relationship is terminated.
2. Rate that will apply after initial rate changes.
i. Increased margins. If the initial rate is based on an index and
the rate may increase due to a change in the margin applied to the
index, the creditor must disclose the increased margin. If more than
one margin could apply, the creditor may disclose the highest margin.
ii. Risk-based pricing. In some plans, the amount of the rate
change depends on how the creditor weighs the occurrence of events
specified in the account agreement that authorize the creditor to
change rates, as well as other factors. Creditors must state the
increased rate that may apply. At the creditor's option, the creditor
may state the possible rates as a range, or by stating only the highest
rate that could be assessed. The creditor must disclose the period for
which the increased rate will remain in effect, such as ``until you
make three timely payments,'' or if there is no limitation, the fact
that the increased rate may remain indefinitely.
3. Effect of rate change on balances. Creditors must disclose
information to consumers about the balance to which the new rate will
apply and the balance to which the current rate at the time of the
change will apply. Card issuers subject to Sec. 226.55 may be subject
to certain restrictions on the application of increased rates to
certain balances.
6(b)(5) Additional disclosures for open-end (not home-secured)
plans.
6(b)(5)(i) Voluntary credit insurance, debt cancellation or debt
suspension.
1. Timing. Under Sec. 226.4(d), disclosures required to exclude
the cost of voluntary credit insurance or debt cancellation or debt
suspension coverage from the finance charge must be provided before the
consumer agrees to the purchase of the insurance or coverage. Creditors
comply with Sec. 226.6(b)(5)(i) if they provide those disclosures in
accordance with Sec. 226.4(d). For example, if the disclosures
required by Sec. 226.4(d) are provided at application, creditors need
not repeat those disclosures at account opening.
6(b)(5)(ii) Security interests.
1. General. Creditors are not required to use specific terms to
describe a security interest, or to explain the type of security or the
creditor's rights with respect to the collateral.
2. Identification of property. Creditors sufficiently identify
collateral by type by stating, for example, motor vehicle or household
appliances. (Creditors should be aware, however, that the Federal
credit practices rules, as well as some State laws, prohibit certain
security interests in household goods.) The creditor may, at its
option, provide a more specific identification (for example, a model
and serial number.)
3. Spreader clause. If collateral for preexisting credit with the
creditor will secure the plan being opened, the creditor must disclose
that fact. (Such security interests may be known as ``spreader'' or
``dragnet'' clauses, or as ``cross-collateralization'' clauses.) The
creditor need not specifically identify the collateral; a reminder such
as ``collateral securing other loans with us may also secure this
loan'' is sufficient. At the creditor's option, a more specific
description of the property involved may be given.
4. Additional collateral. If collateral is required when advances
reach a certain amount, the creditor should disclose the information
available at the time of the account-opening disclosures. For example,
if the creditor knows that a security interest will be taken in
household goods if the consumer's balance exceeds $1,000, the creditor
should disclose accordingly. If the creditor knows that security will
be required if the consumer's balance exceeds $1,000, but the creditor
does not know what security will be required, the creditor must
disclose on the initial disclosure statement that security will be
required if the balance exceeds $1,000, and the creditor must provide a
change-in-terms notice under Sec. 226.9(c) at the time the security is
taken. (See comment 6(b)(5)(ii)-2.)
5. Collateral from third party. Security interests taken in
connection with the plan must be disclosed, whether the collateral is
owned by the consumer or a third party.
6(b)(5)(iii) Statement of billing rights.
1. See the commentary to Model Forms G-3(A) and G-4(A).
Sec. 226.7 Periodic Statement.
1. Multifeatured plans. Some plans involve a number of different
features, such as purchases, cash advances, or overdraft checking.
Groups of transactions subject to different finance charge terms
because of the dates on which the transactions took place are treated
like different features for purposes of disclosures on the periodic
statements. The commentary includes additional guidance for
multifeatured plans.
7(a) Rules affecting home-equity plans.
The requirements of paragraph (a) of this section apply only to
home-equity plans subject to the requirements of Sec. 226.5b.
Alternatively, a creditor subject to this paragraph may, at its option,
comply with any of the requirements of paragraph (b) of this section;
however, any creditor that chooses not to provide a disclosure under
paragraph (a)(7) of this section must comply with paragraph (b)(6) of
this section.
(1) Previous balance. The account balance outstanding at the
beginning of the billing cycle.
(2) Identification of transactions. An identification of each
credit transaction in accordance with Sec. 226.8.
(3) Credits. Any credit to the account during the billing cycle,
including the amount and the date of crediting. The date need not be
provided if a delay in accounting does not result in any finance or
other charge.
(4) Periodic rates. (i) Except as provided in paragraph (a)(4)(ii)
of this section, each periodic rate that may be used to compute the
finance charge, the range of balances to which it is applicable,\14\
and the corresponding annual percentage rate.\15\ If no finance charge
is imposed when the outstanding balance is less than a certain amount,
the creditor is not required to disclose that fact, or the balance
below which no finance charge will be imposed. If different periodic
rates apply to different types of transactions, the types of
transactions to which the periodic rates apply shall also be disclosed.
For variable-rate plans, the fact that the periodic rate(s) may vary.
\14\ [Reserved]
\15\ [Reserved]
(ii) Exception. An annual percentage rate that differs from the
rate that would otherwise apply and is offered only for a promotional
period need not be disclosed except in periods in which the offered
rate is actually applied.
(5) Balance on which finance charge computed. The amount of the
balance to which a periodic rate was applied and an explanation of how
that balance was determined. When a balance is determined without first
deducting all credits and payments made during the billing cycle, the
fact and the amount of the credits and payments shall be disclosed.
(6) Amount of finance charge and other charges. Creditors may
comply with paragraphs (a)(6) of this section, or with paragraph (b)(6)
of this section, at their option.
(i) Finance charges. The amount of any finance charge debited or
added to the account during the billing cycle, using the term finance
charge. The components of the finance charge shall be individually
itemized and identified to show the amount(s) due to the application of
any periodic rates and the amounts(s) of any other type of finance
[[Page 54285]]
charge. If there is more than one periodic rate, the amount of the
finance charge attributable to each rate need not be separately
itemized and identified.
(ii) Other charges. The amounts, itemized and identified by type,
of any charges other than finance charges debited to the account during
the billing cycle.
(7) Annual percentage rate. At a creditor's option, when a finance
charge is imposed during the billing cycle, the annual percentage
rate(s) determined under Sec. 226.14(c) using the term annual
percentage rate.
(8) Grace period. The date by which or the time period within which
the new balance or any portion of the new balance must be paid to avoid
additional finance charges. If such a time period is provided, a
creditor may, at its option and without disclosure, impose no finance
charge if payment is received after the time period's expiration.
(9) Address for notice of billing errors. The address to be used
for notice of billing errors. Alternatively, the address may be
provided on the billing rights statement permitted by Sec.
226.9(a)(2).
(10) Closing date of billing cycle; new balance. The closing date
of the billing cycle and the account balance outstanding on that date.
7(b) Rules affecting open-end (not home-secured) plans.
1. Deferred interest or similar transactions. Creditors offer a
variety of payment plans for purchases that permit consumers to avoid
interest charges if the purchase balance is paid in full by a certain
date. The following provides guidance for a deferred interest or
similar plan where, for example, no interest charge is imposed on a
$500 purchase made in January if the $500 balance is paid by March 31.
i. Annual percentage rates. Under Sec. 226.7(b)(4), creditors must
disclose each annual percentage rate that may be used to compute the
interest charge. Under some plans with a deferred interest or similar
feature, if the deferred interest balance is not paid by a certain
date, March 31 in this example, interest charges applicable to the
billing cycles between the date of purchase in January and March 31 may
be imposed. Annual percentage rates that may apply to the deferred
interest balance ($500 in this example) if the balance is not paid in
full by March 31 must appear on periodic statements for the billing
cycles between the date of purchase and March 31. However, if the
consumer does not pay the deferred interest balance by March 31, the
creditor is not required to identify, on the periodic statement
disclosing the interest charge for the deferred interest balance,
annual percentage rates that have been disclosed in previous billing
cycles between the date of purchase and March 31.
ii. Balances subject to periodic rates. Under Sec. 226.7(b)(5),
creditors must disclose the balances subject to interest during a
billing cycle. The deferred interest balance ($500 in this example) is
not subject to interest for billing cycles between the date of purchase
and March 31 in this example. Periodic statements sent for those
billing cycles should not include the deferred interest balance in the
balance disclosed under Sec. 226.7(b)(5). This amount must be
separately disclosed on periodic statements and identified by a term
other than the term used to identify the balance disclosed under Sec.
226.7(b)(5) (such as ``deferred interest balance''). During any billing
cycle in which an interest charge on the deferred interest balance is
debited to the account, the balance disclosed under Sec. 226.7(b)(5)
should include the deferred interest balance for that billing cycle.
iii. Amount of interest charge. Under Sec. 226.7(b)(6)(ii),
creditors must disclose interest charges imposed during a billing
cycle. For some deferred interest purchases, the creditor may impose
interest from the date of purchase if the deferred interest balance
($500 in this example) is not paid in full by March 31 in this example,
but otherwise will not impose interest for billing cycles between the
date of purchase and March 31. Periodic statements for billing cycles
preceding March 31 in this example should not include in the interest
charge disclosed under Sec. 226.7(b)(6)(ii) the amounts a consumer may
owe if the deferred interest balance is not paid in full by March 31.
In this example, the February periodic statement should not identify as
interest charges interest attributable to the $500 January purchase.
This amount must be separately disclosed on periodic statements and
identified by a term other than ``interest charge'' (such as
``contingent interest charge'' or ``deferred interest charge''). The
interest charge on a deferred interest balance should be reflected on
the periodic statement under Sec. 226.7(b)(6)(ii) for the billing
cycle in which the interest charge is debited to the account.
iv. Due date to avoid obligation for finance charges under a
deferred interest or similar program. Section 226.7(b)(14) requires
disclosure on periodic statements of the date by which any outstanding
balance subject to a deferred interest or similar program must be paid
in full in order to avoid the obligation for finance charges on such
balance. This disclosure must appear on the front of the periodic
statement for two billing cycles immediately preceding the billing
cycle in which the disclosed date occurs. However, if the duration of
the deferred interest period is such that the reminder cannot be given
for the last two billing cycles immediately preceding the disclosed
date, the disclosure must be included on all periodic statements during
the deferred interest period. Assuming monthly billing cycles ending at
month-end and a payment due date of the 25th of the following month for
balances not subject to the deferred interest program, the following
examples illustrate how a creditor may comply with the requirement in
Sec. 226.7(b)(14) to disclose the date by which payment in full of
balances subject to the deferred interest program must occur in order
to avoid the obligation to pay finance charges applicable to a deferred
interest balance ($500 in this example):
A. If the creditor identifies March 31 as the payment-due date for
the $500 purchase, the creditor must include the $500 purchase and its
due date on the periodic statement reflecting activity for January sent
on February 1, and the periodic statement reflecting activity for
February sent on March 1. (For the periodic statement reflecting
account activity for February sent on March 1, the creditor could also
identify March 31 as the payment-due date for any other amounts that
would normally be due on March 25.)
B. If the creditor opts to delay the end of the deferred interest
period to coincide with the end of the grace period for balances not
subject to the deferred interest program by permitting the consumer to
avoid finance charges if the $500 is paid in full by April 25, the
creditor must include the $500 purchase and its due date on the
periodic statement reflecting activity for February sent on March 1,
and the periodic statement reflecting activity for March sent on April
1. The creditor could also include the $500 purchase and its due date
on the periodic statement reflecting activity for January sent on
February 1.
C. If the purchase was made in December (instead of January), the
creditor must include the $500 purchase and its due date on the
periodic statement reflecting activity for January sent on February 1
and the periodic statement reflecting activity for February sent on
March 1. The creditor also could include the $500 purchase and its due
date on the periodic statement reflecting activity for December sent on
January 1.
[[Page 54286]]
D. If the due date for the deferred interest balance is February 20
(instead of March 31), the creditor must include the $500 purchase and
its due date on the periodic statement reflecting activity for January
and sent on February 1.
7(b)(1) Previous balance.
1. Credit balances. If the previous balance is a credit balance, it
must be disclosed in such a way so as to inform the consumer that it is
a credit balance, rather than a debit balance.
2. Multifeatured plans. In a multifeatured plan, the previous
balance may be disclosed either as an aggregate balance for the account
or as separate balances for each feature (for example, a previous
balance for purchases and a previous balance for cash advances). If
separate balances are disclosed, a total previous balance is optional.
3. Accrued finance charges allocated from payments. Some open-end
credit plans provide that the amount of the finance charge that has
accrued since the consumer's last payment is directly deducted from
each new payment, rather than being separately added to each statement
and reflected as an increase in the obligation. In such a plan, the
previous balance need not reflect finance charges accrued since the
last payment.
7(b)(2) Identification of transactions.
1. Multifeatured plans. Creditors may, but are not required to,
arrange transactions by feature (such as disclosing purchase
transactions separately from cash advance transactions). Pursuant to
Sec. 226.7(b)(6), however, creditors must group all fees and all
interest separately from transactions and may not disclose any fees or
interest charges with transactions.
2. Automated teller machine (ATM) charges imposed by other
institutions in shared or interchange systems. A charge imposed on the
cardholder by an institution other than the card issuer for the use of
the other institution's ATM in a shared or interchange system and
included by the terminal-operating institution in the amount of the
transaction need not be separately disclosed on the periodic statement.
7(b)(3) Credits.
1. Identification--sufficiency. The creditor need not describe each
credit by type (returned merchandise, rebate of finance charge, etc.)--
``credit'' would suffice--except if the creditor is using the periodic
statement to satisfy the billing-error correction notice requirement.
(See the commentary to Sec. 226.13(e) and (f).) Credits may be
distinguished from transactions in any way that is clear and
conspicuous, for example, by use of debit and credit columns or by use
of plus signs and/or minus signs.
2. Date. If only one date is disclosed (that is, the crediting date
as required by the regulation), no further identification of that date
is necessary. More than one date may be disclosed for a single entry,
as long as it is clear which date represents the date on which credit
was given.
3. Totals. A total of amounts credited during the billing cycle is
not required.
7(b)(4) Periodic rates.
1. Disclosure of periodic interest rates--whether or not actually
applied. Except as provided in Sec. 226.7(b)(4)(ii), any periodic
interest rate that may be used to compute finance charges, expressed as
and labeled ``Annual Percentage Rate,'' must be disclosed whether or
not it is applied during the billing cycle. For example:
i. If the consumer's account has both a purchase feature and a cash
advance feature, the creditor must disclose the annual percentage rate
for each, even if the consumer only makes purchases on the account
during the billing cycle.
ii. If the annual percentage rate varies (such as when it is tied
to a particular index), the creditor must disclose each annual
percentage rate in effect during the cycle for which the statement was
issued.
2. Disclosure of periodic interest rates required only if
imposition possible. With regard to the periodic interest rate
disclosure (and its corresponding annual percentage rate), only rates
that could have been imposed during the billing cycle reflected on the
periodic statement need to be disclosed. For example:
i. If the creditor is changing annual percentage rates effective
during the next billing cycle (either because it is changing terms or
because of a variable-rate plan), the annual percentage rates required
to be disclosed under Sec. 226.7(b)(4) are only those in effect during
the billing cycle reflected on the periodic statement. For example, if
the annual percentage rate applied during May was 18%, but the creditor
will increase the rate to 21% effective June 1, 18% is the only
required disclosure under Sec. 226.7(b)(4) for the periodic statement
reflecting the May account activity.
ii. If the consumer has an overdraft line that might later be
expanded upon the consumer's request to include secured advances, the
rates for the secured advance feature need not be given until such time
as the consumer has requested and received access to the additional
feature.
iii. If annual percentage rates applicable to a particular type of
transaction changed after a certain date and the old rate is only being
applied to transactions that took place prior to that date, the
creditor need not continue to disclose the old rate for those consumers
that have no outstanding balances to which that rate could be applied.
3. Multiple rates--same transaction. If two or more periodic rates
are applied to the same balance for the same type of transaction (for
example, if the interest charge consists of a monthly periodic interest
rate of 1.5% applied to the outstanding balance and a required credit
life insurance component calculated at 0.1% per month on the same
outstanding balance), creditors must disclose the interest periodic
rate, expressed as an 18% annual percentage rate and the range of
balances to which it is applicable. Costs attributable to the credit
life insurance component must be disclosed as a fee under Sec.
226.7(b)(6)(iii).
4. Fees. Creditors that identify fees in accordance with Sec.
226.7(b)(6)(iii) need not identify the periodic rate at which a fee
would accrue if the fee remains unpaid. For example, assume a fee is
imposed for a late payment in the previous cycle and that the fee,
unpaid, would be included in the purchases balance and accrue interest
at the rate for purchases. The creditor need not separately disclose
that the purchase rate applies to the portion of the purchases balance
attributable to the unpaid fee.
5. Ranges of balances. See comment 6(b)(4)(i)(B)-1. A creditor is
not required to adjust the range of balances disclosure to reflect the
balance below which only a minimum charge applies.
6. Deferred interest transactions. See comment 7(b)-1.iv.
7(b)(5) Balance on which finance charge computed.
1. Split rates applied to balance ranges. If split rates were
applied to a balance because different portions of the balance fall
within two or more balance ranges, the creditor need not separately
disclose the portions of the balance subject to such different rates
since the range of balances to which the rates apply has been
separately disclosed. For example, a creditor could disclose a balance
of $700 for purchases even though a monthly periodic rate of 1.5%
applied to the first $500, and a monthly periodic rate of 1% to the
remainder. This option to disclose a combined balance does not apply
when the interest charge is computed by applying the split rates to
each day's balance (in contrast, for example, to applying the rates to
the average daily balance). In that case, the balances must be
[[Page 54287]]
disclosed using any of the options that are available if two or more
daily rates are imposed. (See comment 7(b)(5)-4.)
2. Monthly rate on average daily balance. Creditors may apply a
monthly periodic rate to an average daily balance.
3. Multifeatured plans. In a multifeatured plan, the creditor must
disclose a separate balance (or balances, as applicable) to which a
periodic rate was applied for each feature. Separate balances are not
required, however, merely because a grace period is available for some
features but not others. A total balance for the entire plan is
optional. This does not affect how many balances the creditor must
disclose--or may disclose--within each feature. (See, for example,
comments 7(b)(5)-4 and 7(b)(4)-5.)
4. Daily rate on daily balance. i. If a finance charge is computed
on the balance each day by application of one or more daily periodic
interest rates, the balance on which the interest charge was computed
may be disclosed in any of the following ways for each feature:
ii. If a single daily periodic interest rate is imposed, the
balance to which it is applicable may be stated as:
A. A balance for each day in the billing cycle.
B. A balance for each day in the billing cycle on which the balance
in the account changes.
C. The sum of the daily balances during the billing cycle.
D. The average daily balance during the billing cycle, in which
case the creditor may, at its option, explain that the average daily
balance is or can be multiplied by the number of days in the billing
cycle and the periodic rate applied to the product to determine the
amount of interest.
iii. If two or more daily periodic interest rates may be imposed,
the balances to which the rates are applicable may be stated as:
A. A balance for each day in the billing cycle.
B. A balance for each day in the billing cycle on which the balance
in the account changes.
C. Two or more average daily balances, each applicable to the daily
periodic interest rates imposed for the time that those rates were in
effect. The creditor may, at its option, explain that interest is or
may be determined by (1) multiplying each of the average balances by
the number of days in the billing cycle (or if the daily rate varied
during the cycle, by multiplying by the number of days the applicable
rate was in effect), (2) multiplying each of the results by the
applicable daily periodic rate, and (3) adding these products together.
5. Information to compute balance. In connection with disclosing
the interest charge balance, the creditor need not give the consumer
all of the information necessary to compute the balance if that
information is not otherwise required to be disclosed. For example, if
current purchases are included from the date they are posted to the
account, the posting date need not be disclosed.
6. Non-deduction of credits. The creditor need not specifically
identify the total dollar amount of credits not deducted in computing
the finance charge balance. Disclosure of the amount of credits not
deducted is accomplished by listing the credits (Sec. 226.7(b)(3)) and
indicating which credits will not be deducted in determining the
balance (for example, ``credits after the 15th of the month are not
deducted in computing the interest charge.'').
7. Use of one balance computation method explanation when multiple
balances disclosed. Sometimes the creditor will disclose more than one
balance to which a periodic rate was applied, even though each balance
was computed using the same balance computation method. For example, if
a plan involves purchases and cash advances that are subject to
different rates, more than one balance must be disclosed, even though
the same computation method is used for determining the balance for
each feature. In these cases, one explanation or a single
identification of the name of the balance computation method is
sufficient. Sometimes the creditor separately discloses the portions of
the balance that are subject to different rates because different
portions of the balance fall within two or more balance ranges, even
when a combined balance disclosure would be permitted under comment
7(b)(5)-1. In these cases, one explanation or a single identification
of the name of the balance computation method is also sufficient
(assuming, of course, that all portions of the balance were computed
using the same method).
8. Deferred interest transactions. See comment 7(b)-1.iv.
7(b)(6) Charges imposed.
1. Examples of charges. See commentary to Sec. 226.6(b)(3).
2. Fees. Costs attributable to periodic rates other than interest
charges shall be disclosed as a fee. For example, if a consumer obtains
credit life insurance that is calculated at 0.1% per month on an
outstanding balance and a monthly interest rate of 1.5% applies to the
same balance, the creditor must disclose the dollar cost attributable
to interest as an ``interest charge'' and the credit insurance cost as
a ``fee.''
3. Total fees for calendar year to date.
i. Monthly statements. Some creditors send monthly statements but
the statement periods do not coincide with the calendar month. For
creditors sending monthly statements, the following comply with the
requirement to provide calendar year-to-date totals.
A. A creditor may disclose a calendar-year-to-date total at the end
of the calendar year by aggregating fees for 12 monthly cycles,
starting with the period that begins during January and finishing with
the period that begins during December. For example, if statement
periods begin on the 10th day of each month, the statement covering
December 10, 2011 through January 9, 2012, may disclose the year-to-
date total for fees imposed from January 10, 2011, through January 9,
2012. Alternatively, the creditor could provide a statement for the
cycle ending January 9, 2012, showing the year-to-date total for fees
imposed January 1, 2011, through December 31, 2011.
B. A creditor may disclose a calendar-year-to-date total at the end
of the calendar year by aggregating fees for 12 monthly cycles,
starting with the period that begins during December and finishing with
the period that begins during November. For example, if statement
periods begin on the 10th day of each month, the statement covering
November 10, 2011 through December 9, 2011, may disclose the year-to-
date total for fees imposed from December 10, 2010, through December 9,
2011.
ii. Quarterly statements. Creditors issuing quarterly statements
may apply the guidance set forth for monthly statements to comply with
the requirement to provide calendar year-to-date totals on quarterly
statements.
4. Minimum charge in lieu of interest. A minimum charge imposed if
a charge would otherwise have been determined by applying a periodic
rate to a balance except for the fact that such charge is smaller than
the minimum must be disclosed as a fee. For example, assume a creditor
imposes a minimum charge of $1.50 in lieu of interest if the calculated
interest for a billing period is less than that minimum charge. If the
interest calculated on a consumer's account for a particular billing
period is 50 cents, the minimum charge of $1.50 would apply. In this
case, the entire $1.50 would be disclosed as a fee; the periodic
statement would reflect the $1.50 as a fee, and $0 in interest.
5. Adjustments to year-to-date totals. In some cases, a creditor
may provide a statement for the current period reflecting that fees or
interest charges
[[Page 54288]]
imposed during a previous period were waived or reversed and credited
to the account. Creditors may, but are not required to, reflect the
adjustment in the year-to-date totals, nor, if an adjustment is made,
to provide an explanation about the reason for the adjustment. Such
adjustments should not affect the total fees or interest charges
imposed for the current statement period.
6. Acquired accounts. An institution that acquires an account or
plan must include, as applicable, fees and charges imposed on the
account or plan prior to the acquisition in the aggregate disclosures
provided under Sec. 226.7(b)(6) for the acquired account or plan.
Alternatively, the institution may provide separate totals reflecting
activity prior and subsequent to the account or plan acquisition. For
example, a creditor that acquires an account or plan on August 12 of a
given calendar year may provide one total for the period from January 1
to August 11 and a separate total for the period beginning on August 12
.
7. Account upgrades. A creditor that upgrades, or otherwise
changes, a consumer's plan to a different open-end credit plan must
include, as applicable, fees and charges imposed for that portion of
the calendar year prior to the upgrade or change in the consumer's plan
in the aggregate disclosures provided pursuant to Sec. 226.7(b)(6) for
the new plan. For example, assume a consumer has incurred $125 in fees
for the calendar year to date for a retail credit card account, which
is then replaced by a cobranded credit card account also issued by the
creditor. In this case, the creditor must reflect the $125 in fees
incurred prior to the replacement of the retail credit card account in
the calendar year-to-date totals provided for the cobranded credit card
account. Alternatively, the institution may provide two separate totals
reflecting activity prior and subsequent to the plan upgrade or change.
7(b)(7) Change-in-terms and increased penalty rate summary for
open-end (not home-secured) plans.
1. Location of summary tables. If a change-in-terms notice required
by Sec. 226.9(c)(2) is provided on or with a periodic statement, a
tabular summary of key changes must appear on the front of the
statement. Similarly, if a notice of a rate increase due to delinquency
or default or as a penalty required by Sec. 226.9(g)(1) is provided on
or with a periodic statement, information required to be provided about
the increase, presented in a table, must appear on the front of the
statement.
7(b)(8) Grace period.
1. Terminology. In describing the grace period, the language used
must be consistent with that used on the account-opening disclosure
statement. (See Sec. 226.5(a)(2)(i).)
2. Deferred interest transactions. See comment 7(b)-1.iv.
7(b)(9) Address for notice of billing errors.
1. Terminology. The periodic statement should indicate the general
purpose for the address for billing-error inquiries, although a
detailed explanation or particular wording is not required.
2. Telephone number. A telephone number, e-mail address, or Web
site location may be included, but the mailing address for billing-
error inquiries, which is the required disclosure, must be clear and
conspicuous. The address is deemed to be clear and conspicuous if a
precautionary instruction is included that telephoning or notifying the
creditor by e-mail or Web site will not preserve the consumer's billing
rights, unless the creditor has agreed to treat billing error notices
provided by electronic means as written notices, in which case the
precautionary instruction is required only for telephoning.
7(b)(10) Closing date of billing cycle; new balance.
1. Credit balances. See comment 7(b)(1)-1.
2. Multifeatured plans. In a multifeatured plan, the new balance
may be disclosed for each feature or for the plan as a whole. If
separate new balances are disclosed, a total new balance is optional.
3. Accrued finance charges allocated from payments. Some plans
provide that the amount of the finance charge that has accrued since
the consumer's last payment is directly deducted from each new payment,
rather than being separately added to each statement and therefore
reflected as an increase in the obligation. In such a plan, the new
balance need not reflect finance charges accrued since the last
payment.
7(b)(11) Due date; late payment costs.
1. Informal periods affecting late payments. Although the terms of
the account agreement may provide that a card issuer may assess a late
payment fee if a payment is not received by a certain date, the card
issuer may have an informal policy or practice that delays the
assessment of the late payment fee for payments received a brief period
of time after the date upon which a card issuer has the contractual
right to impose the fee. A card issuer must disclose the due date
according to the legal obligation between the parties, and need not
consider the end of an informal ``courtesy period'' as the due date
under Sec. 226.7(b)(11).
2. Assessment of late payment fees. Some State or other laws
require that a certain number of days must elapse following a due date
before a late payment fee may be imposed. In addition, a card issuer
may be restricted by the terms of the account agreement from imposing a
late payment fee until a payment is late for a certain number of days
following a due date. For example, assume a payment is due on March 10
and the account agreement or State law provides that a late payment fee
cannot be assessed before March 21. A card issuer must disclose the due
date under the terms of the legal obligation (March 10 in this
example), and not a date different than the due date, such as when the
card issuer is restricted by the account agreement or State or other
law from imposing a late payment fee unless a payment is late for a
certain number of days following the due date (March 21 in this
example). Consumers' rights under State law to avoid the imposition of
late payment fees during a specified period following a due date are
unaffected by the disclosure requirement. In this example, the card
issuer would disclose March 10 as the due date for purposes of Sec.
226.7(b)(11), but could not, under State law, assess a late payment fee
before March 21.
3. Fee or rate triggered by multiple events. If a late payment fee
or penalty rate is triggered after multiple events, such as two late
payments in six months, the card issuer may, but is not required to,
disclose the late payment and penalty rate disclosure each month. The
disclosures must be included on any periodic statement for which a late
payment could trigger the late payment fee or penalty rate, such as
after the consumer made one late payment in this example. For example,
if a cardholder has already made one late payment, the disclosure must
be on each statement for the following five billing cycles.
4. Range of late fees or penalty rates. A card issuer that imposes
a range of late payment fees or rates on a credit card account under an
open-end (not home-secured) consumer credit plan may state the highest
fee or rate along with an indication lower fees or rates could be
imposed. For example, a phrase indicating the late payment fee could be
``up to $29'' complies with this requirement.
5. Penalty rate in effect. If the highest penalty rate has
previously been triggered on an account, the card issuer may, but is
not required to, delete the amount of the penalty rate and the warning
that the rate may be imposed
[[Page 54289]]
for an untimely payment, as not applicable. Alternatively, the card
issuer may, but is not required to, modify the language to indicate
that the penalty rate has been increased due to previous late payments
(if applicable).
6. Same day each month. The requirement that the due date be the
same day each month means that the due date must be the same numerical
date. For example, a consumer's due date could be the 25th of every
month. In contrast, a due date that is the same relative date but not
numerical date each month, such as the third Tuesday of the month,
would not comply with this requirement.
7. Change in due date. A creditor may adjust a consumer's due date
from time to time provided that the new due date will be the same
numerical date each month on an ongoing basis. For example, a creditor
may choose to honor a consumer's request to change from a due date that
is the 20th of each month to the 5th of each month, or may choose to
change a consumer's due date from time to time for operational reasons.
See comment 2(a)(4)-3 for guidance on transitional billing cycles.
8. Billing cycles longer than one month. The requirement that the
due date be the same day each month does not prohibit billing cycles
that are two or three months, provided that the due date for each
billing cycle is on the same numerical date of the month. For example,
a creditor that establishes two-month billing cycles could send a
consumer periodic statements disclosing due dates of January 25, March
25, and May 25.
9. Payment due date when the creditor does not accept or receive
payments by mail. If due date in a given month falls on a day on which
the creditor does not receive or accept payments by mail and the
creditor is required to treat a payment received the next business day
as timely pursuant to Sec. 226.10(d), the creditor must disclose the
due date according to the legal obligation between the parties, not the
date as of which the creditor is permitted to treat the payment as
late. For example, assume that the consumer's due date is the 4th of
every month and the creditor does not accept or receive payments by
mail on Thursday, July 4. Pursuant to Sec. 226.10(d), the creditor may
not treat a mailed payment received on the following business day,
Friday, July 5, as late for any purpose. The creditor must nonetheless
disclose July 4 as the due date on the periodic statement and may not
disclose a July 5 due date.
7(b)(12) Repayment disclosures.
7(b)(12)(iv) Provision of information about credit counseling
services.
1. Approved credit counseling agencies. Section 226.7(b)(12)(iv)(A)
requires card issuers to provide information regarding at least three
organizations that have been approved by the United States Trustee or a
bankruptcy administrator pursuant to 11 U.S.C. 111(a)(1) to provide
credit counseling services in the state in which the billing address
for the account is located or the State specified by the consumer. The
card issuer may use the billing address for the account or, at its
option, allow the consumer to specify the State. A card issuer does not
satisfy the requirements in Sec. 226.7(b)(12)(iv)(A) by providing
information regarding providers that have been approved pursuant to 11
U.S.C. 111(a)(2) to offer personal financial management courses.
2. Information provided by United States Trustee or a bankruptcy
administrator. A card issuer complies with the requirements of Sec.
226.7(b)(12)(iv) if it provides the consumer with information obtained
from the United States Trustee or a bankruptcy administrator, including
information obtained from the Web site operated by the United States
Trustee. If, for example, the Web site address for an organization
approved by the United States Trustee is not available from the Web
site operated by the United States Trustee, a card issuer is not
required to provide a Web site address for that organization. However,
at least annually, the card issuer must verify and update the
information it provides for consistency with the information provided
by the United States Trustee or a bankruptcy administrator.
3. Automated response systems or devices. At their option, card
issuers may use toll-free telephone numbers that connect consumers to
automated systems, such as an interactive voice response system,
through which consumers may obtain the information required by Sec.
226.7(b)(12)(iv) by inputting information using a touch-tone telephone
or similar device.
4. Toll-free telephone number. A card issuer may provide a toll-
free telephone number that is designed to handle customer service calls
generally, so long as the option to receive the information required by
Sec. 226.7(b)(12)(iv) is prominently disclosed to the consumer. For
automated systems, the option to receive the information required by
Sec. 226.7(b)(12)(iv) is prominently disclosed to the consumer if it
is listed as one of the options in the first menu of options given to
the consumer, such as ``Press or say `3' if you would like information
about credit counseling services.'' If the automated system permits
callers to select the language in which the call is conducted and in
which information is provided, the menu to select the language may
precede the menu with the option to receive information about accessing
credit counseling services.
5. Third parties. At their option, card issuers may use a third
party to establish and maintain a toll-free telephone number for use by
the issuer to provide the information required by Sec.
226.7(b)(12)(iv).
6. Web site address. When making the repayment disclosures on the
periodic statement pursuant to Sec. 226.7(b)(12), a card issuer at its
option may also include a reference to a Web site address (in addition
to the toll-free telephone number) where its customers may obtain the
information required by Sec. 226.7(b)(12)(iv), so long as the
information provided on the Web site complies with Sec.
226.7(b)(12)(iv). The Web site address disclosed must take consumers
directly to the Web page where information about accessing credit
counseling may be obtained. In the alternative, the card issuer may
disclose the Web site address for the Web page operated by the United
States Trustee where consumers may obtain information about approved
credit counseling organizations.
7. Advertising or marketing information. If a consumer requests
information about credit counseling services, the card issuer may not
provide advertisements or marketing materials to the consumer (except
for providing the name of the issuer) prior to providing the
information required by Sec. 226.7(b)(12)(iv). Educational materials
that do not solicit business are not considered advertisements or
marketing materials for this purpose. Examples:
i. Toll-free telephone number. As described in comment
7(b)(12)(iv)-4, an issuer may provide a toll-free telephone number that
is designed to handle customer service calls generally, so long as the
option to receive the information required by Sec. 226.7(b)(12)(iv)
through that toll-free telephone number is prominently disclosed to the
consumer. Once the consumer selects the option to receive the
information required by Sec. 226.7(b)(12)(iv), the issuer may not
provide advertisements or marketing materials to the consumer (except
for providing the name of the issuer) prior to providing the required
information.
ii. Web page. If the issuer discloses a link to a Web site address
as part of the repayment disclosures pursuant to comment 7(b)(12)(iv)-
6, the issuer may not provide advertisements or marketing materials
(except for providing the name
[[Page 54290]]
of the issuer) on the Web page accessed by the address prior to
providing the information required by Sec. 226.7(b)(12)(iv).
7(b)(13) Format requirements.
1. Combined deposit account and credit account statements. Some
financial institutions provide information about deposit account and
open-end credit account activity on one periodic statement. For
purposes of providing disclosures on the front of the first page of the
periodic statement pursuant to Sec. 226.7(b)(13), the first page of
such a combined statement shall be the page on which credit
transactions first appear.
Sec. 226.8 Identifying Transactions on Periodic Statements.
8(a) Sale credit.
1. Sale credit. The term ``sale credit'' refers to a purchase in
which the consumer uses a credit card or otherwise directly accesses an
open-end line of credit (see comment 8(b)-1 if access is by means of a
check) to obtain goods or services from a merchant, whether or not the
merchant is the card issuer or creditor. ``Sale credit'' includes:
i. The purchase of funds-transfer services (such as a wire
transfer) from an intermediary.
ii. The purchase of services from the card issuer or creditor. For
the purchase of services that are costs imposed as part of the plan
under Sec. 226.6(b)(3), card issuers and creditors comply with the
requirements for identifying transactions under this section by
disclosing the fees in accordance with the requirements of Sec.
226.7(b)(6). For the purchases of services that are not costs imposed
as part of the plan, card issuers and creditors may, at their option,
identify transactions under this section or in accordance with the
requirements of Sec. 226.7(b)(6).
2. Amount--transactions not billed in full. If sale transactions
are not billed in full on any single statement, but are billed
periodically in precomputed installments, the first periodic statement
reflecting the transaction must show either the full amount of the
transaction together with the date the transaction actually took place;
or the amount of the first installment that was debited to the account
together with the date of the transaction or the date on which the
first installment was debited to the account. In any event, subsequent
periodic statements should reflect each installment due, together with
either any other identifying information required by Sec. 226.8(a)
(such as the seller's name and address in a three-party situation) or
other appropriate identifying information relating the transaction to
the first billing. The debiting date for the particular installment, or
the date the transaction took place, may be used as the date of the
transaction on these subsequent statements.
3. Date--when a transaction takes place.
i. If the consumer conducts the transaction in person, the date of
the transaction is the calendar date on which the consumer made the
purchase or order, or secured the advance.
ii. For transactions billed to the account on an ongoing basis
(other than installments to pay a precomputed amount), the date of the
transaction is the date on which the amount is debited to the account.
This might include, for example, monthly insurance premiums.
iii. For mail, Internet, or telephone orders, a creditor may
disclose as the transaction date either the invoice date, the debiting
date, or the date the order was placed by telephone or via the
Internet.
iv. In a foreign transaction, the debiting date may be considered
the transaction date.
4. Date--sufficiency of description.
i. If the creditor discloses only the date of the transaction, the
creditor need not identify it as the ``transaction date.'' If the
creditor discloses more than one date (for example, the transaction
date and the posting date), the creditor must identify each.
ii. The month and day sufficiently identify the transaction date,
unless the posting of the transaction is delayed so long that the year
is needed for a clear disclosure to the consumer.
5. Same or related persons. i. For purposes of identifying
transactions, the term same or related persons refers to, for example:
A. Franchised or licensed sellers of a creditor's product or
service.
B. Sellers who assign or sell open-end sales accounts to a creditor
or arrange for such credit under a plan that allows the consumer to use
the credit only in transactions with that seller.
ii. A seller is not related to the creditor merely because the
seller and the creditor have an agreement authorizing the seller to
honor the creditor's credit card.
6. Brief identification--sufficiency of description. The ``brief
identification'' provision in Sec. 226.8(a)(1)(i) requires a
designation that will enable the consumer to reconcile the periodic
statement with the consumer's own records. In determining the
sufficiency of the description, the following rules apply:
i. While item-by-item descriptions are not necessary, reasonable
precision is required. For example, ``merchandise,'' ``miscellaneous,''
``second-hand goods,'' or ``promotional items'' would not suffice.
ii. A reference to a department in a sales establishment that
accurately conveys the identification of the types of property or
services available in the department is sufficient--for example,
``jewelry,'' or ``sporting goods.''
iii. A number or symbol that is related to an identification list
printed elsewhere on the statement that reasonably identifies the
transaction with the creditor is sufficient.
7. Seller's name--sufficiency of description. The requirement
contemplates that the seller's name will appear on the periodic
statement in essentially the same form as it appears on transaction
documents provided to the consumer at the time of the sale. The
seller's name may also be disclosed as, for example:
i. A more complete spelling of the name that was alphabetically
abbreviated on the receipt or other credit document.
ii. An alphabetical abbreviation of the name on the periodic
statement even if the name appears in a more complete spelling on the
receipt or other credit document. Terms that merely indicate the form
of a business entity, such as ``Inc.,'' ``Co.,'' or ``Ltd.,'' may
always be omitted.
8. Location of transaction.
i. If the seller has multiple stores or branches within a city, the
creditor need not identify the specific branch at which the sale
occurred.
ii. When no meaningful address is available because the consumer
did not make the purchase at any fixed location of the seller, the
creditor may omit the address, or may provide some other identifying
designation, such as ``aboard plane,'' ``ABC Airways Flight,''
``customer's home,'' ``telephone order,'' ``Internet order'' or ``mail
order.''
8(b) Nonsale credit.
1. Nonsale credit. The term ``nonsale credit'' refers to any form
of loan credit including, for example:
i. A cash advance.
ii. An advance on a credit plan that is accessed by overdrafts on a
checking account.
iii. The use of a ``supplemental credit device'' in the form of a
check or draft or the use of the overdraft credit plan accessed by a
debit card, even if such use is in connection with a purchase of goods
or services.
iv. Miscellaneous debits to remedy mispostings, returned checks,
and similar entries.
[[Page 54291]]
2. Amount--overdraft credit plans. If credit is extended under an
overdraft credit plan tied to a checking account or by means of a debit
card tied to an overdraft credit plan:
i. The amount to be disclosed is that of the credit extension, not
the face amount of the check or the total amount of the debit/credit
transaction.
ii. The creditor may disclose the amount of the credit extensions
on a cumulative daily basis, rather than the amount attributable to
each check or each use of the debit card that accesses the credit plan.
3. Date of transaction. See comment 8(a)-4.
4. Nonsale transaction--sufficiency of identification. The creditor
sufficiently identifies a nonsale transaction by describing the type of
advance it represents, such as cash advance, loan, overdraft loan, or
any readily understandable trade name for the credit program.
Sec. 226.9 Subsequent Disclosure Requirements.
9(a) Furnishing statement of billing rights.
9(a)(1) Annual statement.
1. General. The creditor may provide the annual billing rights
statement:
i. By sending it in one billing period per year to each consumer
that gets a periodic statement for that period; or
ii. By sending a copy to all of its accountholders sometime during
the calendar year but not necessarily all in one billing period (for
example, sending the annual notice in connection with renewal cards or
when imposing annual membership fees).
2. Substantially similar. See the commentary to Model Forms G-3 and
G-3(A) in appendix G to part 226.
9(a)(2) Alternative summary statement.
1. Changing from long-form to short form statement and vice versa.
If the creditor has been sending the long-form annual statement, and
subsequently decides to use the alternative summary statement, the
first summary statement must be sent no later than 12 months after the
last long-form statement was sent. Conversely, if the creditor wants to
switch to the long-form, the first long-form statement must be sent no
later than 12 months after the last summary statement.
2. Substantially similar. See the commentary to Model Forms G-4 and
G-4(A) in appendix G to part 226.
9(b) Disclosures for supplemental credit access devices and
additional features.
1. Credit access device--examples. Credit access device includes,
for example, a blank check, payee-designated check, blank draft or
order, or authorization form for issuance of a check; it does not
include a check issued payable to a consumer representing loan proceeds
or the disbursement of a cash advance.
2. Credit account feature--examples. A new credit account feature
would include, for example:
i. The addition of overdraft checking to an existing account
(although the regular checks that could trigger the overdraft feature
are not themselves ``devices'').
ii. The option to use an existing credit card to secure cash
advances, when previously the card could only be used for purchases.
Paragraph 9(b)(2).
1. Different finance charge terms. Except as provided in Sec.
226.9(b)(3) for checks that access a credit card account, if the
finance charge terms are different from those previously disclosed, the
creditor may satisfy the requirement to give the finance charge terms
either by giving a complete set of new account-opening disclosures
reflecting the terms of the added device or feature or by giving only
the finance charge disclosures for the added device or feature.
9(b)(3) Checks that access a credit card account.
9(b)(3)(i) Disclosures.
1. Front of the page containing the checks. The following would
comply with the requirement that the tabular disclosures provided
pursuant to Sec. 226.9(b)(3) appear on the front of the page
containing the checks:
i. Providing the tabular disclosure on the front of the first page
on which checks appear, for an offer where checks are provided on
multiple pages;
ii. Providing the tabular disclosure on the front of a mini-book or
accordion booklet containing the checks; or
iii. Providing the tabular disclosure on the front of the
solicitation letter, when the checks are printed on the front of the
same page as the solicitation letter even if the checks can be
separated by the consumer from the solicitation letter using
perforations.
Paragraph 9(b)(3)(i)(D).
1. Grace period. Creditors may use the following language to
describe a grace period on check transactions: ``Your due date is [at
least] -------- days after the close of each billing cycle. We will not
charge you interest on check transactions if you pay your entire
balance by the due date each month.'' Creditors may use the following
language to describe that no grace period on check transactions is
offered, as applicable: ``We will begin charging interest on these
checks on the transaction date.''
9(c) Change in terms.
9(c)(1) Rules affecting home-equity plans.
For home-equity plans subject to the requirements of Sec. 226.5b
and other open-end plans that are not credit card accounts, whenever
any term required to be disclosed under Sec. 226.6 is changed or the
required minimum periodic payment is increased, the creditor shall mail
or deliver written notice of the change to each consumer who may be
affected. The notice shall be mailed or delivered at least 15 days
prior to the effective date of the change. The 15-day timing
requirement does not apply if the change has been agreed to by the
consumer, or if a periodic rate or other finance charge is increased
because of the consumer's delinquency or default; the notice shall be
given, however, before the effective date of the change.
(ii) Notice not required. For home-equity plans subject to the
requirements of Sec. 226.5b and other open-end plans that are not
credit card accounts, no notice under this section is required when the
change involves late payment charges, charges for documentary evidence,
or over-the-limit charges; a reduction of any component of a finance or
other charge; suspension of future credit privileges or termination of
an account or plan; or when the change results from an agreement
involving a court proceeding, or from the consumer's default or
delinquency (other than an increase in the periodic rate or other
finance charge).
(iii) Notice for home equity plans. If a creditor prohibits
additional extensions of credit or reduces the credit limit applicable
to a home equity plan pursuant to Sec. 226.5b(f)(3)(i) or Sec.
226.5b(f)(3)(vi), the creditor shall mail or deliver written notice of
the action to each consumer who will be affected. The notice must be
provided not later than three business days after the action is taken
and shall contain specific reasons for the action. If the creditor
requires the consumer to request reinstatement of credit privileges,
the notice also shall state that fact.
9(c)(2) Rules affecting open-end (not home-secured) plans.
1. Changes initially disclosed. Except as provided in Sec.
226.9(g)(1), no notice of a change in terms need be given if the
specific change is set forth initially, such as rate increases under a
properly disclosed variable-rate plan in accordance with Sec.
226.9(c)(2)(v)(C). In contrast, notice must be given if the contract
allows the creditor to increase the rate at its discretion.
[[Page 54292]]
2. State law issues. Some issues are not addressed by Sec.
226.9(c)(2) because they are controlled by State or other applicable
laws. These issues include the types of changes a creditor may make, to
the extent otherwise permitted by this regulation.
3. Change in billing cycle. Whenever the creditor changes the
consumer's billing cycle, it must give a change-in-terms notice if the
change affects any of the terms described in Sec. 226.9(c)(2)(i),
unless an exception under Sec. 226.9(c)(2)(v) applies; for example,
the creditor must give advance notice if the creditor initially
disclosed a 28-day grace period on purchases and the consumer will have
fewer days during the billing cycle change. But see Sec.
226.7(b)(11)(i)(A) regarding the general requirement that the payment
due date for a credit card account under an open-end (not home-secured)
consumer credit plan must be the same day each month.
4. Relationship to Sec. 226.9(b). If a creditor adds a feature to
the account on the type of terms otherwise required to be disclosed
under Sec. 226.6, the creditor must satisfy: the requirement to
provide the finance charge disclosures for the added feature under
Sec. 226.9(b); and any applicable requirement to provide a change-in-
terms notice under Sec. 226.9(c), including any advance notice that
must be provided. For example, if a creditor adds a balance transfer
feature to an account more than 30 days after account-opening
disclosures are provided, it must give the finance charge disclosures
for the balance transfer feature under Sec. 226.9(b) as well as comply
with the change-in-terms notice requirements under Sec. 226.9(c),
including providing notice of the change at least 45 days prior to the
effective date of the change. Similarly, if a creditor makes a balance
transfer offer on finance charge terms that are higher than those
previously disclosed for balance transfers, it would also generally be
required to provide a change-in-terms notice at least 45 days in
advance of the effective date of the change. A creditor may provide a
single notice under Sec. 226.9(c) to satisfy the notice requirements
of both paragraphs (b) and (c) of Sec. 226.9. For checks that access a
credit card account subject to the disclosure requirements in Sec.
226.9(b)(3), a creditor is not subject to the notice requirements under
Sec. 226.9(c) even if the applicable rate or fee is higher than those
previously disclosed for such checks. Thus, for example, the creditor
need not wait 45 days before applying the new rate or fee for
transactions made using such checks, but the creditor must make the
required disclosures on or with the checks in accordance with Sec.
226.9(b)(3).
9(c)(2)(i) Changes where written advance notice is required.
1. Affected consumers. Change-in-terms notices need only go to
those consumers who may be affected by the change. For example, a
change in the periodic rate for check overdraft credit need not be
disclosed to consumers who do not have that feature on their accounts.
If a single credit account involves multiple consumers that may be
affected by the change, the creditor should refer to Sec. 226.5(d) to
determine the number of notices that must be given.
2. Timing--effective date of change. The rule that the notice of
the change in terms be provided at least 45 days before the change
takes effect permits mid-cycle changes when there is clearly no
retroactive effect, such as the imposition of a transaction fee. Any
change in the balance computation method, in contrast, would need to be
disclosed at least 45 days prior to the billing cycle in which the
change is to be implemented.
3. Timing--advance notice not required. Advance notice of 45 days
is not necessary--that is, a notice of change in terms is required, but
it may be mailed or delivered as late as the effective date of the
change if the consumer agrees to the particular change. This provision
is solely intended for use in the unusual instance when a consumer
substitutes collateral or when the creditor can advance additional
credit only if a change relatively unique to that consumer is made,
such as the consumer's providing additional security or paying an
increased minimum payment amount. Therefore, the following are not
``agreements'' between the consumer and the creditor for purposes of
Sec. 226.9(c)(2)(i): The consumer's general acceptance of the
creditor's contract reservation of the right to change terms; the
consumer's use of the account (which might imply acceptance of its
terms under State law); the consumer's acceptance of a unilateral term
change that is not particular to that consumer, but rather is of
general applicability to consumers with that type of account; and the
consumer's request to reopen a closed account or to upgrade an existing
account to another account offered by the creditor with different
credit or other features. See also comment 5(b)(1)(i)-6.
4. Form of change-in-terms notice. Except if Sec. 226.9(c)(2)(iv)
applies, a complete new set of the initial disclosures containing the
changed term complies with Sec. 226.9(c)(2)(i) if the change is
highlighted on the disclosure statement, or if the disclosure statement
is accompanied by a letter or some other insert that indicates or draws
attention to the term being changed.
5. Security interest change--form of notice. A copy of the security
agreement that describes the collateral securing the consumer's account
may be used as the notice, when the term change is the addition of a
security interest or the addition or substitution of collateral.
6. Examples. See comment 55(a)-1 and 55(b)-3 for examples of how a
card issuer that is subject to Sec. 226.55 may comply with the timing
requirements for notices required by Sec. 226.9(c)(2)(i).
9(c)(2)(iii) Charges not covered by Sec. 226.6(b)(1) and (b)(2).
1. Applicability. Generally, if a creditor increases any component
of a charge, or introduces a new charge, that is imposed as part of the
plan under Sec. 226.6(b)(3) but is not required to be disclosed as
part of the account-opening summary table under Sec. 226.6(b)(1) and
(b)(2), the creditor may either, at its option (i) provide at least 45
days' written advance notice before the change becomes effective to
comply with the requirements of Sec. 226.9(c)(2)(i), or (ii) provide
notice orally or in writing, or electronically if the consumer requests
the service electronically, of the amount of the charge to an affected
consumer before the consumer agrees to or becomes obligated to pay the
charge, at a time and in a manner that a consumer would be likely to
notice the disclosure. (See the commentary under Sec. 226.5(a)(1)(iii)
regarding disclosure of such changes in electronic form.) For example,
a fee for expedited delivery of a credit card is a charge imposed as
part of the plan under Sec. 226.6(b)(3) but is not required to be
disclosed in the account-opening summary table under Sec. 226.6(b)(1)
and (b)(2). If a creditor changes the amount of that expedited delivery
fee, the creditor may provide written advance notice of the change to
affected consumers at least 45 days before the change becomes
effective. Alternatively, the creditor may provide oral or written
notice, or electronic notice if the consumer requests the service
electronically, of the amount of the charge to an affected consumer
before the consumer agrees to or becomes obligated to pay the charge,
at a time and in a manner that the consumer would be likely to notice
the disclosure. (See comment 5(b)(1)(ii)-1 for examples of disclosures
given at a time and in a manner that the consumer would be likely to
notice them.)
9(c)(2)(iv) Disclosure requirements.
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9(c)(2)(iv) Significant changes to account terms.
1. Changing margin for calculating a variable rate. If a creditor
is changing a margin used to calculate a variable rate, the creditor
must disclose the amount of the new rate (as calculated using the new
margin) in the table described in Sec. 226.9(c)(2)(iv), and include a
reminder that the rate is a variable rate. For example, if a creditor
is changing the margin for a variable rate that uses the prime rate as
an index, the creditor must disclose in the table the new rate (as
calculated using the new margin) and indicate that the rate varies with
the market based on the prime rate.
2. Changing index for calculating a variable rate. If a creditor is
changing the index used to calculate a variable rate, the creditor must
disclose the amount of the new rate (as calculated using the new index)
and indicate that the rate varies and the how the rate is determined,
as explained in Sec. 226.6(b)(2)(i)(A). For example, if a creditor is
changing from using a prime rate to using the LIBOR in calculating a
variable rate, the creditor would disclose in the table the new rate
(using the new index) and indicate that the rate varies with the market
based on the LIBOR.
3. Changing from a variable rate to a non-variable rate. If a
creditor is changing from a variable rate to a non-variable rate, the
creditor must disclose the amount of the new rate (that is, the non-
variable rate) in the table.
4. Changing from a non-variable rate to a variable rate. If a
creditor is changing from a non-variable rate to a variable rate, the
creditor must disclose the amount of the new rate (the variable rate
using the index and margin), and indicate that the rate varies with the
market based on the index used, such as the prime rate or the LIBOR.
5. Changes in the penalty rate, the triggers for the penalty rate,
or how long the penalty rate applies. If a creditor is changing the
amount of the penalty rate, the creditor must also redisclose the
triggers for the penalty rate and the information about how long the
penalty rate applies even if those terms are not changing. Likewise, if
a creditor is changing the triggers for the penalty rate, the creditor
must redisclose the amount of the penalty rate and information about
how long the penalty rate applies. If a creditor is changing how long
the penalty rate applies, the creditor must redisclose the amount of
the penalty rate and the triggers for the penalty rate, even if they
are not changing.
6. Changes in fees. If a creditor is changing part of how a fee
that is disclosed in a tabular format under Sec. 226.6(b)(1) and
(b)(2) is determined, the creditor must redisclose all relevant
information related to that fee regardless of whether this other
information is changing. For example, if a creditor currently charges a
cash advance fee of ``Either $5 or 3% of the transaction amount,
whichever is greater. (Max: $100),'' and the creditor is only changing
the minimum dollar amount from $5 to $10, the issuer must redisclose
the other information related to how the fee is determined. For
example, the creditor in this example would disclose the following:
``Either $10 or 3% of the transaction amount, whichever is greater.
(Max: $100).''
7. Combining a notice described in Sec. 226.9(c)(2)(iv) with a
notice described in Sec. 226.9(g)(3). If a creditor is required to
provide a notice described in Sec. 226.9(c)(2)(iv) and a notice
described in Sec. 226.9(g)(3) to a consumer, the creditor may combine
the two notices. This would occur if penalty pricing has been
triggered, and other terms are changing on the consumer's account at
the same time.
8. Content. Sample G-20 contains an example of how to comply with
the requirements in Sec. 226.9(c)(2)(iv) when a variable rate is being
changed to a non-variable rate on a credit card account. The sample
explains when the new rate will apply to new transactions and to which
balances the current rate will continue to apply. Sample G-21 contains
an example of how to comply with the requirements in Sec.
226.9(c)(2)(iv) when (i) the late payment fee on a credit card account
is being increased in accordance with a formula that depends on the
outstanding balance on the account, and (ii) the returned payment fee
is also being increased. The sample discloses the consumer's right to
reject the changes in accordance with Sec. 226.9(h).
9. Clear and conspicuous standard. See comment 5(a)(1)-1 for the
clear and conspicuous standard applicable to disclosures required under
Sec. 226.9(c)(2)(iv)(A)(1).
10. Terminology. See Sec. 226.5(a)(2) for terminology requirements
applicable to disclosures required under Sec. 226.9(c)(2)(iv)(A)(1).
9(c)(2)(v) Notice not required.
1. Changes not requiring notice. The following are examples of
changes that do not require a change-in-terms notice:
i. A change in the consumer's credit limit except as otherwise
required by Sec. 226.9(c)(2)(vi).
ii. A change in the name of the credit card or credit card plan.
iii. The substitution of one insurer for another.
iv. A termination or suspension of credit privileges.
v. Changes arising merely by operation of law; for example, if the
creditor's security interest in a consumer's car automatically extends
to the proceeds when the consumer sells the car.
2. Skip features. i. General. If a credit program allows consumers
to skip or reduce one or more payments during the year, or involves
temporary reductions in finance charges other than reductions in an
interest rate (except if Sec. 226.9(c)(2)(v)(B) or (c)(2)(v)(D)
applies), no notice of the change in terms is required either prior to
the reduction or upon resumption of the higher finance charges or
payments if these features are explained on the account-opening
disclosure statement (including an explanation of the terms upon
resumption). For example, a merchant may allow consumers to skip the
December payment to encourage holiday shopping, or a teacher's credit
union may not require payments during summer vacation. Otherwise, the
creditor must give notice prior to resuming the original schedule or
finance charge, even though no notice is required prior to the
reduction. The change-in-terms notice may be combined with the notice
offering the reduction. For example, the periodic statement reflecting
the reduction or skip feature may also be used to notify the consumer
of the resumption of the original schedule or finance charge, either by
stating explicitly when the higher payment or charges resume or by
indicating the duration of the skip option. Language such as ``You may
skip your October payment'' may serve as the change-in-terms notice.
ii. Temporary reductions in interest rates. If a credit program
involves temporary reductions in an interest rate, no notice of the
change in terms is required either prior to the reduction or upon
resumption of the original rate if these features are disclosed in
advance in accordance with the requirements of Sec. 226.9(c)(2)(v)(B).
Otherwise, the creditor must give notice prior to resuming the original
rate, even though no notice is required prior to the reduction. The
notice provided prior to resuming the original rate must comply with
the timing requirements of Sec. 226.9(c)(2)(i) and the content and
format requirements of Sec. 226.9(c)(2)(iv)(A), (B) (if applicable),
and (C). See comment 55(b)-3 for guidance regarding the application of
Sec. 226.55 in these circumstances.
3. Changing from a variable rate to a non-variable rate. If a
creditor is changing a rate applicable to a
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consumer's account from a variable rate to a non-variable rate, the
creditor must provide a notice as otherwise required under Sec.
226.9(c) even if the variable rate at the time of the change is higher
than the non-variable rate. (See comment 9(c)(2)(iv)(A)-3.)
4. Changing from a non-variable rate to a variable rate. If a
creditor is changing a rate applicable to a consumer's account from a
non-variable rate to a variable rate, the creditor must provide a
notice as otherwise required under Sec. 226.9(c) even if the non-
variable rate is higher than the variable rate at the time of the
change. (See comment 9(c)(2)(iv)(A)-4.)
5. Telephone purchases. The timing requirements of Sec.
226.9(c)(2)(v)(B) are deemed to have been met, and written disclosures
required by Sec. 226.9(c)(2)(v)(B) may be provided as soon as
reasonably practicable after the first transaction subject to a rate
that will be in effect for a specified period of time (a temporary
rate) if:
i. The first transaction subject to the temporary rate occurs when
a consumer contacts a merchant by telephone to purchase goods and at
the same time the consumer accepts an offer to finance the purchase at
the temporary rate;
ii. The merchant or third-party creditor permits consumers to
return any goods financed subject to the temporary rate and return the
goods free of cost after the merchant or third-party creditor has
provided the written disclosures required by Sec. 226.9(c)(2)(v)(B);
and
iii. The disclosures required by Sec. 226.9(c)(2)(v)(B) and the
consumer's right to reject the temporary rate offer and return the
goods are disclosed to the consumer as part of the offer to finance the
purchase.
6. Disclosure of annual percentage rates. If a rate disclosed
pursuant to Sec. 226.9(c)(2)(v)(B) or (c)(2)(v)(D) is a variable rate,
the creditor must disclose the fact that the rate may vary and how the
rate is determined. For example, a creditor could state ``After October
1, 2009, your APR will be 14.99%. This APR will vary with the market
based on the Prime Rate.''
7. Deferred interest or similar programs. If the applicable
conditions are met, the exception in Sec. 226.9(c)(2)(v)(B) applies to
deferred interest or similar 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. For such programs, a creditor must disclose pursuant to
Sec. 226.9(c)(2)(v)(B)(1) the length of the deferred interest period
and the rate that will apply to the balance subject to the deferred
interest program if that balance is not paid in full prior to
expiration of the deferred interest period. Examples of language that a
creditor may use to make the required disclosures under Sec.
226.9(c)(2)(v)(B)(1) include:
i. ``No interest if paid in full in 6 months. If the balance is not
paid in full in 6 months, interest will be imposed from the date of
purchase at a rate of 15.99%.''
ii. ``No interest if paid in full by December 31, 2010. If the
balance is not paid in full by that date, interest will be imposed from
the transaction date at a rate of 15%.''
8. Disclosure of the terms of a workout or temporary hardship
arrangement. In order for the exception in Sec. 226.9(c)(2)(v)(D) to
apply, the disclosure provided to the consumer pursuant to Sec.
226.9(c)(2)(v)(D)(2) must set forth:
i. The annual percentage rate that will apply to balances subject
to the workout or temporary hardship arrangement;
ii. The annual percentage rate that will apply to such balances if
the consumer completes or fails to comply with the terms of, the
workout or temporary hardship arrangement;
iii. Any reduced fee or charge of a type required to be disclosed
under Sec. 226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) that will
apply to balances subject to the workout or temporary hardship
arrangement, as well as the fee or charge that will apply if the
consumer completes or fails to comply with the terms of the workout or
temporary hardship arrangement; and
iv. If applicable, that the consumer must make timely minimum
payments in order to remain eligible for the workout or temporary
hardship arrangement.
9(d) Finance charge imposed at time of transaction.
1. Disclosure prior to imposition. A person imposing a finance
charge at the time of honoring a consumer's credit card must disclose
the amount of the charge, or an explanation of how the charge will be
determined, prior to its imposition. This must be disclosed before the
consumer becomes obligated for property or services that may be paid
for by use of a credit card. For example, disclosure must be given
before the consumer has dinner at a restaurant, stays overnight at a
hotel, or makes a deposit guaranteeing the purchase of property or
services.
9(e) Disclosures upon renewal of credit or charge card.
1. Coverage. This paragraph applies to credit and charge card
accounts of the type subject to Sec. 226.5a. (See Sec. 226.5a(a)(5)
and the accompanying commentary for discussion of the types of accounts
subject to Sec. 226.5a.) The disclosure requirements are triggered
when a card issuer imposes any annual or other periodic fee on such an
account or if the card issuer has changed or amended any term of a
cardholder's account required to be disclosed under Sec. 226.6(b)(1)
and (b)(2) that has not previously been disclosed to the consumer,
whether or not the card issuer originally was required to provide the
application and solicitation disclosures described in Sec. 226.5a.
2. Form. The disclosures under this paragraph must be clear and
conspicuous, but need not appear in a tabular format or in a prominent
location. The disclosures need not be in a form the cardholder can
retain.
3. Terms at renewal. Renewal notices must reflect the terms
actually in effect at the time of renewal. For example, a card issuer
that offers a preferential annual percentage rate to employees during
their employment must send a renewal notice to employees disclosing the
lower rate actually charged to employees (although the card issuer also
may show the rate charged to the general public).
4. Variable rate. If the card issuer cannot determine the rate that
will be in effect if the cardholder chooses to renew a variable-rate
account, the card issuer may disclose the rate in effect at the time of
mailing or delivery of the renewal notice. Alternatively, the card
issuer may use the rate as of a specified date within the last 30 days
before the disclosure is provided.
5. Renewals more frequent than annual. If a renewal fee is billed
more often than annually, the renewal notice should be provided each
time the fee is billed. In this instance, the fee need not be disclosed
as an annualized amount. Alternatively, the card issuer may provide the
notice no less than once every 12 months if the notice explains the
amount and frequency of the fee that will be billed during the time
period covered by the disclosure, and also discloses the fee as an
annualized amount. The notice under this alternative also must state
the consequences of a cardholder's decision to terminate the account
after the renewal-notice period has expired. For example, if a $2 fee
is billed monthly but the notice is given annually, the notice must
inform the cardholder that the monthly charge is $2, the annualized fee
is $24, and $2 will be billed to the account each month for the coming
year unless the cardholder notifies the card issuer. If the cardholder
is obligated to pay an amount equal to
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the remaining unpaid monthly charges if the cardholder terminates the
account during the coming year but after the first month, the notice
must disclose the fact.
6. Terminating credit availability. Card issuers have some
flexibility in determining the procedures for how and when an account
may be terminated. However, the card issuer must clearly disclose the
time by which the cardholder must act to terminate the account to avoid
paying a renewal fee, if applicable. State and other applicable law
govern whether the card issuer may impose requirements such as
specifying that the cardholder's response be in writing or that the
outstanding balance be repaid in full upon termination.
7. Timing of termination by cardholder. When a card issuer provides
notice under Sec. 226.9(e)(1), a cardholder must be given at least 30
days or one billing cycle, whichever is less, from the date the notice
is mailed or delivered to make a decision whether to terminate an
account.
8. Timing of notices. A renewal notice is deemed to be provided
when mailed or delivered. Similarly, notice of termination is deemed to
be given when mailed or delivered.
9. Prompt reversal of renewal fee upon termination. In a situation
where a cardholder has provided timely notice of termination and a
renewal fee has been billed to a cardholder's account, the card issuer
must reverse or otherwise withdraw the fee promptly. Once a cardholder
has terminated an account, no additional action by the cardholder may
be required.
9(e)(2) Notification on periodic statements.
1. Combined disclosures. If a single disclosure is used to comply
with both Sec. Sec. 226.9(e) and 226.7, the periodic statement must
comply with the rules in Sec. Sec. 226.5a and 226.7. For example, a
description substantially similar to the heading describing the grace
period required by Sec. 226.5a(b)(5) must be used and the name of the
balance-calculation method must be identified (if listed in Sec.
226.5a(g)) to comply with the requirements of Sec. 226.5a. A card
issuer may include some of the renewal disclosures on a periodic
statement and others on a separate document so long as there is some
reference indicating that the disclosures relate to one another. All
renewal disclosures must be provided to a cardholder at the same time.
2. Preprinted notices on periodic statements. A card issuer may
preprint the required information on its periodic statements. A card
issuer that does so, however, must make clear on the periodic statement
when the preprinted renewal disclosures are applicable. For example,
the card issuer could include a special notice (not preprinted) at the
appropriate time that the renewal fee will be billed in the following
billing cycle, or could show the renewal date as a regular (preprinted)
entry on all periodic statements.
9(f) Change in credit card account insurance provider.
1. Coverage. This paragraph applies to credit card accounts of the
type subject to Sec. 226.5a if credit insurance (typically life,
disability, and unemployment insurance) is offered on the outstanding
balance of such an account. (Credit card accounts subject to Sec.
226.9(f) are the same as those subject to Sec. 226.9(e); see comment
9(e)-1.) Charge card accounts are not covered by this paragraph. In
addition, the disclosure requirements of this paragraph apply only
where the card issuer initiates the change in insurance provider. For
example, if the card issuer's current insurance provider is merged into
or acquired by another company, these disclosures would not be
required. Disclosures also need not be given in cases where card
issuers pay for credit insurance themselves and do not separately
charge the cardholder.
2. No increase in rate or decrease in coverage. The requirement to
provide the disclosure arises when the card issuer changes the provider
of insurance, even if there will be no increase in the premium rate
charged to the consumer and no decrease in coverage under the insurance
policy.
3. Form of notice. If a substantial decrease in coverage will
result from the change in provider, the card issuer either must explain
the decrease or refer to an accompanying copy of the policy or group
certificate for details of the new terms of coverage. (See the
commentary to appendix G-13 to part 226.)
4. Discontinuation of insurance. In addition to stating that the
cardholder may cancel the insurance, the card issuer may explain the
effect the cancellation would have on the consumer's credit card plan.
5. Mailing by third party. Although the card issuer is responsible
for the disclosures, the insurance provider or another third party may
furnish the disclosures on the card issuer's behalf.
9(f)(3) Substantial decrease in coverage.
1. Determination. Whether a substantial decrease in coverage will
result from the change in provider is determined by the two-part test
in Sec. 226.9(f)(3): First, whether the decrease is in a significant
term of coverage; and second, whether the decrease might reasonably be
expected to affect a cardholder's decision to continue the insurance.
If both conditions are met, the decrease must be disclosed in the
notice.
9(g) Increase in rates due to delinquency or default or as a
penalty.
1. Relationship between Sec. 226.9(c) and (g) and Sec. 226.55-
examples. Card issuers subject to Sec. 226.55 are prohibited from
increasing the annual percentage rate for a category of transactions on
any consumer credit card account unless specifically permitted by one
of the exceptions in Sec. 226.55(b). See comments 55(a)-1 and 55(b)-3
and the commentary to Sec. 226.55(b)(4) for examples that illustrate
the relationship between the notice requirements of Sec. 226.9(c) and
(g) and Sec. 226.55.
2. Affected consumers. If a single credit account involves multiple
consumers that may be affected by the change, the creditor should refer
to Sec. 226.5(d) to determine the number of notices that must be
given.
3. Combining a notice described in Sec. 226.9(g)(3) with a notice
described in Sec. 226.9(c)(2)(iv). If a creditor is required to
provide notices pursuant to both Sec. 226.9(c)(2)(iv) and (g)(3) to a
consumer, the creditor may combine the two notices. This would occur
when penalty pricing has been triggered, and other terms are changing
on the consumer's account at the same time.
4. Content. Sample G-22 contains an example of how to comply with
the requirements in Sec. 226.9(g)(3)(i) when the rate on a consumer's
credit card account is being increased to a penalty rate as described
in Sec. 226.9(g)(1)(ii), based on a late payment that is not more than
60 days late Sample G-23 contains an example of how to comply with the
requirements in Sec. 226.9(g)(3)(i) when the rate increase is
triggered by a delinquency of more than 60 days.
5. Clear and conspicuous standard. See comment 5(a)(1)-1 for the
clear and conspicuous standard applicable to disclosures required under
Sec. 226.9(g).
6. Terminology. See Sec. 226.5(a)(2) for terminology requirements
applicable to disclosures required under Sec. 226.9(g).
9(g)(4) Exception for decrease in credit limit.
1. The following illustrates the requirements of Sec. 226.9(g)(4).
Assume that a creditor decreased the credit limit applicable to a
consumer's account and sent a notice pursuant to Sec. 226.9(g)(4) on
January 1, stating among other things that the penalty rate would apply
if the consumer's balance exceeded the new credit limit as of February
16. If the consumer's balance exceeded the credit limit on February 16,
the creditor could impose the penalty rate on that date. However, a
creditor could not apply the
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penalty rate if the consumer's balance did not exceed the new credit
limit on February 16, even if the consumer's balance had exceeded the
new credit limit on several dates between January 1 and February 15. If
the consumer's balance did not exceed the new credit limit on February
16 but the consumer conducted a transaction on February 17 that caused
the balance to exceed the new credit limit, the general rule in Sec.
226.9(g)(1)(ii) would apply and the creditor would be required to give
an additional 45 days' notice prior to imposition of the penalty rate
(but under these circumstances the consumer would have no ability to
cure the over-the-limit balance in order to avoid penalty pricing).
9(h) Consumer rejection of certain significant changes in terms.
1. Circumstances in which Sec. 226.9(h) does not apply. Section
226.9(h) applies when Sec. 226.9(c)(2)(iv)(B) requires disclosure of
the consumer's right to reject a significant change to an account term.
Thus, for example, Sec. 226.9(h) does not apply to changes to the
terms of home equity plans subject to the requirements of Sec. 226.5b
that are accessible by a credit or charge card because Sec.
226.9(c)(2) does not apply to such plans. Similarly, Sec. 226.9(h)
does not apply in the following circumstances because Sec.
226.9(c)(2)(iv)(B) does not require disclosure of the right to reject
in those circumstances: (i) An increase in the required minimum
periodic payment; (ii) an increase in an annual percentage rate
applicable to a consumer's account; (iii) a change in the balance
computation method necessary to comply with Sec. 226.54; and (iv) when
the change results from the creditor not receiving the consumer's
required minimum periodic payment within 60 days after the due date for
that payment.
9(h)(1) Right to reject.
1. Reasonable requirements for submission of rejections. A creditor
may establish reasonable requirements for the submission of rejections
pursuant to Sec. 226.9(h)(1). For example:
i. It would be reasonable for a creditor to require that rejections
be made by the primary account holder and that the consumer identify
the account number.
ii. It would be reasonable for a creditor to require that
rejections be made only using the toll-free telephone number disclosed
pursuant to Sec. 226.9(c). It would also be reasonable for a creditor
to designate additional channels for the submission of rejections (such
as an address for rejections submitted by mail) so long as the creditor
does not require that rejections be submitted through such additional
channels.
iii. It would be reasonable for a creditor to require that
rejections be received before the effective date disclosed pursuant to
Sec. 226.9(c) and to treat the account as not subject to Sec.
226.9(h) if a rejection is received on or after that date. It would
not, however, be reasonable to require that rejections be submitted
earlier than the day before the effective date. If a creditor is unable
to process all rejections received before the effective date, the
creditor may delay implementation of the change in terms until all
rejections have been processed. In the alternative, the creditor could
implement the change on the effective date and then, on any account for
which a timely rejection was received, reverse the change and remove or
credit any interest charges or fees imposed as a result of the change.
For example, if the effective date for a change in terms is June 15 and
the creditor cannot process all rejections received by telephone on
June 14 until June 16, the creditor may delay imposition of the change
until June 17. Alternatively, the creditor could implement the change
for all affected accounts on June 15 and then, once all rejections have
been processed, return any account for which a timely rejection was
received to the prior terms and ensure that the account is not assessed
any additional interest or fees as a result of the change or that the
account is credited for such interest or fees.
2. Use of account following provision of notice. A consumer does
not waive or forfeit the right to reject a significant change in terms
by using the account for transactions prior to the effective date of
the change. Similarly, a consumer does not revoke a rejection by using
the account for transactions after the rejection is received.
9(h)(2)(ii) Prohibition on penalties.
1. Termination or suspension of credit availability. Section
226.9(h)(2)(ii) does not prohibit a creditor from terminating or
suspending credit availability as a result of the consumer's rejection
of a significant change in terms.
2. Solely as a result of rejection. A creditor is prohibited from
imposing a fee or charge or treating an account as in default solely as
a result of the consumer's rejection of a significant change in terms.
For example, if credit availability is terminated or suspended as a
result of the consumer's rejection of a significant change in terms, a
creditor is prohibited from imposing a periodic fee that was not
charged before the consumer rejected the change (such as a closed
account fee). However, regardless of whether credit availability is
terminated or suspended as a result of the consumer's rejection, a
creditor is not prohibited from continuing to charge a periodic fee
that was charged before the rejection. Similarly, a creditor that
charged a fee for late payment before a change was rejected is not
prohibited from charging that fee after rejection of the change.
9(h)(2)(iii) Repayment of outstanding balance.
1. Relevant date for repayment methods. Once a consumer has
rejected a significant change in terms, Sec. 226.9(h)(2)(iii)
prohibits the creditor from requiring repayment of the balance on the
account using a method that is less beneficial to the consumer than one
of the methods listed in Sec. 226.55(c)(2). When applying the methods
listed in Sec. 226.55(c)(2) pursuant to Sec. 226.9(h)(2)(iii), a
creditor may utilize the date on which the creditor was notified of the
rejection or a later date (such as the date on which the change would
have gone into effect but for the rejection). For example, assume that
on April 16 a creditor provides a notice pursuant to Sec. 226.9(c)
informing the consumer that the monthly maintenance fee for the account
will increase effective June 1. The notice also states that the
consumer may reject the increase by calling a specified toll-free
telephone number before June 1 but that, if the consumer does so,
credit availability for the account will be terminated. On May 5, the
consumer calls the toll-free number and exercises the right to reject.
If the creditor chooses to establish a five-year amortization period
for the balance on the account consistent with Sec. 226.55(c)(2)(ii),
that period may begin no earlier than the date on which the creditor
was notified of the rejection (May 5). However, the creditor may also
begin the amortization period on the date on which the change would
have gone into effect but for the rejection (June 1).
2. Balance on the account.
i. In general. When applying the methods listed in Sec.
226.55(c)(2) pursuant to Sec. 226.9(h)(2)(iii), the provisions in
Sec. 226.55(c)(2) and the guidance in the commentary to Sec.
226.55(c)(2) regarding protected balances also apply to a balance on
the account subject to Sec. 226.9(h)(2)(iii). If a creditor terminates
or suspends credit availability based on a consumer's rejection of a
significant change in terms, the balance on the account that is subject
to Sec. 226.9(h)(2)(iii) is the balance at the end of the day on which
credit availability is terminated or suspended. However, if a creditor
does not terminate or suspend credit availability based on the
consumer's
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rejection, the balance on the account subject to Sec. 226.9(h)(2)(iii)
is the balance at the end of the day on which the creditor was notified
of the rejection or, at the creditor's option, a later date.
ii. Example. Assume that on June 16 a creditor provides a notice
pursuant to Sec. 226.9(c) informing the consumer that the annual fee
for the account will increase effective August 1. The notice also
states that the consumer may reject the increase by calling a specified
toll-free telephone number before August 1 but that, if the consumer
does so, credit availability for the account will be terminated. On
July 20, the account has a purchase balance of $1,000 and the consumer
calls the toll-free number and exercises the right to reject. On July
22, a $200 purchase is charged to the account. If the creditor
terminates credit availability on July 25 as a result of the rejection,
the balance subject to the repayment limitations in Sec.
226.9(h)(2)(iii) is the $1,200 purchase balance at the end of the day
on July 25. However, if the creditor does not terminate credit
availability as a result of the rejection, the balance subject to the
repayment limitations in Sec. 226.9(h)(2)(iii) is the $1,000 purchase
balance at the end of the day on the date the creditor was notified of
the rejection (July 20), although the creditor may, at its option,
treat the $200 purchase as part of the balance subject to Sec.
226.9(h)(2)(iii).
9(h)(3) Exception.
1. Examples. Section 226.9(h)(3) provides that Sec. 226.9(h) does
not apply when the creditor has not received the consumer's required
minimum periodic payment within 60 days after the due date for that
payment. The following examples illustrate the application of this
exception:
i. Account becomes more than 60 days delinquent before notice
provided. Assume that a credit card account is opened on January 1 of
year one and that the payment due date for the account is the fifteenth
day of the month. On June 20 of year two, the creditor has not received
the required minimum periodic payments due on April 15, May 15, and
June 15. On June 20, the creditor provides a notice pursuant to Sec.
226.9(c) informing the consumer that a monthly maintenance fee of $10
will be charged beginning on August 4. However, Sec.
226.9(c)(2)(iv)(B) does not require the creditor to notify the consumer
of the right to reject because the creditor has not received the April
15 minimum payment within 60 days after the due date. Furthermore, the
exception in Sec. 226.9(h)(3) applies and the consumer may not reject
the fee.
ii. Account becomes more than 60 days delinquent after rejection.
Assume that a credit card account is opened on January 1 of year one
and that the payment due date for the account is the fifteenth day of
the month. On April 20 of year two, the creditor has not received the
required minimum periodic payment due on April 15. On April 20, the
creditor provides a notice pursuant to Sec. 226.9(c) informing the
consumer that an annual fee of $100 will be charged beginning on June
4. The notice further states that the consumer may reject the fee by
calling a specified toll-free telephone number before June 4 but that,
if the consumer does so, credit availability for the account will be
terminated. On May 5, the consumer calls the toll-free telephone number
and rejects the fee. Section 226.9(h)(2)(i) prohibits the creditor from
charging the $100 fee to the account. If, however, the creditor does
not receive the minimum payments due on April 15 and May 15 by June 15,
Sec. 226.9(h)(3) permits the creditor to charge the $100 fee. The
creditor must provide a second notice of the fee pursuant to Sec.
226.9(c), but Sec. 226.9(c)(2)(iv)(B) does not require the creditor to
disclose the right to reject and Sec. 226.9(h)(3) does not allow the
consumer to reject the fee. Similarly, the restrictions in Sec.
226.9(h)(2)(ii) and (iii) no longer apply.
Sec. 226.10 Payments.
10(a) General rule.
1. Crediting date. Section 226.10(a) does not require the creditor
to post the payment to the consumer's account on a particular date; the
creditor is only required to credit the payment as of the date of
receipt.
2. Date of receipt. The ``date of receipt'' is the date that the
payment instrument or other means of completing the payment reaches the
creditor. For example:
i. Payment by check is received when the creditor gets it, not when
the funds are collected.
ii. In a payroll deduction plan in which funds are deposited to an
asset account held by the creditor, and from which payments are made
periodically to an open-end credit account, payment is received on the
date when it is debited to the asset account (rather than on the date
of the deposit), provided the payroll deduction method is voluntary and
the consumer retains use of the funds until the contractual payment
date.
iii. If the consumer elects to have payment made by a third party
payor such as a financial institution, through a preauthorized payment
or telephone bill-payment arrangement, payment is received when the
creditor gets the third party payor's check or other transfer medium,
such as an electronic fund transfer, as long as the payment meets the
creditor's requirements as specified under Sec. 226.10(b).
iv. Payment made via the creditor's Web site is received on the
date on which the consumer authorizes the creditor to effect the
payment, even if the consumer gives the instruction authorizing that
payment in advance of the date on which the creditor is authorized to
effect the payment. If the consumer authorizes the creditor to effect
the payment immediately, but the consumer's instruction is received
after 5 p.m. or any later cut-off time specified by the creditor, the
date on which the consumer authorizes the creditor to effect the
payment is deemed to be the next business day.
10(b) Specific requirements for payments.
1. Payment by electronic fund transfer. A creditor may be
prohibited from specifying payment by preauthorized electronic fund
transfer. (See section 913 of the Electronic Fund Transfer Act.)
2. Payment via creditor's Web site. If a creditor promotes
electronic payment via its Web site (such as by disclosing on the Web
site itself that payments may be made via the Web site), any payments
made via the creditor's Web site would generally be conforming payments
for purposes of Sec. 226.10(b).
3. Acceptance of nonconforming payments. If the creditor accepts a
nonconforming payment (for example, payment mailed to a branch office,
when the creditor had specified that payment be sent to a different
location), finance charges may accrue for the period between receipt
and crediting of payments.
4. Implied guidelines for payments. In the absence of specified
requirements for making payments (See Sec. 226.10(b)):
i. Payments may be made at any location where the creditor conducts
business.
ii. Payments may be made any time during the creditor's normal
business hours.
iii. Payment may be by cash, money order, draft, or other similar
instrument in properly negotiable form, or by electronic fund transfer
if the creditor and consumer have so agreed.
5. Payments made at point of sale. If a creditor that is a
financial institution issues a credit card that can be used only for
transactions with a particular merchant or merchants, and a consumer is
able to make a payment on that credit card account at a retail location
[[Page 54298]]
maintained by such a merchant, that retail location is not considered
to be a branch or office of the creditor for purposes of Sec.
226.10(b)(3).
6. In-person payments on credit card accounts. For purposes of
Sec. 226.10(b)(3), payments made in person at a branch or office of a
financial institution include payments made with the direct assistance
of, or to, a branch or office employee, for example a teller at a bank
branch. A payment made at the bank branch without the direct assistance
of a branch or office employee, for example a payment placed in a
branch or office mail slot, is not a payment made in person for
purposes of Sec. 226.10(b)(3).
10(d) Crediting of payments when creditor does not receive or
accept payments on due date.
1. Example. A day on which the creditor does not receive or accept
payments by mail may occur, for example, if the U.S. Postal Service
does not deliver mail on that date.
10(e) Limitations on fees related to method of payment.
1. Separate fee to allow consumers to make a payment. For purposes
of Sec. 226.10(e), ``separate fee'' means a fee imposed on a consumer
for making a single payment to the consumer's account. A fee or other
charge imposed if payment is made after the due date, such as a late
fee or finance charge, is not a separate fee to allow consumers to make
a payment for purposes of Sec. 226.10(e).
2. Expedited. For purposes of Sec. 226.10(e), the term
``expedited'' means crediting a payment the same day or, if the payment
is received after any cut-off time established by the creditor, the
next business day.
3. Service by a customer service representative. Service by a
customer service representative of a creditor means any payment made to
the consumer's account with the assistance of a live representative or
agent of the creditor, including those made in person, on the
telephone, or by electronic means. A customer service representative
does not include automated means of making payment that do not involve
a live representative or agent of the creditor, such as a voice
response unit or interactive voice response system.
10(f) Changes by card issuer.
1. Address for receiving payment. For purposes of Sec. 226.10(f),
``address for receiving payment'' means a mailing address for receiving
payment, such as a post office box, or the address of a branch or
office at which payments on credit card accounts are accepted.
2. Materiality. For purposes of Sec. 226.10(f), a ``material
change'' means any change in the address for receiving payment or
procedures for handling cardholder payments which causes a material
delay in the crediting of a payment. ``Material delay'' means any delay
in crediting payment to a consumer's account which would result in a
late payment and the imposition of a late fee or finance charge. A
delay in crediting a payment which does not result in a late fee or
finance charge would be immaterial.
3. Safe harbor. A card issuer may elect not to impose a late fee or
finance charge on a consumer's account for the 60-day period following
a change in address for receiving payment or procedures for handling
cardholder payments which could reasonably be expected to cause a
material delay in crediting of a payment to the consumer's account.
4. Examples.
i. A card issuer changes the mailing address for receiving payments
by mail from a five-digit postal zip code to a nine-digit postal zip
code. A consumer mails a payment using the five-digit postal zip code.
The change in mailing address is immaterial and it does not cause a
delay. Therefore, a card issuer may impose a late fee or finance charge
for a late payment on the account.
ii. A card issuer changes the mailing address for receiving
payments by mail from one post office box number to another post office
box number. For a 60-day period following the change, the card issuer
continues to use both post office box numbers for the collection of
payments received by mail. The change in mailing address would not
cause a material delay in crediting a payment because payments would be
received and credited at both addresses. Therefore, a card issuer may
impose a late fee or finance charge for a late payment on the account
during the 60-day period following the date on which the change took
effect.
iii. Same facts as paragraph ii. above, except the prior post
office box number is no longer valid and mail sent to that address
during the 60-day period following the change would be returned to
sender. The change in mailing address is material and the change could
cause a material delay in the crediting of a payment because a payment
sent to the old address could be delayed past the due date. If, as a
result, a consumer makes a late payment on the account during the 60-
day period following the date on which the change took effect, a card
issuer may not impose any late fee or finance charge for the late
payment.
iv. A consumer regularly makes payments in person at a local branch
of a card issuer which maintains offices at which payments are accepted
on credit card accounts. The card issuer permanently closes that local
branch office. The permanent closing of the local branch office is a
material change in address for receiving payment. If, as a result, a
consumer makes a late payment on the account during the 60-day period
following the date on which the change took effect, the card issuer may
not impose any late fee or finance charge for the late payment.
v. A consumer has elected to make payments automatically to a
credit card account, such as through a payroll deduction plan or a
third party payor's preauthorized payment arrangement. A card issuer
changes the procedures for handling such payments and as a result, a
payment is delayed and not credited to the consumer's account before
the due date. In these circumstances, a card issuer may not impose any
late fee or finance charge during the 60-day period following the date
on which the change took effect for a late payment on the account.
5. Finance charge due to periodic interest rate. When an account is
not eligible for a grace period, imposing a finance charge due to a
periodic interest rate does not constitute imposition of a finance
charge for a late payment for the purposes of Sec. 226.10(f).
Sec. 226.11 Treatment of Credit Balances; Account Termination.
11(a) Credit balances.
1. Timing of refund. The creditor may also fulfill its obligations
under Sec. 226.11 by:
i. Refunding any credit balance to the consumer immediately.
ii. Refunding any credit balance prior to receiving a written
request (under Sec. 226.11(a)(2)) from the consumer.
iii. Refunding any credit balance upon the consumer's oral or
electronic request.
iv. Making a good faith effort to refund any credit balance before
6 months have passed. If that attempt is unsuccessful, the creditor
need not try again to refund the credit balance at the end of the 6-
month period.
2. Amount of refund. The phrases any part of the remaining credit
balance in Sec. 226.11(a)(2) and any part of the credit balance
remaining in the account in Sec. 226.11(a)(3) mean the amount of the
credit balance at the time the creditor is required to make the refund.
The creditor may take into consideration intervening purchases or other
debits to the consumer's account (including those that have not yet
been reflected on a
[[Page 54299]]
periodic statement) that decrease or eliminate the credit balance.
Paragraph 11(a)(2).
1. Written requests--standing orders. The creditor is not required
to honor standing orders requesting refunds of any credit balance that
may be created on the consumer's account.
Paragraph 11(a)(3).
1. Good faith effort to refund. The creditor must take positive
steps to return any credit balance that has remained in the account for
over 6 months. This includes, if necessary, attempts to trace the
consumer through the consumer's last known address or telephone number,
or both.
2. Good faith effort unsuccessful. Section 226.11 imposes no
further duties on the creditor if a good faith effort to return the
balance is unsuccessful. The ultimate disposition of the credit balance
(or any credit balance of $1 or less) is to be determined under other
applicable law.
11(b) Account termination.
Paragraph 11(b)(1).
1. Expiration date. The credit agreement determines whether or not
an open-end plan has a stated expiration (maturity) date. Creditors
that offer accounts with no stated expiration date are prohibited from
terminating those accounts solely because a consumer does not incur a
finance charge, even if credit cards or other access devices associated
with the account expire after a stated period. Creditors may still
terminate such accounts for inactivity consistent with Sec.
226.11(b)(2).
11(c) Timely settlement of estate debts.
1. Examples. The following are examples of reasonable procedures
that may satisfy this rule:
i. A creditor may decline future transactions and terminate the
account upon receiving reasonable notice of the consumer's death.
ii. A creditor may credit the account for fees and charges imposed
after the date of receiving reasonable notice of the consumer's death.
iii. A creditor may waive the estate's liability for all charges
made to the account after receiving reasonable notice of the consumer's
death.
iv. A creditor may authorize an agent to handle matters in
accordance with the requirements of this rule.
2. Fees and charges. Section 226.11(c)(2) does not prohibit a
creditor from imposing finance charges based on balances for days that
precede the date on which the creditor receives a request pursuant to
Sec. 226.11(c)(3). For example, if the last day of the billing cycle
is June 30 and the creditor receives a request pursuant to Sec.
226.11(c)(3) on June 25, the creditor may charge interest that accrued
prior to June 25.
3. Application to joint accounts. A creditor may impose fees and
charges on an account of a deceased consumer if a joint accountholder
remains on the account. If only an authorized user remains on the
account of a deceased consumer, however, then a creditor may not impose
fees and charges.
4. Request by an administrator or executor of an estate. A creditor
may receive a request for the amount of the balance on a deceased
consumer's account in writing or by telephone call from the
administrator or executor of an estate. If a request is made in
writing, such as by mail, the request is received on the date the
creditor receives the correspondence.
5. Timely statement of balance. A creditor must disclose the
balance on a deceased consumer's account, upon request by the
administrator or executor of the decedent's estate. A creditor may
provide the amount, if any, by a written statement or by telephone.
This does not preclude a creditor from providing the balance amount to
appropriate persons, other than the administrator or executor, such as
the spouse or a relative of the decedent, who indicate that they may
pay any balance. This provision does not relieve creditors of the
requirements to provide a periodic statement, under Sec. 226.5(b)(2).
A periodic statement, under Sec. 226.5(b)(2), may satisfy the
requirements of Sec. 226.11(c)(3), if provided within 30 days of the
notice of the consumer's death.
Sec. 226.12 Special Credit Card Provisions.
1. Scope. Sections 226.12(a) and (b) deal with the issuance and
liability rules for credit cards, whether the card is intended for
consumer, business, or any other purposes. Sections 226.12(a) and (b)
are exceptions to the general rule that the regulation applies only to
consumer credit. (See Sec. Sec. 226.1 and 226.3.)
2. Definition of ``accepted credit card''. For purposes of this
section, ``accepted credit card'' means any credit card that a
cardholder has requested or applied for and received, or has signed,
used, or authorized another person to use to obtain credit. Any credit
card issued as a renewal or substitute in accordance with Sec.
226.12(a) becomes an accepted credit card when received by the
cardholder.
12(a) Issuance of credit cards.
Paragraph 12(a)(1).
1. Explicit request. A request or application for a card must be
explicit. For example, a request for an overdraft plan tied to a
checking account does not constitute an application for a credit card
with overdraft checking features.
2. Addition of credit features. If the consumer has a non-credit
card, the addition of credit features to the card (for example, the
granting of overdraft privileges on a checking account when the
consumer already has a check guarantee card) constitutes issuance of a
credit card.
3. Variance of card from request. The request or application need
not correspond exactly to the card that is issued. For example:
i. The name of the card requested may be different when issued.
ii. The card may have features in addition to those reflected in
the request or application.
4. Permissible form of request. The request or application may be
oral (in response to a telephone solicitation by a card issuer, for
example) or written.
5. Time of issuance. A credit card may be issued in response to a
request made before any cards are ready for issuance (for example, if a
new program is established), even if there is some delay in issuance.
6. Persons to whom cards may be issued. A card issuer may issue a
credit card to the person who requests it, and to anyone else for whom
that person requests a card and who will be an authorized user on the
requester's account. In other words, cards may be sent to consumer A on
A's request, and also (on A's request) to consumers B and C, who will
be authorized users on A's account. In these circumstances, the
following rules apply:
i. The additional cards may be imprinted in either A's name or in
the names of B and C.
ii. No liability for unauthorized use (by persons other than B and
C), not even the $50, may be imposed on B or C since they are merely
users and not cardholders as that term is defined in Sec. 226.2 and
used in Sec. 226.12(b); of course, liability of up to $50 for
unauthorized use of B's and C's cards may be imposed on A.
iii. Whether B and C may be held liable for their own use, or on
the account generally, is a matter of State or other applicable law.
7. Issuance of non-credit cards.
i. General. Under Sec. 226.12(a)(1), a credit card cannot be
issued except in response to a request or an application. (See comment
2(a)(15)-2 for examples of cards or devices that are and are not credit
cards.) A non-credit card may be sent on an unsolicited basis by an
issuer that does not propose to connect the card to any credit plan; a
credit feature may be added to a previously issued
[[Page 54300]]
non-credit card only upon the consumer's specific request.
ii. Examples. A purchase-price discount card may be sent on an
unsolicited basis by an issuer that does not propose to connect the
card to any credit plan. An issuer demonstrates that it proposes to
connect the card to a credit plan by, for example, including
promotional materials about credit features or account agreements and
disclosures required by Sec. 226.6. The issuer will violate the rule
against unsolicited issuance if, for example, at the time the card is
sent a credit plan can be accessed by the card or the recipient of the
unsolicited card has been preapproved for credit that the recipient can
access by contacting the issuer and activating the card.
8. Unsolicited issuance of PINs. A card issuer may issue personal
identification numbers (PINs) to existing credit cardholders without a
specific request from the cardholders, provided the PINs cannot be used
alone to obtain credit. For example, the PINs may be necessary if
consumers wish to use their existing credit cards at automated teller
machines or at merchant locations with point of sale terminals that
require PINs.
Paragraph 12(a)(2).
1. Renewal. Renewal generally contemplates the regular replacement
of existing cards because of, for example, security reasons or new
technology or systems. It also includes the re-issuance of cards that
have been suspended temporarily, but does not include the opening of a
new account after a previous account was closed.
2. Substitution--examples. Substitution encompasses the replacement
of one card with another because the underlying account relationship
has changed in some way--such as when the card issuer has:
i. Changed its name.
ii. Changed the name of the card.
iii. Changed the credit or other features available on the account.
For example, the original card could be used to make purchases and
obtain cash advances at teller windows. The substitute card might be
usable, in addition, for obtaining cash advances through automated
teller machines. (If the substitute card constitutes an access device,
as defined in Regulation E, then the Regulation E issuance rules would
have to be followed.) The substitution of one card with another on an
unsolicited basis is not permissible, however, where in conjunction
with the substitution an additional credit card account is opened and
the consumer is able to make new purchases or advances under both the
original and the new account with the new card. For example, if a
retail card issuer replaces its credit card with a combined retailer/
bank card, each of the creditors maintains a separate account, and both
accounts can be accessed for new transactions by use of the new credit
card, the card cannot be provided to a consumer without solicitation.
iv. Substituted a card user's name on the substitute card for the
cardholder's name appearing on the original card.
v. Changed the merchant base, provided that the new card is honored
by at least one of the persons that honored the original card. However,
unless the change in the merchant base is the addition of an affiliate
of the existing merchant base, the substitution of a new card for
another on an unsolicited basis is not permissible where the account is
inactive. A credit card cannot be issued in these circumstances without
a request or application. For purposes of Sec. 226.12(a), an account
is inactive if no credit has been extended and if the account has no
outstanding balance for the prior 24 months. (See Sec. 226.11(b)(2).)
3. Substitution--successor card issuer. Substitution also occurs
when a successor card issuer replaces the original card issuer (for
example, when a new card issuer purchases the accounts of the original
issuer and issues its own card to replace the original one). A
permissible substitution exists even if the original issuer retains the
existing receivables and the new card issuer acquires the right only to
future receivables, provided use of the original card is cut off when
use of the new card becomes possible.
4. Substitution--non-credit-card plan. A credit card that replaces
a retailer's open-end credit plan not involving a credit card is not
considered a substitute for the retailer's plan--even if the consumer
used the retailer's plan. A credit card cannot be issued in these
circumstances without a request or application.
5. One-for-one rule. An accepted card may be replaced by no more
than one renewal or substitute card. For example, the card issuer may
not replace a credit card permitting purchases and cash advances with
two cards, one for the purchases and another for the cash advances.
6. One-for-one rule--exceptions. The regulation does not prohibit
the card issuer from:
i. Replacing a debit/credit card with a credit card and another
card with only debit functions (or debit functions plus an associated
overdraft capability), since the latter card could be issued on an
unsolicited basis under Regulation E.
ii. Replacing an accepted card with more than one renewal or
substitute card, provided that:
A. No replacement card accesses any account not accessed by the
accepted card;
B. For terms and conditions required to be disclosed under Sec.
226.6, all replacement cards are issued subject to the same terms and
conditions, except that a creditor may vary terms for which no change
in terms notice is required under Sec. 226.9(c); and
C. Under the account's terms the consumer's total liability for
unauthorized use with respect to the account does not increase.
7. Methods of terminating replaced card. The card issuer need not
physically retrieve the original card, provided the old card is voided
in some way, for example:
i. The issuer includes with the new card a notification that the
existing card is no longer valid and should be destroyed immediately.
ii. The original card contained an expiration date.
iii. The card issuer, in order to preclude use of the card,
reprograms computers or issues instructions to authorization centers.
8. Incomplete replacement. If a consumer has duplicate credit cards
on the same account (Card A--one type of bank credit card, for
example), the card issuer may not replace the duplicate cards with one
Card A and one Card B (Card B--another type of bank credit card) unless
the consumer requests Card B.
9. Multiple entities. Where multiple entities share
responsibilities with respect to a credit card issued by one of them,
the entity that issued the card may replace it on an unsolicited basis,
if that entity terminates the original card by voiding it in some way,
as described in comment 12(a)(2)-7. The other entity or entities may
not issue a card on an unsolicited basis in these circumstances.
12(b) Liability of cardholder for unauthorized use.
1. Meaning of cardholder. For purposes of this provision,
cardholder includes any person (including organizations) to whom a
credit card is issued for any purpose, including business. When a
corporation is the cardholder, required disclosures should be provided
to the corporation (as opposed to an employee user).
2. Imposing liability. A card issuer is not required to impose
liability on a cardholder for the unauthorized use of a credit card; if
the card issuer does not seek to impose liability, the issuer need
[[Page 54301]]
not conduct any investigation of the cardholder's claim.
3. Reasonable investigation. If a card issuer seeks to impose
liability when a claim of unauthorized use is made by a cardholder, the
card issuer must conduct a reasonable investigation of the claim. In
conducting its investigation, the card issuer may reasonably request
the cardholder's cooperation. The card issuer may not automatically
deny a claim based solely on the cardholder's failure or refusal to
comply with a particular request, including providing an affidavit or
filing a police report; however, if the card issuer otherwise has no
knowledge of facts confirming the unauthorized use, the lack of
information resulting from the cardholder's failure or refusal to
comply with a particular request may lead the card issuer reasonably to
terminate the investigation. The procedures involved in investigating
claims may differ, but actions such as the following represent steps
that a card issuer may take, as appropriate, in conducting a reasonable
investigation:
i. Reviewing the types or amounts of purchases made in relation to
the cardholder's previous purchasing pattern.
ii. Reviewing where the purchases were delivered in relation to the
cardholder's residence or place of business.
iii. Reviewing where the purchases were made in relation to where
the cardholder resides or has normally shopped.
iv. Comparing any signature on credit slips for the purchases to
the signature of the cardholder or an authorized user in the card
issuer's records, including other credit slips.
v. Requesting documentation to assist in the verification of the
claim.
vi. Requiring a written, signed statement from the cardholder or
authorized user. For example, the creditor may include a signature line
on a billing rights form that the cardholder may send in to provide
notice of the claim. However, a creditor may not require the cardholder
to provide an affidavit or signed statement under penalty of perjury as
part of a reasonable investigation.
vii. Requesting a copy of a police report, if one was filed.
viii. Requesting information regarding the cardholder's knowledge
of the person who allegedly used the card or of that person's authority
to do so.
4. Checks that access a credit card account. The liability
provisions for unauthorized use under Sec. 226.12(b)(1) only apply to
transactions involving the use of a credit card, and not if an
unauthorized transaction is made using a check accessing the credit
card account. However, the billing error provisions in Sec. 226.13
apply to both of these types of transactions.
12(b)(1)(ii) Limitation on amount.
1. Meaning of authority. Section 226.12(b)(1)(i) defines
unauthorized use in terms of whether the user has actual, implied, or
apparent authority. Whether such authority exists must be determined
under State or other applicable law.
2. Liability limits--dollar amounts. As a general rule, the
cardholder's liability for a series of unauthorized uses cannot exceed
either $50 or the value obtained through the unauthorized use before
the card issuer is notified, whichever is less.
3. Implied or apparent authority. If a cardholder furnishes a
credit card and grants authority to make credit transactions to a
person (such as a family member or coworker) who exceeds the authority
given, the cardholder is liable for the transaction(s) unless the
cardholder has notified the creditor that use of the credit card by
that person is no longer authorized.
4. Credit card obtained through robbery or fraud. An unauthorized
use includes, but is not limited to, a transaction initiated by a
person who has obtained the credit card from the consumer, or otherwise
initiated the transaction, through fraud or robbery.
12(b)(2) Conditions of liability.
1. Issuer's option not to comply. A card issuer that chooses not to
impose any liability on cardholders for unauthorized use need not
comply with the disclosure and identification requirements discussed in
Sec. 226.12(b)(2).
Paragraph 12(b)(2)(ii).
1. Disclosure of liability and means of notifying issuer. The
disclosures referred to in Sec. 226.12(b)(2)(ii) may be given, for
example, with the initial disclosures under Sec. 226.6, on the credit
card itself, or on periodic statements. They may be given at any time
preceding the unauthorized use of the card.
2. Meaning of ``adequate notice.'' For purposes of this provision,
``adequate notice'' means a printed notice to a cardholder that sets
forth clearly the pertinent facts so that the cardholder may reasonably
be expected to have noticed it and understood its meaning. The notice
may be given by any means reasonably assuring receipt by the
cardholder.
Paragraph 12(b)(2)(iii).
1. Means of identifying cardholder or user. To fulfill the
condition set forth in Sec. 226.12(b)(2)(iii), the issuer must provide
some method whereby the cardholder or the authorized user can be
identified. This could include, for example, a signature, photograph,
or fingerprint on the card or other biometric means, or electronic or
mechanical confirmation.
2. Identification by magnetic strip. Unless a magnetic strip (or
similar device not readable without physical aids) must be used in
conjunction with a secret code or the like, it would not constitute
sufficient means of identification. Sufficient identification also does
not exist if a ``pool'' or group card, issued to a corporation and
signed by a corporate agent who will not be a user of the card, is
intended to be used by another employee for whom no means of
identification is provided.
3. Transactions not involving card. The cardholder may not be held
liable under Sec. 226.12(b) when the card itself (or some other
sufficient means of identification of the cardholder) is not presented.
Since the issuer has not provided a means to identify the user under
these circumstances, the issuer has not fulfilled one of the conditions
for imposing liability. For example, when merchandise is ordered by
telephone or the Internet by a person without authority to do so, using
a credit card account number by itself or with other information that
appears on the card (for example, the card expiration date and a 3- or
4-digit cardholder identification number), no liability may be imposed
on the cardholder.
12(b)(3) Notification to card issuer.
1. How notice must be provided. Notice given in a normal business
manner--for example, by mail, telephone, or personal visit--is
effective even though it is not given to, or does not reach, some
particular person within the issuer's organization. Notice also may be
effective even though it is not given at the address or phone number
disclosed by the card issuer under Sec. 226.12(b)(2)(ii).
2. Who must provide notice. Notice of loss, theft, or possible
unauthorized use need not be initiated by the cardholder. Notice is
sufficient so long as it gives the ``pertinent information'' which
would include the name or card number of the cardholder and an
indication that unauthorized use has or may have occurred.
3. Relationship to Sec. 226.13. The liability protections afforded
to cardholders in Sec. 226.12 do not depend upon the cardholder's
following the error resolution procedures in Sec. 226.13. For example,
the written notification and time limit requirements of Sec. 226.13 do
not affect the Sec. 226.12 protections. (See also comment 12(b)-4.)
[[Page 54302]]
12(b)(5) Business use of credit cards.
1. Agreement for higher liability for business use cards. The card
issuer may not rely on Sec. 226.12(b)(5) if the business is clearly
not in a position to provide 10 or more cards to employees (for
example, if the business has only 3 employees). On the other hand, the
issuer need not monitor the personnel practices of the business to make
sure that it has at least 10 employees at all times.
2. Unauthorized use by employee. The protection afforded to an
employee against liability for unauthorized use in excess of the limits
set in Sec. 226.12(b) applies only to unauthorized use by someone
other than the employee. If the employee uses the card in an
unauthorized manner, the regulation sets no restriction on the
employee's potential liability for such use.
12(c) Right of cardholder to assert claims or defenses against card
issuer.
1. Relationship to Sec. 226.13. The Sec. 226.12(c) credit card
``holder in due course'' provision deals with the consumer's right to
assert against the card issuer a claim or defense concerning property
or services purchased with a credit card, if the merchant has been
unwilling to resolve the dispute. Even though certain merchandise
disputes, such as non-delivery of goods, may also constitute ``billing
errors'' under Sec. 226.13, that section operates independently of
Sec. 226.12(c). The cardholder whose asserted billing error involves
undelivered goods may institute the error resolution procedures of
Sec. 226.13; but whether or not the cardholder has done so, the
cardholder may assert claims or defenses under Sec. 226.12(c).
Conversely, the consumer may pay a disputed balance and thus have no
further right to assert claims and defenses, but still may assert a
billing error if notice of that billing error is given in the proper
time and manner. An assertion that a particular transaction resulted
from unauthorized use of the card could also be both a ``defense'' and
a billing error.
2. Claims and defenses assertible. Section 226.12(c) merely
preserves the consumer's right to assert against the card issuer any
claims or defenses that can be asserted against the merchant. It does
not determine what claims or defenses are valid as to the merchant;
this determination must be made under State or other applicable law.
3. Transactions excluded. Section 226.12(c) does not apply to the
use of a check guarantee card or a debit card in connection with an
overdraft credit plan, or to a check guarantee card used in connection
with cash-advance checks.
4. Method of calculating the amount of credit outstanding. The
amount of the claim or defense that the cardholder may assert shall not
exceed the amount of credit outstanding for the disputed transaction at
the time the cardholder first notifies the card issuer or the person
honoring the credit card of the existence of the claim or defense. To
determine the amount of credit outstanding for purposes of this
section, payments and other credits shall be applied to: (i) Late
charges in the order of entry to the account; then to (ii) finance
charges in the order of entry to the account; and then to (iii) any
other debits in the order of entry to the account. If more than one
item is included in a single extension of credit, credits are to be
distributed pro rata according to prices and applicable taxes.
12(c)(1) General rule.
1. Situations excluded and included. The consumer may assert claims
or defenses only when the goods or services are ``purchased with the
credit card.'' This could include mail, the Internet or telephone
orders, if the purchase is charged to the credit card account. But it
would exclude:
i. Use of a credit card to obtain a cash advance, even if the
consumer then uses the money to purchase goods or services. Such a
transaction would not involve ``property or services purchased with the
credit card.''
ii. The purchase of goods or services by use of a check accessing
an overdraft account and a credit card used solely for identification
of the consumer. (On the other hand, if the credit card is used to make
partial payment for the purchase and not merely for identification, the
right to assert claims or defenses would apply to credit extended via
the credit card, although not to the credit extended on the overdraft
line.)
iii. Purchases made by use of a check guarantee card in conjunction
with a cash advance check (or by cash advance checks alone). (See
comment 12(c)-3.) A cash advance check is a check that, when written,
does not draw on an asset account; instead, it is charged entirely to
an open-end credit account.
iv. Purchases effected by use of either a check guarantee card or a
debit card when used to draw on overdraft credit plans. (See comment
12(c)-3.) The debit card exemption applies whether the card accesses an
asset account via point of sale terminals, automated teller machines,
or in any other way, and whether the card qualifies as an ``access
device'' under Regulation E or is only a paper based debit card. If a
card serves both as an ordinary credit card and also as check guarantee
or debit card, a transaction will be subject to this rule on asserting
claims and defenses when used as an ordinary credit card, but not when
used as a check guarantee or debit card.
12(c)(2) Adverse credit reports prohibited.
1. Scope of prohibition. Although an amount in dispute may not be
reported as delinquent until the matter is resolved:
i. That amount may be reported as disputed.
ii. Nothing in this provision prohibits the card issuer from
undertaking its normal collection activities for the delinquent and
undisputed portion of the account.
2. Settlement of dispute. A card issuer may not consider a dispute
settled and report an amount disputed as delinquent or begin collection
of the disputed amount until it has completed a reasonable
investigation of the cardholder's claim. A reasonable investigation
requires an independent assessment of the cardholder's claim based on
information obtained from both the cardholder and the merchant, if
possible. In conducting an investigation, the card issuer may request
the cardholder's reasonable cooperation. The card issuer may not
automatically consider a dispute settled if the cardholder fails or
refuses to comply with a particular request. However, if the card
issuer otherwise has no means of obtaining information necessary to
resolve the dispute, the lack of information resulting from the
cardholder's failure or refusal to comply with a particular request may
lead the card issuer reasonably to terminate the investigation.
12(c)(3) Limitations.
Paragraph 12(c)(3)(i)(A).
1. Resolution with merchant. The consumer must have tried to
resolve the dispute with the merchant. This does not require any
special procedures or correspondence between them, and is a matter for
factual determination in each case. The consumer is not required to
seek satisfaction from the manufacturer of the goods involved. When the
merchant is in bankruptcy proceedings, the consumer is not required to
file a claim in those proceedings, and may instead file a claim for the
property or service purchased with the credit card with the card issuer
directly.
Paragraph 12(c)(3)(i)(B).
1. Geographic limitation. The question of where a transaction
occurs (as in the case of mail, Internet, or telephone orders, for
example) is to be determined under State or other applicable law.
[[Page 54303]]
Paragraph 12(c)(3)(ii).
1. Merchant honoring card. The exceptions (stated in Sec.
226.12(c)(3)(ii)) to the amount and geographic limitations in Sec.
226.12(c)(3)(i)(B) do not apply if the merchant merely honors, or
indicates through signs or advertising that it honors, a particular
credit card.
12(d) Offsets by card issuer prohibited.
Paragraph 12(d)(1).
1. Holds on accounts. ``Freezing'' or placing a hold on funds in
the cardholder's deposit account is the functional equivalent of an
offset and would contravene the prohibition in Sec. 226.12(d)(1),
unless done in the context of one of the exceptions specified in Sec.
226.12(d)(2). For example, if the terms of a security agreement
permitted the card issuer to place a hold on the funds, the hold would
not violate the offset prohibition. Similarly, if an order of a
bankruptcy court required the card issuer to turn over deposit account
funds to the trustee in bankruptcy, the issuer would not violate the
regulation by placing a hold on the funds in order to comply with the
court order.
2. Funds intended as deposits. If the consumer tenders funds as a
deposit (to a checking account, for example), the card issuer may not
apply the funds to repay indebtedness on the consumer's credit card
account.
3. Types of indebtedness; overdraft accounts. The offset
prohibition applies to any indebtedness arising from transactions under
a credit card plan, including accrued finance charges and other charges
on the account. The prohibition also applies to balances arising from
transactions not using the credit card itself but taking place under
plans that involve credit cards. For example, if the consumer writes a
check that accesses an overdraft line of credit, the resulting
indebtedness is subject to the offset prohibition since it is incurred
through a credit card plan, even though the consumer did not use an
associated check guarantee or debit card.
4. When prohibition applies in case of termination of account. The
offset prohibition applies even after the card issuer terminates the
cardholder's credit card privileges, if the indebtedness was incurred
prior to termination. If the indebtedness was incurred after
termination, the prohibition does not apply.
Paragraph 12(d)(2).
1. Security interest--limitations. In order to qualify for the
exception stated in Sec. 226.12(d)(2), a security interest must be
affirmatively agreed to by the consumer and must be disclosed in the
issuer's account-opening disclosures under Sec. 226.6. The security
interest must not be the functional equivalent of a right of offset; as
a result, routinely including in agreements contract language
indicating that consumers are giving a security interest in any deposit
accounts maintained with the issuer does not result in a security
interest that falls within the exception in Sec. 226.12(d)(2). For a
security interest to qualify for the exception under Sec. 226.12(d)(2)
the following conditions must be met:
i. The consumer must be aware that granting a security interest is
a condition for the credit card account (or for more favorable account
terms) and must specifically intend to grant a security interest in a
deposit account. Indicia of the consumer's awareness and intent include
at least one of the following (or a substantially similar procedure
that evidences the consumer's awareness and intent):
A. Separate signature or initials on the agreement indicating that
a security interest is being given.
B. Placement of the security agreement on a separate page, or
otherwise separating the security interest provisions from other
contract and disclosure provisions.
C. Reference to a specific amount of deposited funds or to a
specific deposit account number.
ii. The security interest must be obtainable and enforceable by
creditors generally. If other creditors could not obtain a security
interest in the consumer's deposit accounts to the same extent as the
card issuer, the security interest is prohibited by Sec. 226.12(d)(2).
2. Security interest--after-acquired property. As used in Sec.
226.12(d), the term ``security interest'' does not exclude (as it does
for other Regulation Z purposes) interests in after-acquired property.
Thus, a consensual security interest in deposit-account funds,
including funds deposited after the granting of the security interest
would constitute a permissible exception to the prohibition on offsets.
3. Court order. If the card issuer obtains a judgment against the
cardholder, and if State and other applicable law and the terms of the
judgment do not so prohibit, the card issuer may offset the
indebtedness against the cardholder's deposit account.
Paragraph 12(d)(3).
1. Automatic payment plans--scope of exception. With regard to
automatic debit plans under Sec. 226.12(d)(3), the following rules
apply:
i. The cardholder's authorization must be in writing and signed or
initialed by the cardholder.
ii. The authorizing language need not appear directly above or next
to the cardholder's signature or initials, provided it appears on the
same document and that it clearly spells out the terms of the automatic
debit plan.
iii. If the cardholder has the option to accept or reject the
automatic debit feature (such option may be required under section 913
of the Electronic Fund Transfer Act), the fact that the option exists
should be clearly indicated.
2. Automatic payment plans--additional exceptions. The following
practices are not prohibited by Sec. 226.12(d)(1):
i. Automatically deducting charges for participation in a program
of banking services (one aspect of which may be a credit card plan).
ii. Debiting the cardholder's deposit account on the cardholder's
specific request rather than on an automatic periodic basis (for
example, a cardholder might check a box on the credit card bill stub,
requesting the issuer to debit the cardholder's account to pay that
bill).
12(e) Prompt notification of returns and crediting of refunds.
Paragraph 12(e)(1).
1. Normal channels. The term normal channels refers to any network
or interchange system used for the processing of the original charge
slips (or equivalent information concerning the transaction).
Paragraph 12(e)(2).
1. Crediting account. The card issuer need not actually post the
refund to the consumer's account within three business days after
receiving the credit statement, provided that it credits the account as
of a date within that time period.
Sec. 226.13 Billing Error Resolution.
1. Creditor's failure to comply with billing error provisions.
Failure to comply with the error resolution procedures may result in
the forfeiture of disputed amounts as prescribed in section 161(e) of
the act. (Any failure to comply may also be a violation subject to the
liability provisions of section 130 of the act.)
2. Charges for error resolution. If a billing error occurred,
whether as alleged or in a different amount or manner, the creditor may
not impose a charge related to any aspect of the error resolution
process (including charges for documentation or investigation) and must
credit the consumer's account if such a charge was assessed pending
resolution. Since the act grants the consumer error resolution rights,
the creditor should avoid any chilling effect
[[Page 54304]]
on the good faith assertion of errors that might result if charges are
assessed when no billing error has occurred.
13(a) Definition of billing error.
Paragraph 13(a)(1).
1. Actual, implied, or apparent authority. Whether use of a credit
card or open-end credit plan is authorized is determined by State or
other applicable law. (See comment 12(b)(1)(ii)-1.)
Paragraph 13(a)(3).
1. Coverage. i. Section 226.13(a)(3) covers disputes about goods or
services that are ``not accepted'' or ``not delivered * * * as
agreed''; for example:
A. The appearance on a periodic statement of a purchase, when the
consumer refused to take delivery of goods because they did not comply
with the contract.
B. Delivery of property or services different from that agreed
upon.
C. Delivery of the wrong quantity.
D. Late delivery.
E. Delivery to the wrong location.
ii. Section 226.13(a)(3) does not apply to a dispute relating to
the quality of property or services that the consumer accepts. Whether
acceptance occurred is determined by State or other applicable law.
2. Application to purchases made using a third-party payment
intermediary. Section 226.13(a)(3) generally applies to disputes about
goods and services that are purchased using a third-party payment
intermediary, such as a person-to-person Internet payment service,
funded through use of a consumer's open-end credit plan when the goods
or services are not accepted by the consumer or not delivered to the
consumer as agreed. However, the extension of credit must be made at
the time the consumer purchases the good or service and match the
amount of the transaction to purchase the good or service (including
ancillary taxes and fees). Under these circumstances, the property or
service for which the extension of credit is made is not the payment
service, but rather the good or service that the consumer has purchased
using the payment service. Thus, for example, Sec. 226.13(a)(3) would
not apply to purchases using a third party payment intermediary that is
funded through use of an open-end credit plan if:
i. The extension of credit is made to fund the third-party payment
intermediary ``account,'' but the consumer does not contemporaneously
use those funds to purchase a good or service at that time.
ii. The extension of credit is made to fund only a portion of the
purchase amount, and the consumer uses other sources to fund the
remaining amount.
3. Notice to merchant not required. A consumer is not required to
first notify the merchant or other payee from whom he or she has
purchased goods or services and attempt to resolve a dispute regarding
the good or service before providing a billing-error notice to the
creditor under Sec. 226.13(a)(3) asserting that the goods or services
were not accepted or delivered as agreed.
Paragraph 13(a)(5).
1. Computational errors. In periodic statements that are combined
with other information, the error resolution procedures are triggered
only if the consumer asserts a computational billing error in the
credit-related portion of the periodic statement. For example, if a
bank combines a periodic statement reflecting the consumer's credit
card transactions with the consumer's monthly checking statement, a
computational error in the checking account portion of the combined
statement is not a billing error.
Paragraph 13(a)(6).
1. Documentation requests. A request for documentation such as
receipts or sales slips, unaccompanied by an allegation of an error
under Sec. 226.13(a) or a request for additional clarification under
Sec. 226.13(a)(6), does not trigger the error resolution procedures.
For example, a request for documentation merely for purposes such as
tax preparation or recordkeeping does not trigger the error resolution
procedures.
13(b) Billing error notice.
1. Withdrawal of billing error notice by consumer. The creditor
need not comply with the requirements of Sec. 226.13(c) through (g) of
this section if the consumer concludes that no billing error occurred
and voluntarily withdraws the billing error notice. The consumer's
withdrawal of a billing error notice may be oral, electronic or
written.
2. Form of written notice. The creditor may require that the
written notice not be made on the payment medium or other material
accompanying the periodic statement if the creditor so stipulates in
the billing rights statement required by Sec. Sec. 226.6(a)(5) or
(b)(5)(iii), and 226.9(a). In addition, if the creditor stipulates in
the billing rights statement that it accepts billing error notices
submitted electronically, and states the means by which a consumer may
electronically submit a billing error notice, a notice sent in such
manner will be deemed to satisfy the written notice requirement for
purposes of Sec. 226.13(b).
Paragraph 13(b)(1).
1. Failure to send periodic statement--timing. If the creditor has
failed to send a periodic statement, the 60-day period runs from the
time the statement should have been sent. Once the statement is
provided, the consumer has another 60 days to assert any billing errors
reflected on it.
2. Failure to reflect credit--timing. If the periodic statement
fails to reflect a credit to the account, the 60-day period runs from
transmittal of the statement on which the credit should have appeared.
3. Transmittal. If a consumer has arranged for periodic statements
to be held at the financial institution until called for, the statement
is ``transmitted'' when it is first made available to the consumer.
Paragraph 13(b)(2).
1. Identity of the consumer. The billing error notice need not
specify both the name and the account number if the information
supplied enables the creditor to identify the consumer's name and
account.
13(c) Time for resolution; general procedures.
1. Temporary or provisional corrections. A creditor may temporarily
correct the consumer's account in response to a billing error notice,
but is not excused from complying with the remaining error resolution
procedures within the time limits for resolution.
2. Correction without investigation. A creditor may correct a
billing error in the manner and amount asserted by the consumer without
the investigation or the determination normally required. The creditor
must comply, however, with all other applicable provisions. If a
creditor follows this procedure, no presumption is created that a
billing error occurred.
3. Relationship with Sec. 226.12. The consumer's rights under the
billing error provisions in Sec. 226.13 are independent of the
provisions set forth in Sec. 226.12(b) and (c). (See comments 12(b)-4,
12(b)(3)-3, and 12(c)-1.)
Paragraph 13(c)(2).
1. Time for resolution. The phrase two complete billing cycles
means two actual billing cycles occurring after receipt of the billing
error notice, not a measure of time equal to two billing cycles. For
example, if a creditor on a monthly billing cycle receives a billing
error notice mid-cycle, it has the remainder of that cycle plus the
next two full billing cycles to resolve the error.
2. Finality of error resolution procedure. A creditor must comply
with the error resolution procedures and complete its investigation to
determine whether an error occurred within two complete billing cycles
as set forth in paragraph (c)(2) of this section. Thus,
[[Page 54305]]
for example, the creditor would be prohibited from reversing amounts
previously credited for an alleged billing error even if the creditor
obtains evidence after the error resolution time period has passed
indicating that the billing error did not occur as asserted by the
consumer. Similarly, if a creditor fails to mail or deliver a written
explanation setting forth the reason why the billing error did not
occur as asserted, or otherwise fails to comply with the error
resolution procedures set forth in Sec. 226.13(f), the creditor
generally must credit the disputed amount and related finance or other
charges, as applicable, to the consumer's account.
13(d) Rules pending resolution.
1. Disputed amount. Disputed amount is the dollar amount alleged by
the consumer to be in error. When the allegation concerns the
description or identification of the transaction (such as the date or
the seller's name) rather than a dollar amount, the disputed amount is
the amount of the transaction or charge that corresponds to the
disputed transaction identification. If the consumer alleges a failure
to send a periodic statement under Sec. 226.13(a)(7), the disputed
amount is the entire balance owing.
13(d)(1) Consumer's right to withhold disputed amount; collection
action prohibited.
1. Prohibited collection actions. During the error resolution
period, the creditor is prohibited from trying to collect the disputed
amount from the consumer. Prohibited collection actions include, for
example, instituting court action, taking a lien, or instituting
attachment proceedings.
2. Right to withhold payment. If the creditor reflects any disputed
amount or related finance or other charges on the periodic statement,
and is therefore required to make the disclosure under Sec.
226.13(d)(4), the creditor may comply with that disclosure requirement
by indicating that payment of any disputed amount is not required
pending resolution. Making a disclosure that only refers to the
disputed amount would, of course, in no way affect the consumer's right
under Sec. 226.13(d)(1) to withhold related finance and other charges.
The disclosure under Sec. 226.13(d)(4) need not appear in any specific
place on the periodic statement, need not state the specific amount
that the consumer may withhold, and may be preprinted on the periodic
statement.
3. Imposition of additional charges on undisputed amounts. The
consumer's withholding of a disputed amount from the total bill cannot
subject undisputed balances (including new purchases or cash advances
made during the present or subsequent cycles) to the imposition of
finance or other charges. For example, if on an account with a grace
period (that is, an account in which paying the new balance in full
allows the consumer to avoid the imposition of additional finance
charges), a consumer disputes a $2 item out of a total bill of $300 and
pays $298 within the grace period, the consumer would not lose the
grace period as to any undisputed amounts, even if the creditor
determines later that no billing error occurred. Furthermore, finance
or other charges may not be imposed on any new purchases or advances
that, absent the unpaid disputed balance, would not have finance or
other charges imposed on them. Finance or other charges that would have
been incurred even if the consumer had paid the disputed amount would
not be affected.
4. Automatic payment plans--coverage. The coverage of this
provision is limited to the card issuer's automatic payment plans,
whether or not the consumer's asset account is held by the card issuer
or by another financial institution. It does not apply to automatic or
bill-payment plans offered by financial institutions other than the
credit card issuer.
5. Automatic payment plans--time of notice. While the card issuer
does not have to restore or prevent the debiting of a disputed amount
if the billing error notice arrives after the three business-day cut-
off, the card issuer must, however, prevent the automatic debit of any
part of the disputed amount that is still outstanding and unresolved at
the time of the next scheduled debit date.
13(d)(2) Adverse credit reports prohibited.
1. Report of dispute. Although the creditor must not issue an
adverse credit report because the consumer fails to pay the disputed
amount or any related charges, the creditor may report that the amount
or the account is in dispute. Also, the creditor may report the account
as delinquent if undisputed amounts remain unpaid.
2. Person. During the error resolution period, the creditor is
prohibited from making an adverse credit report about the disputed
amount to any person--including employers, insurance companies, other
creditors, and credit bureaus.
3. Creditor's agent. Whether an agency relationship exists between
a creditor and an issuer of an adverse credit report is determined by
State or other applicable law.
13(e) Procedures if billing error occurred as asserted.
1. Correction of error. The phrase as applicable means that the
necessary corrections vary with the type of billing error that
occurred. For example, a misidentified transaction (or a transaction
that is identified by one of the alternative methods in Sec. 226.8) is
cured by properly identifying the transaction and crediting related
finance and any other charges imposed. The creditor is not required to
cancel the amount of the underlying obligation incurred by the
consumer.
2. Form of correction notice. The written correction notice may
take a variety of forms. It may be sent separately, or it may be
included on or with a periodic statement that is mailed within the time
for resolution. If the periodic statement is used, the amount of the
billing error must be specifically identified. If a separate billing
error correction notice is provided, the accompanying or subsequent
periodic statement reflecting the corrected amount may simply identify
it as credit.
3. Discovery of information after investigation period. See comment
13(c)(2)-2.
13(f) Procedures if different billing error or no billing error
occurred.
1. Different billing error. Examples of a different billing error
include:
i. Differences in the amount of an error (for example, the customer
asserts a $55.00 error but the error was only $53.00).
ii. Differences in other particulars asserted by the consumer (such
as when a consumer asserts that a particular transaction never
occurred, but the creditor determines that only the seller's name was
disclosed incorrectly).
2. Form of creditor's explanation. The written explanation (which
also may notify the consumer of corrections to the account) may take a
variety of forms. It may be sent separately, or it may be included on
or with a periodic statement that is mailed within the time for
resolution. If the creditor uses the periodic statement for the
explanation and correction(s), the corrections must be specifically
identified. If a separate explanation, including the correction notice,
is provided, the enclosed or subsequent periodic statement reflecting
the corrected amount may simply identify it as a credit. The
explanation may be combined with the creditor's notice to the consumer
of amounts still owing, which is required under Sec. 226.13(g)(1),
provided it is sent within the time limit for resolution. (See
commentary to Sec. 226.13(e).)
3. Reasonable investigation. A creditor must conduct a reasonable
investigation before it determines that no billing error occurred or
that a
[[Page 54306]]
different billing error occurred from that asserted. In conducting its
investigation of an allegation of a billing error, the creditor may
reasonably request the consumer's cooperation. The creditor may not
automatically deny a claim based solely on the consumer's failure or
refusal to comply with a particular request, including providing an
affidavit or filing a police report. However, if the creditor otherwise
has no knowledge of facts confirming the billing error, the lack of
information resulting from the consumer's failure or refusal to comply
with a particular request may lead the creditor reasonably to terminate
the investigation. The procedures involved in investigating alleged
billing errors may differ depending on the billing error type.
i. Unauthorized transaction. In conducting an investigation of a
notice of billing error alleging an unauthorized transaction under
Sec. 226.13(a)(1), actions such as the following represent steps that
a creditor may take, as appropriate, in conducting a reasonable
investigation:
A. Reviewing the types or amounts of purchases made in relation to
the consumer's previous purchasing pattern.
B. Reviewing where the purchases were delivered in relation to the
consumer's residence or place of business.
C. Reviewing where the purchases were made in relation to where the
consumer resides or has normally shopped.
D. Comparing any signature on credit slips for the purchases to the
signature of the consumer (or an authorized user in the case of a
credit card account) in the creditor's records, including other credit
slips.
E. Requesting documentation to assist in the verification of the
claim.
F. Requesting a written, signed statement from the consumer (or
authorized user, in the case of a credit card account). For example,
the creditor may include a signature line on a billing rights form that
the consumer may send in to provide notice of the claim. However, a
creditor may not require the consumer to provide an affidavit or signed
statement under penalty of perjury as a part of a reasonable
investigation.
G. Requesting a copy of a police report, if one was filed.
H. Requesting information regarding the consumer's knowledge of the
person who allegedly obtained an extension of credit on the account or
of that person's authority to do so.
ii. Nondelivery of property or services. In conducting an
investigation of a billing error notice alleging the nondelivery of
property or services under Sec. 226.13(a)(3), the creditor shall not
deny the assertion unless it conducts a reasonable investigation and
determines that the property or services were actually delivered,
mailed, or sent as agreed.
iii. Incorrect information. In conducting an investigation of a
billing error notice alleging that information appearing on a periodic
statement is incorrect because a person honoring the consumer's credit
card or otherwise accepting an access device for an open-end plan has
made an incorrect report to the creditor, the creditor shall not deny
the assertion unless it conducts a reasonable investigation and
determines that the information was correct.
13(g) Creditor's rights and duties after resolution.
Paragraph 13(g)(1).
1. Amounts owed by consumer. Amounts the consumer still owes may
include both minimum periodic payments and related finance and other
charges that accrued during the resolution period. As explained in the
commentary to Sec. 226.13(d)(1), even if the creditor later determines
that no billing error occurred, the creditor may not include finance or
other charges that are imposed on undisputed balances solely as a
result of a consumer's withholding payment of a disputed amount.
2. Time of notice. The creditor need not send the notice of amount
owed within the time period for resolution, although it is under a duty
to send the notice promptly after resolution of the alleged error. If
the creditor combines the notice of the amount owed with the
explanation required under Sec. 226.13(f)(1), the combined notice must
be provided within the time limit for resolution.
Paragraph 13(g)(2).
1. Grace period if no error occurred. If the creditor determines,
after a reasonable investigation, that a billing error did not occur as
asserted, and the consumer was entitled to a grace period at the time
the consumer provided the billing error notice, the consumer must be
given a period of time equal to the grace period disclosed under Sec.
226.6(a)(1) or (b)(2) and Sec. 226.7(a)(8) or (b)(8) to pay any
disputed amounts due without incurring additional finance or other
charges. However, the creditor need not allow a grace period disclosed
under the above-mentioned sections to pay the amount due under Sec.
226.13(g)(1) if no error occurred and the consumer was not entitled to
a grace period at the time the consumer asserted the error. For
example, assume that a creditor provides a consumer a grace period of
20 days to pay a new balance to avoid finance charges, and that the
consumer did not carry an outstanding balance from the prior month. If
the consumer subsequently asserts a billing error for the current
statement period within the 20-day grace period, and the creditor
determines that no billing error in fact occurred, the consumer must be
given at least 20 days (i.e., the full disclosed grace period) to pay
the amount due without incurring additional finance charges.
Conversely, if the consumer was not entitled to a grace period at the
time the consumer asserted the billing error, for example, if the
consumer did not pay the previous monthly balance of undisputed charges
in full, the creditor may assess finance charges on the disputed
balance for the entire period the item was in dispute.
Paragraph 13(g)(3).
1. Time for payment. The consumer has a minimum of 10 days to pay
(measured from the time the consumer could reasonably be expected to
have received notice of the amount owed) before the creditor may issue
an adverse credit report; if an initially disclosed grace period allows
the consumer a longer time in which to pay, the consumer has the
benefit of that longer period.
Paragraph 13(g)(4).
1. Credit reporting. Under Sec. 226.13(g)(4)(i) and (iii) the
creditor's additional credit reporting responsibilities must be
accomplished promptly. The creditor need not establish costly
procedures to fulfill this requirement. For example, a creditor that
reports to a credit bureau on scheduled updates need not transmit
corrective information by an unscheduled computer or magnetic tape; it
may provide the credit bureau with the correct information by letter or
other commercially reasonable means when using the scheduled update
would not be ``prompt.'' The creditor is not responsible for ensuring
that the credit bureau corrects its information immediately.
2. Adverse report to credit bureau. If a creditor made an adverse
report to a credit bureau that disseminated the information to other
creditors, the creditor fulfills its Sec. 226.13(g)(4)(ii) obligations
by providing the consumer with the name and address of the credit
bureau.
13(i) Relation to Electronic Fund Transfer Act and Regulation E.
1. Coverage. Credit extended directly from a non-overdraft credit
line is governed solely by Regulation Z, even though a combined credit
card/access device is used to obtain the extension.
[[Page 54307]]
2. Incidental credit under agreement. Credit extended incident to
an electronic fund transfer under an agreement between the consumer and
the financial institution is governed by Sec. 226.13(i), which
provides that certain error resolution procedures in both this
regulation and Regulation E apply. Incidental credit that is not
extended under an agreement between the consumer and the financial
institution is governed solely by the error resolution procedures in
Regulation E. For example, credit inadvertently extended incident to an
electronic fund transfer, such as under an overdraft service not
subject to Regulation Z, is governed solely by the Regulation E error
resolution procedures, if the bank and the consumer do not have an
agreement to extend credit when the consumer's account is overdrawn.
3. Application to debit/credit transactions-examples. If a consumer
withdraws money at an automated teller machine and activates an
overdraft credit feature on the checking account:
i. An error asserted with respect to the transaction is subject,
for error resolution purposes, to the applicable Regulation E
provisions (such as timing and notice) for the entire transaction.
ii. The creditor need not provisionally credit the consumer's
account, under Sec. 205.11(c)(2)(i) of Regulation E, for any portion
of the unpaid extension of credit.
iii. The creditor must credit the consumer's account under Sec.
205.11(c) with any finance or other charges incurred as a result of the
alleged error.
iv. The provisions of Sec. Sec. 226.13(d) and (g) apply only to
the credit portion of the transaction.
Sec. 226.14 Determination of Annual Percentage Rate.
14(a) General rule.
1. Tolerance. The tolerance of \1/8\ of 1 percentage point above or
below the annual percentage rate applies to any required disclosure of
the annual percentage rate. The disclosure of the annual percentage
rate is required in Sec. Sec. 226.5a, 226.5b, 226.6, 226.7, 226.9,
226.15, 226.16, 226.26, 226.55, and 226.56.
2. Rounding. The regulation does not require that the annual
percentage rate be calculated to any particular number of decimal
places; rounding is permissible within the \1/8\ of 1 percent
tolerance. For example, an exact annual percentage rate of 14.33333%
may be stated as 14.33% or as 14.3%, or even as 14\1/4\%; but it could
not be stated as 14.2% or 14%, since each varies by more than the
permitted tolerance.
3. Periodic rates. No explicit tolerance exists for any periodic
rate as such; a disclosed periodic rate may vary from precise accuracy
(for example, due to rounding) only to the extent that its annualized
equivalent is within the tolerance permitted by Sec. 226.14(a).
Further, a periodic rate need not be calculated to any particular
number of decimal places.
4. Finance charges. The regulation does not prohibit creditors from
assessing finance charges on balances that include prior, unpaid
finance charges; State or other applicable law may do so, however.
5. Good faith reliance on faulty calculation tools. The regulation
relieves a creditor of liability for an error in the annual percentage
rate or finance charge that resulted from a corresponding error in a
calculation tool used in good faith by the creditor. Whether or not the
creditor's use of the tool was in good faith must be determined on a
case-by-case basis, but the creditor must in any case have taken
reasonable steps to verify the accuracy of the tool, including any
instructions, before using it. Generally, the safe harbor from
liability is available only for errors directly attributable to the
calculation tool itself, including software programs; it is not
intended to absolve a creditor of liability for its own errors, or for
errors arising from improper use of the tool, from incorrect data
entry, or from misapplication of the law.
14(b) Annual percentage rate--in general.
1. Corresponding annual percentage rate computation. For purposes
of Sec. Sec. 226.5a, 226.5b, 226.6, 226.7(a)(4) or (b)(4), 226.9,
226.15, 226.16, 226.26, 226.55, and 226.56, the annual percentage rate
is determined by multiplying the periodic rate by the number of periods
in the year. This computation reflects the fact that, in such
disclosures, the rate (known as the corresponding annual percentage
rate) is prospective and does not involve any particular finance charge
or periodic balance.
14(c) Optional effective annual percentage rate for periodic
statements for creditors offering open-end plans subject to the
requirements of Sec. 226.5b.
1. General rule. The periodic statement may reflect (under Sec.
226.7(a)(7)) the annualized equivalent of the rate actually applied
during a particular cycle; this rate may differ from the corresponding
annual percentage rate because of the inclusion of, for example, fixed,
minimum, or transaction charges. Sections 226.14(c)(1) through (c)(4)
state the computation rules for the effective rate.
2. Charges related to opening, renewing, or continuing an account.
Sections 226.14(c)(2) and (c)(3) exclude from the calculation of the
effective annual percentage rate finance charges that are imposed
during the billing cycle such as a loan fee, points, or similar charge
that relates to opening, renewing, or continuing an account. The
charges involved here do not relate to a specific transaction or to
specific activity on the account, but relate solely to the opening,
renewing, or continuing of the account. For example, an annual fee to
renew an open-end credit account that is a percentage of the credit
limit on the account, or that is charged only to consumers that have
not used their credit card for a certain dollar amount in transactions
during the preceding year, would not be included in the calculation of
the annual percentage rate, even though the fee may not be excluded
from the finance charge under Sec. 226.4(c)(4). (See comment 4(c)(4)-
2.) This rule applies even if the loan fee, points, or similar charges
are billed on a subsequent periodic statement or withheld from the
proceeds of the first advance on the account.
3. Classification of charges. If the finance charge includes a
charge not due to the application of a periodic rate, the creditor must
use the annual percentage rate computation method that corresponds to
the type of charge imposed. If the charge is tied to a specific
transaction (for example, 3 percent of the amount of each transaction),
then the method in Sec. 226.14(c)(3) must be used. If a fixed or
minimum charge is applied, that is, one not tied to any specific
transaction, then the formula in Sec. 226.14(c)(2) is appropriate.
4. Small finance charges. Section 226.14(c)(4) gives the creditor
an alternative to Sec. 226.14(c)(2) and (c)(3) if small finance
charges (50 cents or less) are involved; that is, if the finance charge
includes minimum or fixed fees not due to the application of a periodic
rate and the total finance charge for the cycle does not exceed 50
cents. For example, while a monthly activity fee of 50 cents on a
balance of $20 would produce an annual percentage rate of 30 percent
under the rule in Sec. 226.14(c)(2), the creditor may disclose an
annual percentage rate of 18 percent if the periodic rate generally
applicable to all balances is 1\1/2\ percent per month.
5. Prior-cycle adjustments. i. The annual percentage rate reflects
the finance charges imposed during the billing cycle. However, finance
charges imposed during the billing cycle may
[[Page 54308]]
relate to activity in a prior cycle. Examples of circumstances when
this may occur are:
A. A cash advance occurs on the last day of a billing cycle on an
account that uses the transaction date to figure finance charges, and
it is impracticable to post the transaction until the following cycle.
B. An adjustment to the finance charge is made following the
resolution of a billing error dispute.
C. A consumer fails to pay the purchase balance under a deferred
payment feature by the payment due date, and finance charges are
imposed from the date of purchase.
ii. Finance charges relating to activity in prior cycles should be
reflected on the periodic statement as follows:
A. If a finance charge imposed in the current billing cycle is
attributable to periodic rates applicable to prior billing cycles (such
as when a deferred payment balance was not paid in full by the payment
due date and finance charges from the date of purchase are now being
debited to the account, or when a cash advance occurs on the last day
of a billing cycle on an account that uses the transaction date to
figure finance charges and it is impracticable to post the transaction
until the following cycle), and the creditor uses the quotient method
to calculate the annual percentage rate, the numerator would include
the amount of any transaction charges plus any other finance charges
posted during the billing cycle. At the creditor's option, balances
relating to the finance charge adjustment may be included in the
denominator if permitted by the legal obligation, if it was
impracticable to post the transaction in the previous cycle because of
timing, or if the adjustment is covered by comment 14(c)-5.ii.B.
B. If a finance charge that is posted to the account relates to
activity for which a finance charge was debited or credited to the
account in a previous billing cycle (for example, if the finance charge
relates to an adjustment such as the resolution of a billing error
dispute, or an unintentional posting error, or a payment by check that
was later returned unpaid for insufficient funds or other reasons), the
creditor shall at its option:
1. Calculate the annual percentage rate in accordance with ii.A. of
this paragraph, or
2. Disclose the finance charge adjustment on the periodic statement
and calculate the annual percentage rate for the current billing cycle
without including the finance charge adjustment in the numerator and
balances associated with the finance charge adjustment in the
denominator.
14(c)(1) Solely periodic rates imposed.
1. Periodic rates. Section 226.14(c)(1) applies if the only finance
charge imposed is due to the application of a periodic rate to a
balance. The creditor may compute the annual percentage rate either:
i. By multiplying each periodic rate by the number of periods in
the year; or
ii. By the ``quotient'' method. This method refers to a composite
annual percentage rate when different periodic rates apply to different
balances. For example, a particular plan may involve a periodic rate of
1\1/2\ percent on balances up to $500, and 1 percent on balances over
$500. If, in a given cycle, the consumer has a balance of $800, the
finance charge would consist of $7.50 (500x.015) plus $3.00 (300x.01),
for a total finance charge of $10.50. The annual percentage rate for
this period may be disclosed either as 18% on $500 and 12 percent on
$300, or as 15.75 percent on a balance of $800 (the quotient of $10.50
divided by $800, multiplied by 12).
14(c)(2) Minimum or fixed charge, but not transaction charge,
imposed.
1. Certain charges not based on periodic rates. Section
226.14(c)(2) specifies use of the quotient method to determine the
annual percentage rate if the finance charge imposed includes a certain
charge not due to the application of a periodic rate (other than a
charge relating to a specific transaction). For example, if the
creditor imposes a minimum $1 finance charge on all balances below $50,
and the consumer's balance was $40 in a particular cycle, the creditor
would disclose an annual percentage rate of 30 percent (1/40x12).
2. No balance. If there is no balance to which the finance charge
is applicable, an annual percentage rate cannot be determined under
Sec. 226.14(c)(2). This could occur not only when minimum charges are
imposed on an account with no balance, but also when a periodic rate is
applied to advances from the date of the transaction. For example, if
on May 19 the consumer pays the new balance in full from a statement
dated May 1, and has no further transactions reflected on the June 1
statement, that statement would reflect a finance charge with no
account balance.
14(c)(3) Transaction charge imposed.
1. Transaction charges. i. Section 226.14(c)(3) transaction charges
include, for example:
A. A loan fee of $10 imposed on a particular advance.
B. A charge of 3 percent of the amount of each transaction.
ii. The reference to avoiding duplication in the computation
requires that the amounts of transactions on which transaction charges
were imposed not be included both in the amount of total balances and
in the ``other amounts on which a finance charge was imposed'' figure.
In a multifeatured plan, creditors may consider each bona fide feature
separately in the calculation of the denominator. A creditor has
considerable flexibility in defining features for open-end plans, as
long as the creditor has a reasonable basis for the distinctions. For
further explanation and examples of how to determine the components of
this formula, see appendix F to part 226.
2. Daily rate with specific transaction charge. Section
226.14(c)(3) sets forth an acceptable method for calculating the annual
percentage rate if the finance charge results from a charge relating to
a specific transaction and the application of a daily periodic rate.
This section includes the requirement that the creditor follow the
rules in appendix F to part 226 in calculating the annual percentage
rate, especially the provision in the introductory section of appendix
F which addresses the daily rate/transaction charge situation by
providing that the ``average of daily balances'' shall be used instead
of the ``sum of the balances.''
14(d) Calculations where daily periodic rate applied.
1. Quotient method. Section 226.14(d) addresses use of a daily
periodic rate(s) to determine some or all of the finance charge and use
of the quotient method to determine the annual percentage rate. Since
the quotient formula in Sec. 226.14(c)(1)(ii) and (c)(2) cannot be
used when a daily rate is being applied to a series of daily balances,
Sec. 226.14(d) provides two alternative ways to calculate the annual
percentage rate--either of which satisfies the provisions of Sec.
226.7(a)(7).
2. Daily rate with specific transaction charge. If the finance
charge results from a charge relating to a specific transaction and the
application of a daily periodic rate, see comment 14(c)(3)-2 for
guidance on an appropriate calculation method.
* * * * *
Sec. 226.16 Advertising.
1. Clear and conspicuous standard--general. Section 226.16 is
subject to the general ``clear and conspicuous'' standard for subpart B
(see Sec. 226.5(a)(1)) but prescribes no specific rules for the format
of the necessary disclosures, other than the format requirements
related to the disclosure of a
[[Page 54309]]
promotional rate or payment under Sec. 226.16(d)(6), a promotional
rate under Sec. 226.16(g), or a deferred interest or similar offer
under Sec. 226.16(h). Other than the disclosure of certain terms
described in Sec. Sec. 226.16(d)(6), (g), or (h), the credit terms
need not be printed in a certain type size nor need they appear in any
particular place in the advertisement.
2. Clear and conspicuous standard--promotional rates or payments;
deferred interest or similar offers.
i. For purposes of Sec. 226.16(d)(6), a clear and conspicuous
disclosure means that the required information in Sec.
226.16(d)(6)(ii)(A)-(C) is disclosed with equal prominence and in close
proximity to the promotional rate or payment to which it applies. If
the information in Sec. 226.16(d)(6)(ii)(A)-(C) is the same type size
and is located immediately next to or directly above or below the
promotional rate or payment to which it applies, without any
intervening text or graphical displays, the disclosures would be deemed
to be equally prominent and in close proximity. Notwithstanding the
above, for electronic advertisements that disclose promotional rates or
payments, compliance with the requirements of Sec. 226.16(c) is deemed
to satisfy the clear and conspicuous standard.
ii. For purposes of Sec. 226.16(g)(4) as it applies to written or
electronic advertisements only, a clear and conspicuous disclosure
means the required information in Sec. 226.16(g)(4)(i) and (g)(4)(ii)
must be equally prominent to the promotional rate to which it applies.
If the information in Sec. 226.16(g)(4)(i) and (g)(4)(ii) is the same
type size as the promotional rate to which it applies, the disclosures
would be deemed to be equally prominent. For purposes of Sec.
226.16(h)(3) as it applies to written or electronic advertisements
only, a clear and conspicuous disclosure means the required information
in Sec. 226.16(h)(3) must be equally prominent to each statement of
``no interest,'' ``no payments,'' ``deferred interest,'' ``same as
cash,'' or similar term regarding interest or payments during the
deferred interest period. If the information required to be disclosed
under Sec. 226.16(h)(3) is the same type size as the statement of ``no
interest,'' ``no payments,'' ``deferred interest,'' ``same as cash,''
or similar term regarding interest or payments during the deferred
interest period, the disclosure would be deemed to be equally
prominent.
3. Clear and conspicuous standard--Internet advertisements for
home-equity plans. For purposes of this section, a clear and
conspicuous disclosure for visual text advertisements on the Internet
for home-equity plans subject to the requirements of Sec. 226.5b means
that the required disclosures are not obscured by techniques such as
graphical displays, shading, coloration, or other devices and comply
with all other requirements for clear and conspicuous disclosures under
Sec. 226.16(d). (See also comment 16(c)(1)-2.)
4. Clear and conspicuous standard--televised advertisements for
home-equity plans. For purposes of this section, including alternative
disclosures as provided for by Sec. 226.16(e), a clear and conspicuous
disclosure in the context of visual text advertisements on television
for home-equity plans subject to the requirements of Sec. 226.5b means
that the required disclosures are not obscured by techniques such as
graphical displays, shading, coloration, or other devices, are
displayed in a manner that allows for a consumer to read the
information required to be disclosed, and comply with all other
requirements for clear and conspicuous disclosures under Sec.
226.16(d). For example, very fine print in a television advertisement
would not meet the clear and conspicuous standard if consumers cannot
see and read the information required to be disclosed.
5. Clear and conspicuous standard--oral advertisements for home-
equity plans. For purposes of this section, including alternative
disclosures as provided for by Sec. 226.16(e), a clear and conspicuous
disclosure in the context of an oral advertisement for home-equity
plans subject to the requirements of Sec. 226.5b, whether by radio,
television, the Internet, or other medium, means that the required
disclosures are given at a speed and volume sufficient for a consumer
to hear and comprehend them. For example, information stated very
rapidly at a low volume in a radio or television advertisement would
not meet the clear and conspicuous standard if consumers cannot hear
and comprehend the information required to be disclosed.
6. Expressing the annual percentage rate in abbreviated form.
Whenever the annual percentage rate is used in an advertisement for
open-end credit, it may be expressed using a readily understandable
abbreviation such as APR.
7. Effective date. For guidance on the applicability of the Board's
revisions to Sec. 226.16 published on July 30, 2008, see comment
1(d)(5)-1.
16(a) Actually available terms.
1. General rule. To the extent that an advertisement mentions
specific credit terms, it may state only those terms that the creditor
is actually prepared to offer. For example, a creditor may not
advertise a very low annual percentage rate that will not in fact be
available at any time. Section 226.16(a) is not intended to inhibit the
promotion of new credit programs, but to bar the advertising of terms
that are not and will not be available. For example, a creditor may
advertise terms that will be offered for only a limited period, or
terms that will become available at a future date.
2. Specific credit terms. Specific credit terms is not limited to
the disclosures required by the regulation but would include any
specific components of a credit plan, such as the minimum periodic
payment amount or seller's points in a plan secured by real estate.
16(b) Advertisement of terms that require additional disclosures.
Paragraph (b)(1).
1. Triggering terms. Negative as well as affirmative references
trigger the requirement for additional information. For example, if a
creditor states no interest or no annual membership fee in an
advertisement, additional information must be provided. Other examples
of terms that trigger additional disclosures are:
i. Small monthly service charge on the remaining balance, which
describes how the amount of a finance charge will be determined.
ii. 12 percent Annual Percentage Rate or A $15 annual membership
fee buys you $2,000 in credit, which describe required disclosures
under Sec. 226.6.
2. Implicit terms. Section 226.16(b) applies even if the triggering
term is not stated explicitly, but may be readily determined from the
advertisement.
3. Membership fees. A membership fee is not a triggering term nor
need it be disclosed under Sec. 226.16(b)(3) if it is required for
participation in the plan whether or not an open-end credit feature is
attached. (See comment 6(a)(2)-1 and Sec. 226.6(b)(3)(iii)(B).)
4. Deferred billing and deferred payment programs. Statements such
as ``Charge it--you won't be billed until May'' or ``You may skip your
January payment'' are not in themselves triggering terms, since the
timing for initial billing or for monthly payments are not terms
required to be disclosed under Sec. 226.6. However, a statement such
as ``No interest charges until May'' or any other statement regarding
when interest or finance charges begin to accrue is a triggering term,
whether appearing alone or in conjunction with a description of a
deferred billing or
[[Page 54310]]
deferred payment program such as the examples above.
5. Variable-rate plans. In disclosing the annual percentage rate in
an advertisement for a variable-rate plan, as required by Sec.
226.16(b)(1)(ii), the creditor may use an insert showing the current
rate; or may give the rate as of a specified recent date. The
additional requirement in Sec. 226.16(b)(1)(ii) to disclose the
variable-rate feature may be satisfied by disclosing that the annual
percentage rate may vary or a similar statement, but the advertisement
need not include the information required by Sec. 226.6(a)(1)(ii) or
(b)(4)(ii).
6. Membership fees for open-end (not home-secured) plans. For
purposes of Sec. 226.16(b)(1)(iii), membership fees that may be
imposed on open-end (not home-secured) plans shall have the same
meaning as in Sec. 226.5a(b)(2).
Paragraph (b)(2).
1. Assumptions. In stating the total of payments and the time
period to repay the obligation, assuming that the consumer pays only
the periodic payment amounts advertised, as required under Sec.
226.16(b)(2), the following additional assumptions may be made:
i. Payments are made timely so as not to be considered late by the
creditor;
ii. Payments are made each period, and no debt cancellation or
suspension agreement, or skip payment feature applies to the account;
iii. No interest rate changes will affect the account;
iv. No other balances are currently carried or will be carried on
the account;
v. No taxes or ancillary charges are or will be added to the
obligation;
vi. Goods or services are delivered on a single date; and
vii. The consumer is not currently and will not become delinquent
on the account.
2. Positive periodic payment amounts. Only positive periodic
payment amounts trigger the additional disclosures under Sec.
226.16(b)(2). Therefore, if the periodic payment amount advertised is
not a positive amount (e.g., ``No payments''), the advertisement need
not state the total of payments and the time period to repay the
obligation.
16(c) Catalogs or other multiple-page advertisements; electronic
advertisements.
1. Definition. The multiple-page advertisements to which Sec.
226.16(c) refers are advertisements consisting of a series of
sequentially numbered pages--for example, a supplement to a newspaper.
A mailing consisting of several separate flyers or pieces of
promotional material in a single envelope does not constitute a single
multiple-page advertisement for purposes of Sec. 226.16(c).
Paragraph 16(c)(1).
1. General. Section 226.16(c)(1) permits creditors to put credit
information together in one place in a catalog or other multiple-page
advertisement or an electronic advertisement (such as an advertisement
appearing on an Internet Web site). The rule applies only if the
advertisement contains one or more of the triggering terms from Sec.
226.16(b).
2. Electronic advertisement. If an electronic advertisement (such
as an advertisement appearing on an Internet Web site) contains the
table or schedule permitted under Sec. 226.16(c)(1), any statement of
terms set forth in Sec. 226.6 appearing anywhere else in the
advertisement must clearly direct the consumer to the location where
the table or schedule begins. For example, a term triggering additional
disclosures may be accompanied by a link that directly takes the
consumer to the additional information.
Paragraph 16(c)(2).
1. Table or schedule if credit terms depend on outstanding balance.
If the credit terms of a plan vary depending on the amount of the
balance outstanding, rather than the amount of any property purchased,
a table or schedule complies with Sec. 226.16(c)(2) if it includes the
required disclosures for representative balances. For example, a
creditor would disclose that a periodic rate of 1.5% is applied to
balances of $500 or less, and a 1% rate is applied to balances greater
than $500.
16(d) Additional requirements for home-equity plans.
1. Trigger terms. Negative as well as affirmative references
trigger the requirement for additional information. For example, if a
creditor states no annual fee, no points, or we waive closing costs in
an advertisement, additional information must be provided. (See comment
16(d)-4 regarding the use of a phrase such as no closing costs.)
Inclusion of a statement such as low fees, however, would not trigger
the need to state additional information. References to payment terms
include references to the draw period or any repayment period, to the
length of the plan, to how the minimum payments are determined and to
the timing of such payments.
2. Fees to open the plan. Section 226.16(d)(1)(i) requires a
disclosure of any fees imposed by the creditor or a third party to open
the plan. In providing the fee information required under this
paragraph, the corresponding rules for disclosure of this information
apply. For example, fees to open the plan may be stated as a range.
Similarly, if property insurance is required to open the plan, a
creditor either may estimate the cost of the insurance or provide a
statement that such insurance is required. (See the commentary to Sec.
226.5b(d)(7) and (d)(8).)
3. Statements of tax deductibility. An advertisement that refers to
deductibility for tax purposes is not misleading if it includes a
statement such as ``consult a tax advisor regarding the deductibility
of interest.'' An advertisement distributed in paper form or through
the Internet (rather than by radio or television) that states that the
advertised extension of credit may exceed the fair market value of the
consumer's dwelling is not misleading if it clearly and conspicuously
states the required information in Sec. Sec. 226.16(d)(4)(i) and
(d)(4)(ii).
4. Misleading terms prohibited. Under Sec. 226.16(d)(5),
advertisements may not refer to home-equity plans as free money or use
other misleading terms. For example, an advertisement could not state
``no closing costs'' or ``we waive closing costs'' if consumers may be
required to pay any closing costs, such as recordation fees. In the
case of property insurance, however, a creditor may state, for example,
``no closing costs'' even if property insurance may be required, as
long as the creditor also provides a statement that such insurance may
be required. (See the commentary to this section regarding fees to open
a plan.)
5. Promotional rates and payments in advertisements for home-equity
plans. Section 226.16(d)(6) requires additional disclosures for
promotional rates or payments.
i. Variable-rate plans. In advertisements for variable-rate plans,
if the advertised annual percentage rate is based on (or the advertised
payment is derived from) the index and margin that will be used to make
rate (or payment) adjustments over the term of the loan, then there is
no promotional rate or promotional payment. If, however, the advertised
annual percentage rate is not based on (or the advertised payment is
not derived from) the index and margin that will be used to make rate
(or payment) adjustments, and a reasonably current application of the
index and margin would result in a higher annual percentage rate (or,
given an assumed balance, a higher payment) then there is a promotional
rate or promotional payment.
ii. Equal prominence, close proximity. Information required to be
disclosed in Sec. 226.16(d)(6)(ii) that is immediately
[[Page 54311]]
next to or directly above or below the promotional rate or payment (but
not in a footnote) is deemed to be closely proximate to the listing.
Information required to be disclosed in Sec. 226.16(d)(6)(ii) that is
in the same type size as the promotional rate or payment is deemed to
be equally prominent.
iii. Amounts and time periods of payments. Section
226.16(d)(6)(ii)(C) requires disclosure of the amount and time periods
of any payments that will apply under the plan. This section may
require disclosure of several payment amounts, including any balloon
payment. For example, if an advertisement for a home-equity plan offers
a $100,000 five-year line of credit and assumes that the entire line is
drawn resulting in a minimum payment of $800 per month for the first
six months, increasing to $1,000 per month after month six, followed by
a $50,000 balloon payment after five years, the advertisement must
disclose the amount and time period of each of the two monthly payment
streams, as well as the amount and timing of the balloon payment, with
equal prominence and in close proximity to the promotional payment.
However, if the final payment could not be more than twice the amount
of other minimum payments, the final payment need not be disclosed.
iv. Plans other than variable-rate plans. For a plan other than a
variable-rate plan, if an advertised payment is calculated in the same
way as other payments based on an assumed balance, the fact that the
minimum payment could increase solely if the consumer made an
additional draw does not make the payment a promotional payment. For
example, if a payment of $500 results from an assumed $10,000 draw, and
the payment would increase to $1,000 if the consumer made an additional
$10,000 draw, the payment is not a promotional payment.
v. Conversion option. Some home-equity plans permit the consumer to
repay all or part of the balance during the draw period at a fixed rate
(rather than a variable rate) and over a specified time period. The
fixed-rate conversion option does not, by itself, make the rate or
payment that would apply if the consumer exercised the fixed-rate
conversion option a promotional rate or payment.
vi. Preferred-rate provisions. Some home-equity plans contain a
preferred-rate provision, where the rate will increase upon the
occurrence of some event, such as the consumer-employee leaving the
creditor's employ, the consumer closing an existing deposit account
with the creditor, or the consumer revoking an election to make
automated payments. A preferred-rate provision does not, by itself,
make the rate or payment under the preferred-rate provision a
promotional rate or payment.
6. Reasonably current index and margin. For the purposes of this
section, an index and margin is considered reasonably current if:
i. For direct mail advertisements, it was in effect within 60 days
before mailing;
ii. For advertisements in electronic form it was in effect within
30 days before the advertisement is sent to a consumer's e-mail
address, or in the case of an advertisement made on an Internet Web
site, when viewed by the public; or
iii. For printed advertisements made available to the general
public, including ones contained in a catalog, magazine, or other
generally available publication, it was in effect within 30 days before
printing.
7. Relation to other sections. Advertisements for home-equity plans
must comply with all provisions in Sec. 226.16, not solely the rules
in Sec. 226.16(d). If an advertisement contains information (such as
the payment terms) that triggers the duty under Sec. 226.16(d) to
state the annual percentage rate, the additional disclosures in Sec.
226.16(b) must be provided in the advertisement. While Sec. 226.16(d)
does not require a statement of fees to use or maintain the plan (such
as membership fees and transaction charges), such fees must be
disclosed under Sec. 226.16(b)(1)(i) and (b)(1)(iii).
8. Inapplicability of closed-end rules. Advertisements for home-
equity plans are governed solely by the requirements in Sec. 226.16,
except Sec. 226.16(g), and not by the closed-end advertising rules in
Sec. 226.24. Thus, if a creditor states payment information about the
repayment phase, this will trigger the duty to provide additional
information under Sec. 226.16, but not under Sec. 226.24.
9. Balloon payment. See comment 5b(d)(5)(ii)-3 for information not
required to be stated in advertisements, and on situations in which the
balloon payment requirement does not apply.
16(e) Alternative disclosures--television or radio advertisements.
1. Multi-purpose telephone number. When an advertised telephone
number provides a recording, disclosures must be provided early in the
sequence to ensure that the consumer receives the required disclosures.
For example, in providing several options--such as providing directions
to the advertiser's place of business--the option allowing the consumer
to request disclosures should be provided early in the telephone
message to ensure that the option to request disclosures is not
obscured by other information.
2. Statement accompanying toll free number. Language must accompany
a telephone number indicating that disclosures are available by calling
the telephone number, such as ``call 1-800-000-0000 for details about
credit costs and terms.''
16(g) Promotional rates.
1. Rate in effect at the end of the promotional period. If the
annual percentage rate that will be in effect at the end of the
promotional period (i.e., the post-promotional rate) is a variable
rate, the post-promotional rate for purposes of Sec. 226.16(g)(2)(i)
is the rate that would have applied at the time the promotional rate
was advertised if the promotional rate was not offered, consistent with
the accuracy requirements in Sec. 226.5a(c)(2) and (e)(4), as
applicable.
2. Immediate proximity. For written or electronic advertisements,
including the term ``introductory'' or ``intro'' in the same phrase as
the listing of the introductory rate is deemed to be in immediate
proximity of the listing.
3. Prominent location closely proximate. For written or electronic
advertisements, information required to be disclosed in Sec.
226.16(g)(4)(i) and (g)(4)(ii) that is in the same paragraph as the
first listing of the promotional rate is deemed to be in a prominent
location closely proximate to the listing. Information disclosed in a
footnote will not be considered in a prominent location closely
proximate to the listing.
4. First listing. For purposes of Sec. 226.16(g)(4) as it applies
to written or electronic advertisements, the first listing of the
promotional rate is the most prominent listing of the rate on the front
side of the first page of the principal promotional document. The
principal promotional document is the document designed to be seen
first by the consumer in a mailing, such as a cover letter or
solicitation letter. If the promotional rate does not appear on the
front side of the first page of the principal promotional document,
then the first listing of the promotional rate is the most prominent
listing of the rate on the subsequent pages of the principal
promotional document. If the promotional rate is not listed on the
principal promotional document or there is no principal promotional
document, the first listing is the most prominent listing of the rate
on the front side of the first page of each document listing the
promotional rate. If the promotional rate does not appear on the front
side of the first page of a document, then the first listing of the
[[Page 54312]]
promotional rate is the most prominent listing of the rate on the
subsequent pages of the document. If the listing of the promotional
rate with the largest type size on the front side of the first page (or
subsequent pages if the promotional rate is not listed on the front
side of the first page) of the principal promotional document (or each
document listing the promotional rate if the promotional rate is not
listed on the principal promotional document or there is no principal
promotional document,) is used as the most prominent listing, it will
be deemed to be the first listing. Consistent with comment 16(c)-1, a
catalog or multiple-page advertisement is considered one document for
purposes of Sec. 226.16(g)(4).
5. Post-promotional rate depends on consumer's creditworthiness.
For purposes of disclosing the rate that may apply after the end of the
promotional rate period, at the advertiser's option, the advertisement
may disclose the rates that may apply as either specific rates, or a
range of rates. For example, if there are three rates that may apply
(9.99%, 12.99% or 17.99%), an issuer may disclose these three rates as
specific rates (9.99%, 12.99% or 17.99%) or as a range of rates (9.99%-
17.99%).
16(h) Deferred interest or similar offers.
1. Deferred interest or similar offers clarified. Deferred interest
or similar offers do not include offers that allow a consumer to skip
payments during a specified period of time, and under which the
consumer is not obligated under any circumstances for any interest or
other finance charges that could be attributable to that period.
Deferred interest or similar offers also do not include 0% annual
percentage rate offers where a consumer is not obligated under any
circumstances for interest attributable to the time period the 0%
annual percentage rate was in effect, though such offers may be
considered promotional rates under Sec. 226.16(g)(2)(i). Deferred
interest or similar offers also do not include skip payment programs
that have no required minimum payment for one or more billing cycles
but where interest continues to accrue and is imposed during that
period.
2. Deferred interest period clarified. Although the terms of an
advertised deferred interest or similar offer may provide that a
creditor may charge the accrued interest if the balance is not paid in
full by a certain date, creditors sometimes have an informal policy or
practice that delays charging the accrued interest for payment received
a brief period of time after the date upon which a creditor has the
contractual right to charge the accrued interest. The advertisement
need not include the end of an informal ``courtesy period'' in
disclosing the deferred interest period under Sec. 226.16(h)(3).
3. Immediate proximity. For written or electronic advertisements,
including the deferred interest period in the same phrase as the
statement of ``no interest,'' ``no payments,'' ``deferred interest,''
or ``same as cash'' or similar term regarding interest or payments
during the deferred interest period is deemed to be in immediate
proximity of the statement.
4. Prominent location closely proximate. For written or electronic
advertisements, information required to be disclosed in Sec.
226.16(h)(4)(i) and (ii) that is in the same paragraph as the first
statement of ``no interest,'' ``no payments,'' ``deferred interest,''
or ``same as cash'' or similar term regarding interest or payments
during the deferred interest period is deemed to be in a prominent
location closely proximate to the statement. Information disclosed in a
footnote is not considered in a prominent location closely proximate to
the statement.
5. First listing. For purposes of Sec. 226.16(h)(4) as it applies
to written or electronic advertisements, the first statement of ``no
interest,'' ``no payments,'' ``deferred interest,'' ``same as cash,''
or similar term regarding interest or payments during the deferred
interest period is the most prominent listing of one of these
statements on the front side of the first page of the principal
promotional document. The principal promotional document is the
document designed to be seen first by the consumer in a mailing, such
as a cover letter or solicitation letter. If one of the statements does
not appear on the front side of the first page of the principal
promotional document, then the first listing of one of these statements
is the most prominent listing of a statement on the subsequent pages of
the principal promotional document. If one of the statements is not
listed on the principal promotional document or there is no principal
promotional document, the first listing of one of these statements is
the most prominent listing of the statement on the front side of the
first page of each document containing one of these statements. If one
of the statements does not appear on the front side of the first page
of a document, then the first listing of one of these statements is the
most prominent listing of a statement on the subsequent pages of the
document. If the listing of one of these statements with the largest
type size on the front side of the first page (or subsequent pages if
one of these statements is not listed on the front side of the first
page) of the principal promotional document (or each document listing
one of these statements if a statement is not listed on the principal
promotional document or there is no principal promotional document) is
used as the most prominent listing, it will be deemed to be the first
listing. Consistent with comment 16(c)-1, a catalog or multiple-page
advertisement is considered one document for purposes of Sec.
226.16(h)(4).
6. Additional information. Consistent with comment 5(a)-2, the
information required under Sec. 226.16(h)(4) need not be segregated
from other information regarding the deferred interest or similar
offer. Advertisements may also be required to provide additional
information pursuant to Sec. 226.16(b) though such information need
not be integrated with the information required under Sec.
226.16(h)(4).
7. Examples. Examples of disclosures that could be used to comply
with the requirements of Sec. 226.16(h)(3) include: ``no interest if
paid in full within 6 months'' and ``no interest if paid in full by
December 31, 2010.''
* * * * *
Sec. 226.26 Use of Annual Percentage Rate in Oral Disclosures.
* * * * *
26(a) Open-end credit.
1. Information that may be given. The creditor may state periodic
rates in addition to the required annual percentage rate, but it need
not do so. If the annual percentage rate is unknown because transaction
charges, loan fees, or similar finance charges may be imposed, the
creditor must give the corresponding annual percentage rate (that is,
the periodic rate multiplied by the number of periods in a year, as
described in Sec. Sec. 226.6(a)(1)(ii) and (b)(4)(i)(A) and
226.7(a)(4) and (b)(4)). In such cases, the creditor may, but need not,
also give the consumer information about other finance charges and
other charges.
* * * * *
Sec. 226.27 Language of Disclosures.
1. Subsequent disclosures. If a creditor provides account-opening
disclosures in a language other than English, subsequent disclosures
need not be in that other language. For example, if the creditor gave
Spanish-language account-opening disclosures, periodic statements and
change-in-terms notices may be made in English.
* * * * *
[[Page 54313]]
Sec. 226.28 Effect on State Laws.
28(a) Inconsistent disclosure requirements.
* * * * *
6. Rules for other fair credit billing provisions. The second part
of the criteria for fair credit billing relates to the other rules
implementing chapter 4 of the act (addressed in Sec. Sec. 226.4(c)(8),
226.5(b)(2)(ii), 226.6(a)(5) and (b)(5)(iii), 226.7(a)(9) and (b)(9),
226.9(a), 226.10, 226.11, 226.12(c) through (f), 226.13, and 226.21).
Section 226.28(a)(2)(ii) provides that the test of inconsistency is
whether the creditor can comply with State law without violating
Federal law. For example:
i. A State law that allows the card issuer to offset the consumer's
credit-card indebtedness against funds held by the card issuer would be
preempted, since Sec. 226.12(d) prohibits such action.
ii. A State law that requires periodic statements to be sent more
than 14 days before the end of a free-ride period would not be
preempted.
iii. A State law that permits consumers to assert claims and
defenses against the card issuer without regard to the $50 and 100-mile
limitations of Sec. 226.12(c)(3)(ii) would not be preempted.
iv. In paragraphs ii. and iii. of this comment, compliance with
State law would involve no violation of the Federal law.
* * * * *
Sec. 226.30 Limitation on Rates.
* * * * *
8. Manner of stating the maximum interest rate. The maximum
interest rate must be stated in the credit contract either as a
specific amount or in any other manner that would allow the consumer to
easily ascertain, at the time of entering into the obligation, what the
rate ceiling will be over the term of the obligation.
i. For example, the following statements would be sufficiently
specific:
A. The maximum interest rate will not exceed X%.
B. The interest rate will never be higher than X percentage points
above the initial rate of Y%.
C. The interest rate will not exceed X%, or X percentage points
about [a rate to be determined at some future point in time], whichever
is less.
D. The maximum interest rate will not exceed X%, or the State usury
ceiling, whichever is less.
ii. The following statements would not comply with this section:
A. The interest rate will never be higher than X percentage points
over the prevailing market rate.
B. The interest rate will never be higher than X percentage points
above [a rate to be determined at some future point in time].
C. The interest rate will not exceed the State usury ceiling which
is currently X%.
iii. A creditor may state the maximum rate in terms of a maximum
annual percentage rate that may be imposed. Under an open-end credit
plan, this normally would be the corresponding annual percentage rate.
(See generally Sec. 226.6(a)(1)(ii) and (b)(4)(i)(A).)
* * * * *
Subpart G--Special Rules Applicable to Credit Card Accounts and
Open-End Credit Offered to College Students
Sec. 226.51 Ability to pay.
51(a) General rule.
1. Consideration of additional factors. Section 226.51(a) requires
a card issuer to consider a consumer's ability to make the required
minimum periodic payments under the terms of an account based on the
consumer's income or assets and the consumer's current obligations. The
card issuer may also consider credit reports, credit scores, and other
factors, consistent with Regulation B (12 CFR part 202).
2. Ability to pay as of application or consideration of increase. A
card issuer complies with Sec. 226.51(a) if it bases its determination
regarding a consumer's ability to make the required minimum periodic
payments on the facts and circumstances known to the card issuer at the
time the consumer applies to open the credit card account or when the
card issuer considers increasing the credit line on an existing
account.
3. Credit line increase. When a card issuer considers increasing
the credit line on an existing account, Sec. 226.51(a) applies when
the consideration is based upon a request of the consumer or is
initiated by the card issuer.
4. Income, assets, and employment. Any current or reasonably
expected assets or income may be considered by the card issuer. For
example, a card issuer may use information about current or expected
salary, wages, bonus pay, tips and commissions. Employment may be full-
time, part-time, seasonal, irregular, military, or self-employment.
Other sources of income could include interest or dividends, retirement
benefits, public assistance, alimony, child support, or separate
maintenance payments. A card issuer may also take into account assets
such as savings accounts or investments that the consumer can or will
be able to use.
5. Current obligations. A card issuer may consider the consumer's
current obligations based on information provided by the consumer or in
a consumer report.
51(b) Rules affecting young consumers.
1. Age as of date of application or consideration of credit line
increase. Sections 226.51(b)(1) and (b)(2) apply only to a consumer who
has not attained the age of 21 as of the date of submission of the
application under Sec. 226.51(b)(1) or the date the credit line
increase is requested by the consumer (or if no request has been made,
the date the credit line increase is considered by the card issuer)
under Sec. 226.51(b)(2).
2. Liability of cosigner, guarantor, or joint accountholder.
Sections 226.51(b)(1)(i) and (b)(2) require the signature or written
consent of a cosigner, guarantor, or joint accountholder agreeing
either to be secondarily liable for any debt on the account incurred by
the consumer before the consumer has attained the age of 21 in the
event the consumer defaults on the account or to be jointly liable with
the consumer for any debt on the account incurred by either party.
Sections 226.51(b)(1)(i) and (b)(2) do not prohibit a card issuer from
also requiring the cosigner, guarantor, or joint accountholder to
assume liability for debts incurred after the consumer has attained the
age of 21, consistent with any agreement made between the parties.
3. Authorized users exempt. If a consumer who has not attained the
age of 21 is being added to another person's account as an authorized
user and has no liability for debts incurred on the account, Sec.
226.51(b)(1) and (b)(2) do not apply.
4. Electronic application. Consistent with Sec. 226.5(a)(1)(iii),
an application may be provided to the consumer in electronic form
without regard to the consumer consent or other provisions of the
Electronic Signatures in Global and National Commerce Act (E-Sign Act)
(15 U.S.C. 7001 et seq.) in the circumstances set forth in Sec.
226.5a. The electronic submission of an application from a consumer or
a credit line increase approval from a consumer, cosigner, guarantor,
or joint accountholder to a card issuer would constitute a written
application or approval for purposes of Sec. 226.51(b) and would not
be considered a consumer disclosure for purposes of the E-Sign Act.
51(b)(1) Applications from young consumers.
1. Relation to Regulation B. In considering an application or
credit line increase on the credit card account of a consumer who is
less than 21 years old, creditors must comply with the
[[Page 54314]]
applicable rules in Regulation B (12 CFR part 202).
51(b)(2) Credit line increases for young consumers.
1. Credit line request by joint accountholder aged 21 or older. The
requirement under Sec. 226.51(b)(2) that a cosigner, guarantor, or
joint accountholder for a credit card account opened pursuant to Sec.
226.51(b)(1)(i) must agree in writing to assume liability for the
increase before a credit line is increased, does not apply if the
cosigner, guarantor or joint accountholder who is at least 21 years old
requests the increase.
Sec. 226.52 Limitations on Fees.
52(a) Limitations during first year after account opening.
52(a)(1)(i) 25 percent limit.
1. Example. Assume that, under the terms of a credit card account,
a consumer is required to pay $120 in fees for the issuance or
availability of credit at account opening. The consumer is also
required to pay a cash advance fee that is equal to five percent of the
cash advance and a late payment fee of $15 if the required minimum
periodic payment is not received by the payment due date (which is the
twenty-fifth of the month). At account opening on January 1 of year
one, the credit limit for the account is $500. Section 226.52(a)(1)(i)
permits the card issuer to charge to the account the $120 in fees for
the issuance or availability of credit at account opening. On February
1 of year one, the consumer uses the account for a $100 cash advance.
Section 226.52(a)(1)(i) permits the card issuer to charge a $5 cash-
advance fee to the account. On March 26 of year one, the card issuer
has not received the consumer's required minimum periodic payment.
Section 226.52(a)(2)(i) permits the card issuer to charge a $15 late
payment fee to the account. On July 15 of year one, the consumer uses
the account for a $50 cash advance. Section 226.52(a)(1)(i) does not
permit the card issuer to charge a $2.50 cash advance fee to the
account. Furthermore, Sec. 225.52(a)(1)(ii) prohibits the card issuer
from collecting the $2.50 cash advance fee from the consumer by other
means.
2. Fees that exceed 25 percent limit. A card issuer that charges a
fee to a credit card account that exceeds the 25 percent limit complies
with Sec. 226.52(a)(1)(i) if the card issuer waives or removes the fee
and any associated interest charges or credits the account for an
amount equal to the fee and any associated interest charges at the end
of the billing cycle during which the fee was charged. For example,
assuming the facts in comment 52(a)(1)(i)-1 above, the card issuer
complies with Sec. 226.52(a)(1)(i) if the card issuer charged the
$2.50 cash advance fee to the account on July 15 of year one but waived
or removed the fee or credited the account for $2.50 (plus any interest
charges on that $2.50) at the end of the billing cycle.
3. Increases in credit limit. Because the limitation in Sec.
226.52(a)(1)(i) is based on the credit limit in effect when the account
is opened, a subsequent increase in the credit limit during the first
year does not permit the card issuer to charge to the account
additional fees that would otherwise be prohibited (such as a fee for
increasing the credit limit). For example, assume that, at account
opening on January 1, the credit limit for a credit card account is
$400 and the consumer is required to pay $100 in fees for the issuance
or availability of credit. On July 1, the card issuer increases the
credit limit for the account to $600. Section 226.52(a)(1)(i) does not
permit the card issuer to require the consumer to pay additional fees
based on the increased credit limit.
52(a)(1)(ii) Additional fees.
1. Example. Section 226.52(a)(1)(ii) prohibits a card issuer that
charges to a credit card account fees during the first year that total
25 percent of the initial credit limit from requiring the consumer to
pay any additional fees through other means during the first year (such
as through a payment from the consumer to the card issuer or from
another credit account provided by the card issuer). For example,
assume that, under the terms of a credit card account, a consumer is
required to pay $125 in fees for the issuance or availability of credit
during the first year after account opening. At account opening on
January 1 of year one, the credit limit for the account is $500.
Section 226.52(a)(1)(i) permits the card issuer to charge the $125 in
fees to the account. However, Sec. 226.52(a)(1)(ii) prohibits the card
issuer from requiring the consumer to make payments to the card issuer
for additional fees with respect to the account during the first year
after account opening or requiring the consumer to open a separate
credit account with the card issuer to fund the payment of additional
fees during the first year.
52(a)(2) Fees not subject to limitations.
1. Covered fees. Except as provided in Sec. 226.52(a)(2), the
limitations in Sec. 226.52(a)(1) apply to any fees that a card issuer
will or may require the consumer to pay with respect to a credit card
account under an open-end (not home-secured) consumer credit plan
during the first year after account opening. For example, Sec.
226.52(a) applies to:
i. Fees that the consumer is required to pay for the issuance or
availability of credit described in Sec. 226.5a(b)(2), including any
fee based on account activity or inactivity and any fee that a consumer
is required to pay in order to receive a particular credit limit;
ii. Fees for insurance described in Sec. 226.4(b)(7) or debt
cancellation or debt suspension coverage described in Sec.
226.4(b)(10) written in connection with a credit transaction, if the
insurance or debt cancellation or debt suspension coverage is required
by the terms of the account;
iii. Fees that the consumer is required to pay in order to engage
in transactions using the account (such as cash advance fees, balance
transfer fees, foreign transaction fees, and fees for using the account
for purchases); and
iv. Fees that the consumer is required to pay for violating the
terms of the account (except to the extent specifically excluded by
Sec. 226.52(a)(2)(i)).
2. Fees the consumer is not required to pay. Section
226.52(a)(2)(ii) provides that Sec. 226.52(a) does not apply to fees
that the consumer is not required to pay with respect to the account.
For example, the limitations in Sec. 226.52(a) generally do not apply
to fees for making an expedited payment (to the extent permitted by
Sec. 226.10(e)), fees for optional services (such as travel
insurance), fees for reissuing a lost or stolen card, or statement
reproduction fees.
3. Security deposits. A security deposit that is charged to a
credit card account is a fee for purposes of the limitations in Sec.
226.52(a)(1). In contrast, however, a security deposit is not subject
to the 25 percent limit in Sec. 226.52(a)(1)(i) if it is not charged
to the account. Similarly, Sec. 226.52(a)(1)(ii) does not prohibit a
card issuer from requiring a consumer to provide a security deposit
that exceeds 25 percent of the credit limit at account opening so long
as the card issuer does not charge any portion of that security deposit
to the account.
52(a)(3) Rule of construction.
1. Fees or charges otherwise prohibited by law. Section 226.52(a)
does not authorize the imposition or payment of fees or charges
otherwise prohibited by law. For example, see 16 CFR 310.4(a)(4).
Sec. 226.53 Allocation of Payments.
1. Required minimum periodic payment. Section 226.53 addresses the
allocation of amounts paid by the
[[Page 54315]]
consumer in excess of the minimum periodic payment required by the card
issuer. Section 226.53 does not limit or otherwise address the card
issuer's ability to determine, consistent with applicable law and
regulatory guidance, the amount of the required minimum periodic
payment or how that payment is allocated. A card issuer may, but is not
required to, allocate the required minimum periodic payment consistent
with the requirements in Sec. 226.53 to the extent consistent with
other applicable law or regulatory guidance.
2. Applicable rates and balances. Section 226.53 permits a card
issuer to allocate an amount paid by the consumer in excess of the
required minimum periodic payment based on the annual percentage rates
and balances on the date the preceding billing cycle ends, on the date
the payment is credited to the account, or on any day in between those
two dates. For example:
i. Assume that the billing cycles for a credit card account start
on the first day of the month and end on the last day of the month. On
the date the March billing cycle ends (March 31), the account has a
purchase balance of $500 at a promotional annual percentage rate of 5%
and another purchase balance of $200 at a non-promotional annual
percentage rate of 15%. On April 5, a $100 purchase to which the 15%
rate applies is charged to the account. On April 15, the promotional
rate expires and Sec. 226.55(b)(1) permits the card issuer to increase
the rate that applies to the $500 balance from 5% to 18%. On April 25,
the card issuer credits to the account $400 paid by the consumer in
excess of the required minimum periodic payment. Under Sec. 226.53,
the card issuer could, based on the rates and balances on March 31,
allocate the $400 payment to pay in full the $200 balance to which the
15% rate applied on March 31 and then allocate the remaining $200 to
the $500 balance to which the 5% rate applied on March 31. In the
alternative, the card issuer could, based on the rates and balances on
April 25, allocate the $400 payment to the $500 balance to which the
18% rate applied on April 25.
ii. Same facts as above except that, on April 25, the card issuer
credits to the account $750 paid by the consumer in excess of the
required minimum periodic payment. Under Sec. 226.53, the card issuer
could, based on the rates and balances on March 31, allocate the $750
payment to pay in full the $200 balance to which the 15% rate applied
on March 31 and the $500 balance to which the 5% rate applied on March
31 and then allocate the remaining $50 to the $100 purchase made on
April 5. In the alternative, the card issuer could, based on the rates
and balances on April 25, allocate the $750 payment to pay in full the
$500 balance to which the 18% rate applied on April 25 and then
allocate the remaining $250 to the $300 balance to which the 15% rate
applied on April 25.
3. Claims or defenses under Sec. 226.12(c). When a consumer has
asserted a claim or defense against the card issuer pursuant to Sec.
226.12(c), the card issuer must apply the consumer's payment in a
manner that avoids or minimizes any reduction in the amount of that
claim or defense.
4. 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. 226.53 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 card issuer may treat the
balances with the same rate as a single balance or separate balances.
See example in comment 53(a)-1.iv. However, when a balance on a credit
card account is subject to a deferred interest or similar program that
provides that a consumer will not be obligated to pay interest that
accrues on the balance if the 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. 226.53 during that period of time. For example, if an account has
a $1,000 purchase balance and a $2,000 balance that is subject to a
deferred interest program that expires on 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. 226.53 until July
1. In addition, for purposes of allocating pursuant to Sec. 226.53,
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 deferred interest
period (when it must be applied first to any remaining portion of the
$2,000 balance). See example in comment 53(a)-1.v.
53(a) General rule.
1. Examples. For purposes of the following examples, assume that
none of the required minimum periodic payment is allocated to the
balances discussed (unless otherwise stated).
i. Assume that a credit card account has a cash advance balance of
$500 at an annual percentage rate of 20% and a purchase balance of
$1,500 at an annual percentage rate of 15% and that the consumer pays
$800 in excess of the required minimum periodic payment. Under Sec.
226.53(a), the card issuer must allocate $500 to pay off the cash
advance balance and then allocate the remaining $300 to the purchase
balance.
ii. Assume that a credit card account has a cash advance balance of
$500 at an annual percentage rate of 20% and a purchase balance of
$1,500 at an annual percentage rate of 15% and that the consumer pays
$400 in excess of the required minimum periodic payment. Under Sec.
226.53(a), the card issuer must allocate the entire $400 to the cash
advance balance.
iii. Assume that a credit card account has a cash advance balance
of $100 at an annual percentage rate of 20%, a purchase balance of $300
at an annual percentage rate of 18%, and a $600 protected balance on
which the 12% annual percentage rate cannot be increased pursuant to
Sec. 226.55. If the consumer pays $500 in excess of the required
minimum periodic payment, Sec. 226.53(a) requires the card issuer to
allocate $100 to pay off the cash advance balance, $300 to pay off the
purchase balance, and $100 to the protected balance.
iv. Assume that a credit card account has a cash advance balance of
$500 at an annual percentage rate of 20%, a purchase balance of $1,000
at an annual percentage rate of 15%, and a transferred balance of
$2,000 that was previously at a discounted annual percentage rate of 5%
but is now at an annual percentage rate of 15%. Assume also that the
consumer pays $800 in excess of the required minimum periodic payment.
Under Sec. 226.53(a), the card issuer must allocate $500 to pay off
the cash advance balance and allocate the remaining $300 among the
purchase balance and the transferred balance in the manner the card
issuer deems appropriate.
v. Assume that on January 1 a consumer uses a credit card account
to make a $1,200 purchase subject to a deferred interest program 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 deferred
interest program but are subject to the 15% rate. Each month from
February through June, the consumer pays $400 in excess of the
[[Page 54316]]
required minimum periodic payment on the payment due date, which is the
twenty-fifth of the month. Any interest that accrues on the purchases
not subject to the deferred interest program is paid by the required
minimum periodic payment. Under Sec. 226.53(a), the card issuer must
allocate the $400 excess payments received on February 25, March 25,
and April 25 as follows: $200 to pay off the balance not subject to the
deferred interest program (which is subject to the 15% rate) and the
remaining $200 to the deferred interest balance (which is treated as a
balance with a rate of zero). Section 226.53(b), however, requires the
card issuer to allocate the entire $400 excess payment received on May
25 to the deferred interest balance. Similarly, Sec. 227.53(b)
requires the card issuer to allocate the $400 excess payment received
on June 25 as follows: $200 to the deferred interest balance (which
pays that balance in full) and the remaining $200 to the balance not
subject to the deferred interest program.
53(b) Special rule for balances subject to deferred interest or
similar programs.
1. Expiration during billing cycle. For purposes of Sec.
226.53(b), a billing cycle does not constitute one of the two billing
cycles immediately preceding expiration of a deferred interest or
similar program if the expiration date for the program precedes the
payment due date in that billing cycle. For example, assume that a
credit card account has a balance subject to a deferred interest
program that expires on June 15. Assume also that the billing cycles
for the account begin on the first day of the month and end on the last
day of the month and that the required minimum periodic payment is due
on the twenty-fifth day of the month. Because the expiration date for
the deferred interest program (June 15) precedes the due date in the
June billing cycle (June 25), Sec. 226.53(b) requires the card issuer
to allocate first to the deferred interest balance any amount paid by
the consumer in excess of the required minimum periodic payment during
the April and May billing cycles (as well as any amount paid by the
consumer before June 15). However, if the deferred interest program
expired on June 25 or on June 30 (or on any day in between), Sec.
226.53(b) would apply only to the May and June billing cycles.
2. Grace periods. Section 226.53(b) applies to deferred interest or
similar 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 any credit extended may be repaid without incurring a
finance charge due to a periodic interest rate is not a deferred
interest or similar program for purposes of Sec. 226.53(b).
Sec. 226.54 Limitations on the Imposition of Finance Charges.
54(a) Limitations on imposing finance charges as a result of the
loss of a grace period.
54(a)(1) General rule.
1. Grace period not mandated. Section 226.54 prohibits the
imposition of finance charges as a result of the loss of a grace period
in certain specified circumstances. Section 226.54 does not require the
card issuer to provide a grace period or prohibit the card issuer from
placing limitations and conditions on a grace period to the extent
consistent with Sec. 226.54.
2. Charging accrued interest at expiration of deferred interest or
similar promotional programs. When a card issuer offers a deferred
interest or similar 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 the expiration of a specified period of time,
Sec. 226.54 does not prohibit the card issuer from charging that
accrued interest to the account if the balance is not paid in full
prior to expiration of the period (to the extent consistent with Sec.
226.55 and other applicable law and regulatory guidance).
3. Relationship to payment allocation requirements in Sec. 226.53.
Card issuers must comply with the payment allocation requirements in
Sec. 226.53 even if doing so will result in the loss of a grace
period.
4. Prohibition on two-cycle balance computation method. When a
consumer ceases to be eligible for a grace period, Sec.
226.54(a)(1)(i) prohibits the card issuer from computing the finance
charge using the two-cycle average daily balance computation method.
This method calculates the finance charge using a balance that is the
sum of the average daily balances for two billing cycles. The first
balance is for the current billing cycle, and is calculated by adding
the total balance (including or excluding new purchases and deducting
payments and credits) for each day in the billing cycle, and then
dividing by the number of days in the billing cycle. The second balance
is for the preceding billing cycle.
5. Prohibition on imposing finance charges on amounts paid within
grace period. When a balance on a credit card account is subject to a
grace period and the card issuer receives payment for some but not all
of that balance prior to the expiration of the grace period, Sec.
226.54(a)(1)(ii) prohibits the card issuer from imposing finance
charges on the portion of the balance paid. Card issuers are not
required to use a particular method to comply with Sec.
226.54(a)(1)(ii). However, a card issuer complies with Sec.
226.54(a)(1)(ii) if it applies the consumer's payment to the balance
subject to the grace period at the end of the prior billing cycle (in a
manner consistent with the payment allocation requirements in Sec.
226.53) and then calculates interest charges based on the amount of the
balance that remains unpaid.
6. Examples. Assume that the annual percentage rate for purchases
on a credit card account is 15%. The billing cycle starts on the first
day of the month and ends on the last day of the month. The payment due
date for the account is the twenty-fifth day of the month. Under the
terms of the account, the consumer will receive a grace period and not
be charged interest on purchases if the purchase balance at the end of
a billing cycle is paid in full by the following payment due date. For
purposes of this example, assume that none of the required minimum
periodic payment is allocated to the balances discussed. During the
March billing cycle, the following transactions are charged to the
account: a $100 purchase on March 10, a $200 purchase on March 15, and
a $300 purchase on March 20. The balance for the February billing cycle
is paid in full on March 25. At the end of the March billing cycle
(March 31), the consumer's total purchase balance is $600 and the
consumer will not be charged interest on that balance if it is paid in
full by the following due date (April 25).
i. On April 10, a $150 purchase is charged to the account. On April
25, the card issuer receives $500 in excess of the required minimum
periodic payment. Section 226.54(a)(1)(i) prohibits the card issuer
from reaching back and charging interest on any of the March
transactions from the date of the transaction through the end of the
March billing cycle (March 31). In these circumstances, the card issuer
may comply with Sec. 226.54(a)(1)(ii) by applying the $500 excess
payment to the $600 purchase balance and then charging interest only on
the portion of the $600 purchase balance that remains unpaid ($100)
from the start of the April billing cycle (April 1) through the end of
the April billing cycle (April 30). In addition, the card issuer may
charge interest on the $150 purchase from the date of the transaction
(April 10) through the end of the April billing cycle (April 31).
[[Page 54317]]
ii. Same facts as in paragraph 6 above except that, on March 18, a
$250 cash advance is charged to the account at an annual percentage
rate of 25%. The grace period does not apply to cash advances, but the
consumer retains the grace period on purchases. On April 25, the card
issuer receives $600 in excess of the required minimum periodic
payment. As required by Sec. 226.53, the card issuer allocates the
$600 excess payment first to the balance with the highest annual
percentage rate (the $250 cash advance balance). Although Sec.
226.54(a)(1)(i) prohibits the card issuer from charging interest on the
March transactions based on days in the March billing cycle, the card
issuer may charge interest on the $250 cash advance from the date of
the transaction (March 18) through April 24. In these circumstances,
the card issuer may comply with Sec. 226.54(a)(1)(ii) by applying the
remainder of the excess payment ($350) to the $600 purchase balance and
then charging interest only on the portion of the $600 purchase balance
that remains unpaid ($250) from the start of the April billing cycle
(April 1) through the end of the April billing cycle (April 30).
iii. Same facts as in paragraph 6 above except that the consumer
does not pay the balance for the February billing cycle in full on
March 25 and therefore, under the terms of the account, is not eligible
for a grace period on the March purchases. Under these circumstances,
Sec. 226.54 does not apply and the card issuer may charge interest
from the date of each transaction through April 24 and interest on the
remaining $100 from April 25 through the end of the April billing cycle
(April 25).
Sec. 226.55 Limitations on Increasing Annual Percentage Rates, Fees,
and Charges.
55(a) General rule.
1. Examples. Section 226.55(a) prohibits card issuers from
increasing an annual percentage rate or any fee or charge required to
be disclosed under Sec. 226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii)
on a credit card account unless specifically permitted by one of the
exceptions in Sec. 226.55(b). The following examples illustrate the
general application of Sec. 226.55(a) and (b). Additional examples
illustrating specific aspects of the exceptions in Sec. 226.55(b) are
provided in the commentary to those exceptions.
i. Account-opening disclosure of non-variable rate for six months,
then variable rate. Assume that, at account opening on January 1 of
year one, a card issuer discloses that the annual percentage rate for
purchases is a non-variable rate of 15% and will apply for six months.
The card issuer 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 card issuer's
control. Furthermore, the card issuer discloses that the annual
percentage rate for cash advances is the same variable rate that will
apply to purchases after six months. Finally, the card issuer discloses
that, to the extent consistent with Sec. 226.55 and other applicable
law, a non-variable penalty rate of 30% may apply if the consumer 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.
A. Change-in-terms rate increase for new transactions after first
year. On January 15 of year one, the consumer uses the account to make
a $2,000 purchase and a $500 cash advance. No other transactions are
made on the account. At the start of each quarter, the card issuer may
adjust the variable rate that applies to the $500 cash advance
consistent with changes in the index (pursuant to Sec. 226.55(b)(2)).
All required minimum periodic payments are received on or before the
payment due date until May of year one, when the payment due on May 25
is received by the creditor on May 28. At this time, the card issuer is
prohibited by Sec. 226.55 from increasing the rates that apply to the
$2,000 purchase, the $500 cash advance, or future purchases and cash
advances. Six months after account opening (July 1), the card issuer
may begin to accrue interest on the $2,000 purchase at the previously-
disclosed variable rate determined using an 8-point margin (pursuant to
Sec. 226.55(b)(1)). Because no other increases in rate were disclosed
at account opening, the card issuer may not subsequently increase the
variable rate that applies to the $2,000 purchase and the $500 cash
advance (except due to increases in the index pursuant to Sec.
226.55(b)(2)). On November 16, the card issuer provides a notice
pursuant to Sec. 226.9(c) informing the consumer of a new variable
rate that will apply on January 1 of year two (calculated using the
same index and an increased margin of 12 percentage points). On
December 15, the consumer makes a $100 purchase. On January 1 of year
two, the card issuer may increase the margin used to determine the
variable rate that applies to new purchases to 12 percentage points
(pursuant to Sec. 227.55(b)(3)). On January 15 of year two, the
consumer makes a $300 purchase. The card issuer may apply the variable
rate determined using the 12-point margin to the $300 purchase but not
the $2,000 purchase or the $100 purchase.
B. Account becomes more than 60 days delinquent during first year.
Same facts as above except that the required minimum periodic payment
due on May 25 of year one is not received by the card issuer until July
30 of year one. Because the card issuer received the required minimum
periodic payment more than 60 days after the payment due date, Sec.
226.55(b)(4) permits the card issuer to increase the annual percentage
rate applicable to the $2,000 purchase, the $500 cash advance, and
future purchases and cash advances. However, the card issuer must first
comply with the notice requirements in Sec. 226.9(g). Thus, if the
card issuer provided a Sec. 226.9(g) notice on July 25 stating that
all rates on the account would be increased to the 30% penalty rate,
the card issuer could apply that rate beginning on September 8 to all
balances and to future transactions.
ii. Account-opening disclosure of non-variable rate for six months,
then increased non-variable rate for six months, then variable rate;
change-in-terms rate increase for new transactions after first year.
Assume that, at account opening on January 1 of year one, a card issuer
discloses that the annual percentage rate for purchases will increase
as follows: a non-variable rate of 5% for six months; a non-variable
rate of 10% for an additional six months; and thereafter a variable
rate that is currently 15% and will be adjusted monthly by adding a
margin of 5 percentage points to a publicly-available index not under
the card issuer's control. The payment due date for the account is the
fifteenth day of the month and the required minimum periodic payments
are applied to accrued interest and fees but do not reduce the purchase
balance. On January 15 of year one, the consumer uses the account to
make a $1,500 purchase. Six months after account opening (July 1), the
card issuer may begin to accrue interest on the $1,500 purchase at the
previously-disclosed 10% non-variable rate (pursuant to Sec.
226.55(b)(1)). On September 15, the consumer uses the account for a
$700 purchase. On November 16, the card issuer provides a notice
pursuant to Sec. 226.9(c) informing the consumer of a new variable
rate that will apply on January 1 of year two (calculated using the
same index and an increased margin
[[Page 54318]]
of 8 percentage points). One year after account opening (January 1 of
year two), the card issuer may begin accruing interest on the $2,200
purchase balance at the previously-disclosed variable rate determined
using a 5-point margin (pursuant to Sec. 226.55(b)(1)). Because the
variable rate determined using the 8-point margin was not disclosed at
account opening, the card issuer may not apply that rate to the $2,200
purchase balance. Furthermore, because no other increases in rate were
disclosed at account opening, the card issuer may not subsequently
increase the variable rate that applies to the $2,200 purchase balance
(except due to increases in the index pursuant to Sec. 226.55(b)(2)).
The card issuer may, however, apply the variable rate determined using
the 8-point margin to purchases made on or after January 1 of year two
(pursuant to Sec. 226.55(b)(3)).
iii. Change-in-terms rate increase for new transactions after first
year; penalty rate increase after first year. Assume that, at account
opening on January 1 of year one, a card issuer 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 card issuer's control. The card issuer also discloses
that, to the extent consistent with Sec. 226.55 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 card issuer provides a notice pursuant to Sec.
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 15 (calculated by
using the same index and an increased margin of 8 percentage points).
On June 14, the consumer makes a $500 purchase. On June 15, the
consumer makes a $200 purchase. On July 1, the card issuer has not
received the payment due on June 15 and provides the consumer with a
notice pursuant to Sec. 226.9(g) stating that the 28% penalty rate
will apply as of August 15 to all transactions made on or after July 16
and that, if the consumer becomes more than 60 days late, the penalty
rate will apply to all balances on the account. On July 17, the
consumer makes a $300 purchase.
A. Account does not become more than 60 days delinquent. The
payment due on June 15 of year two is received on July 2. On July 16,
Sec. 226.55(b)(3) permits the card issuer to apply the variable rate
determined using the 8-point margin disclosed in the Sec. 226.9(c)
notice to the $200 purchase made on June 15 but does not permit the
card issuer to apply this rate to the $1,500 purchase balance. On
August 15, Sec. 226.55(b)(3) permits the card issuer to apply the 28%
penalty rate disclosed at account opening and in the Sec. 226.9(g)
notice to the $300 purchase made on July 17 but does not permit the
card issuer to apply this rate to the $1,500 purchase balance (which
remains at the variable rate determined using the 6-point margin) or
the $200 purchase (which remains at the variable rate determined using
the 8-point margin).
B. Account becomes more than 60 days delinquent after provision of
Sec. 226.9(g) notice. Same facts as above except the payment due on
June 15 of year two has not been received by August 15. Section
226.55(b)(4) permits the card issuer to apply the 28% penalty rate to
the $1,500 purchase balance and the $200 purchase because it has not
received the June 15 payment within 60 days after the due date.
However, in order to do so, the card issuer must provide an additional
notice pursuant to Sec. 226.9(g). This notice must be sent no earlier
than August 15, which is the first day the account became more than 60
days' delinquent. If the notice is sent on August 15, the card issuer
may begin accruing interest on the $1,500 purchase balance and the $200
purchase at the 28% penalty rate beginning on September 29.
2. Relationship to grace period. Nothing in Sec. 226.55 prohibits
a card issuer from assessing interest due to the loss of a grace period
to the extent consistent with Sec. 226.54. In addition, a card issuer
has not reduced an annual percentage rate on a credit card account for
purposes of Sec. 226.55 if the card issuer does not charge interest on
a balance or a portion thereof based on a payment received prior to the
expiration of a grace period. For example, if the annual percentage
rate for purchases on an account is 15% but the card issuer does not
charge any interest on a $500 purchase balance because that balance was
paid in full prior to the expiration of the grace period, the card
issuer has not reduced the 15% purchase rate to 0% for purposes of
Sec. 226.55.
55(b) Exceptions.
1. Exceptions not mutually exclusive. A card issuer may increase an
annual percentage rate or a fee or charge required to be disclosed
under Sec. 226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) pursuant to an
exception set forth in Sec. 226.55(b) even if that increase would not
be permitted under a different exception. For example, although a card
issuer cannot increase an annual percentage rate pursuant to Sec.
226.55(b)(1) unless that rate is provided for a specified period of at
least six months, the card issuer may increase an annual percentage
rate during a specified period due to an increase in an index
consistent with Sec. 226.55(b)(2). Similarly, although Sec.
226.55(b)(3) does not permit a card issuer to increase an annual
percentage rate during the first year after account opening, the card
issuer may increase the rate during the first year after account
opening pursuant to Sec. 226.55(b)(4) if the required minimum periodic
payment is not received within 60 days after the due date.
2. Delayed implementation of increase. If Sec. 226.55(b) permits a
card issuer to apply an increased annual percentage rate, fee, or
charge on a date that is not the first day of a billing cycle, the card
issuer may delay application of the increased rate, fee, or charge
until the first day of the following billing cycle without
relinquishing the ability to apply that rate, fee, or charge. For
example, assume that, at account opening on January 1, a card issuer
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 each billing cycle for the account is the
fifteenth of the month. If the six-month period expires on July 1, the
card issuer may delay application of the 15% rate until the start of
the next billing cycle (July 15) without relinquishing its ability to
apply that rate under Sec. 226.55(b)(1).
3. Application of a lower rate, fee, or charge. Nothing in Sec.
226.55 prohibits a card issuer from lowering an annual percentage rate
or a fee or charge required to be disclosed under Sec.
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii). However, a card issuer
that does so cannot subsequently increase the rate, fee, or charge
unless permitted by one of the exceptions in Sec. 226.55(b). The
following examples illustrate the application of the rule:
i. Application of lower rate during first year. Assume that a card
issuer discloses at account opening on January 1 of year one that a
non-variable annual percentage rate of 15% will apply to purchases. The
card issuer also discloses that, to the extent consistent with Sec.
226.55 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.
[[Page 54319]]
A. Temporary rate returns to standard rate at expiration. On
September 30 of year one, the account has a purchase balance of $1,400
at the 15% rate. On October 1, the card issuer provides a notice
pursuant to Sec. 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 October 1 through March 31 of year two) and that, beginning on
April 1 of year two, the rate for purchases will increase to the 15%
non-variable rate disclosed at account opening. The card issuer does
not apply the 5% rate to the $1,400 purchase balance. On October 14 of
year one, the consumer makes a $300 purchase at the 5% rate. On January
15 of year two, the consumer makes a $150 purchase at the 5% rate. On
April 1 of year two, the card issuer may begin accruing interest on the
$300 purchase and the $150 purchase at 15% as disclosed in the Sec.
226.9(c) notice (pursuant to Sec. 226.55(b)(1)).
B. Penalty rate increase. 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 226.55 does not permit the card
issuer to increase any annual percentage rate on the account at this
time. The card issuer may apply the 30% penalty rate to new
transactions beginning on April 1 of year two pursuant to Sec.
226.55(b)(3) by providing a Sec. 226.9(g) notice informing the
consumer of this increase no later than February 14 of year two. The
card issuer may not, however, apply the 30% penalty rate to the $1,400
purchase balance as of September 30 of year one, the $300 purchase on
October 15 of year one, or the $150 purchase on January 15 of year two.
ii. Application of lower rate at end of first year. Assume that, at
account opening on January 1 of year one, a card issuer discloses that
a non-variable annual percentage rate of 15% will apply to purchases
for one year and discloses that, after the first year, the card issuer
will apply a variable rate that is currently 20% and is determined by
adding a margin of 10 percentage points to a publicly-available index
not under the card issuer's control. On December 31 of year one, the
account has a purchase balance of $3,000.
A. Notice of temporary rate provided consistent with Sec.
226.55(b)(1)(i). On November 16 of year one, the card issuer provides a
notice pursuant to Sec. 226.9(c) informing the consumer of a new
variable rate that will apply on January 1 of year two (which is
calculated using the same index and a reduced margin of 8 percentage
points). The notice further states that, on July 1 of year two, the
margin will increase to the margin disclosed at account opening (10
percentage points). On July 1 of year two, the card issuer may increase
the margin used to determine the variable rate that applies to new
purchases to 10 percentage points and apply that rate to any remaining
portion of the $3,000 purchase balance (pursuant to Sec.
226.55(b)(1)).
B. No notice provided. Same facts as above except that the card
issuer does not send a notice on November 16 of year one. Instead, on
January 1 of year two, the card issuer lowers the margin used to
determine the variable rate to 8 percentage points and applies that
rate to the $3,000 purchase balance and to new purchases. Section 226.9
does not require advance notice in these circumstances. However, unless
the account becomes more than 60 days' delinquent, the card issuer may
not subsequently increase the rate that applies to the $3,000 purchase
balance except due to increases in the index (pursuant to Sec.
226.55(b)(2)).
iii. Application of lower rate after first year; effect of 14-day
period. Assume that a card issuer 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 card issuer also discloses
that, to the extent consistent with Sec. 226.55 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 card issuer provides
a notice pursuant to Sec. 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 15 of year two, the
consumer makes a $200 purchase. On July 16, the consumer makes a $100
purchase. On January 1 of year three, the card issuer may begin
accruing interest on the $100 purchase at 17% (pursuant to Sec.
226.55(b)(1)). However, Sec. 226.55(b)(1)(ii)(B) does not permit the
card issuer to apply the 17% rate to the $200 purchase because that
transaction occurred within 14 days after provision of the Sec.
226.9(c) notice. Instead, the card issuer may apply the 15% rate that
applied to purchases prior to provision of the Sec. 226.9(c) notice.
In addition, if the card issuer applied the 5% rate to the $1,000
purchase balance, Sec. 226.55(b)(ii)(A) would not permit the card
issuer to increase the rate that applies to that balance on January 1
of year three to a rate that is higher than 15% that previously applied
to the balance.
4. Date on which transaction occurred. When a transaction occurred
for purposes of Sec. 226.55 is generally determined by the date of the
transaction. However, if a transaction that occurred within 14 days
after provision of a Sec. 226.9(c) or (g) notice is not charged to the
account prior to the effective date of the change or increase, the card
issuer may treat the transaction as occurring more than 14 days after
provision of the notice for purposes of Sec. 226.55. See example in
comment 55(b)(3)-4.iii.B. In addition, when a merchant places a
``hold'' on the available credit on an account for an estimated
transaction amount because the actual transaction amount will not be
known until a later date, the date of the transaction for purposes of
Sec. 226.55 is the date on which the card issuer receives the actual
transaction amount from the merchant. See example in comment 55(b)(3)-
4.iii.A.
5. Category of transactions. For purposes of Sec. 226.55, 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. Similarly, a
type or group of transactions is a ``category of transactions'' for
purposes of Sec. 226.55 if a fee or charge required to be disclosed
under Sec. 226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) applies to
those transactions that is different than the fee or charge 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. 226.55 if a card
issuer applies different annual percentage rates to each. Furthermore,
if, for example, the card issuer applies different annual percentage
rates to different types of purchase transactions (such as one rate for
purchases of gasoline or purchases over $100 and a different rate for
all other purchases), each type constitutes a separate category of
transactions for purposes of Sec. 226.55.
6. Relationship between exceptions in Sec. 226.55(b) and 45-day
advance notice requirements in Sec. 226.9(c) and (g). Nothing in Sec.
226.55 alters the requirements in Sec. 226.9(c) and (g) that creditors
provide written notice at least
[[Page 54320]]
45 days prior to the effective date of certain increases in annual
percentage rates, fees, and charges. For example, although Sec.
226.55(b)(3)(ii) permits a card issuer that discloses an increased rate
pursuant to Sec. 226.9(c) or (g) to apply that rate to transactions
that occurred more than 14 days after provision of the notice, the card
issuer cannot begin to accrue interest at the increased rate until that
increase goes into effect, consistent with Sec. 226.9(c) or (g). See
examples in comment 55(b)(3)-4. Similarly, on or after the effective
date, the card issuer cannot calculate interest charges for days before
the effective date based on the increased rate.
55(b)(1) Temporary rate exception.
1. Relationship to Sec. 226.9(c)(2)(v)(B). A card issuer that has
complied with the disclosure requirements in Sec. 226.9(c)(2)(v)(B)
has also complied with the disclosure requirements in Sec.
226.55(b)(1)(i).
2. Period of six months or longer. A temporary annual percentage
rate must apply to transactions for a specified period of six months or
longer before a card issuer can increase that rate pursuant to Sec.
226.55(b)(1). The specified period must expire no less than six months
after the date on which the creditor provides the consumer with the
disclosures required by Sec. 226.55(b)(1)(i) or, if later, the date on
which the account can be used for transactions to which the temporary
rate applies. Section 226.55(b)(1) does not prohibit a card issuer from
limiting the application of a temporary annual percentage rate to a
particular category of transactions (such as balance transfers or
purchases over $100). However, in circumstances where the card issuer
limits application of the temporary rate to a particular transaction,
the specified period must expire no less than six months after the date
on which that transaction occurred. The following examples illustrate
the application of Sec. 226.55(b)(1):
i. Assume that on January 1 a card issuer offers a consumer a 5%
annual percentage rate on purchases made during the months of January
through June. A 15% rate will apply thereafter. On February 15, a $500
purchase is charged to the account. On June 15, a $200 purchase is
charged to the account. On July 1, the card issuer may begin accruing
interest at the 15% rate on the $500 purchase and the $200 purchase
(pursuant to Sec. 226.55(b)(1)).
ii. Same facts as above except that on January 1 the card issuer
offered the 5% rate on purchases beginning in the month of February.
Section 226.55(b)(1) would not permit the card issuer to begin accruing
interest at the 15% rate on the $500 purchase and the $200 purchase
until August 1.
iii. Assume that on October 31 of year one the annual percentage
rate for purchases on a credit card account is 17%. On November 1, the
card issuer offers the consumer a 0% rate for six months on purchases
made during the months of November and December. The 17% rate will
apply thereafter. On November 15, a $500 purchase is charged to the
account. On December 15, a $300 purchase is charged to the account. On
January 15 of year two, a $150 purchase is charged to the account.
Section 226.55(b)(1) would not permit the card issuer to begin accruing
interest at the 17% rate on the $500 purchase and the $300 purchase
until May 1 of year two. However, the card issuer may accrue interest
at the 17% rate on the $150 purchase beginning on January 15 of year
two.
iv. Assume that on June 1 of year one a card issuer offers a
consumer a 0% annual percentage rate for six months on the purchase of
an appliance. An 18% rate will apply thereafter. On September 1, a
$5,000 transaction is charged to the account for the purchase of an
appliance. Section 226.55(b)(1) would not permit the card issuer to
begin accruing interest at the 18% rate on the $5,000 transaction until
March 1 of year two.
v. Assume that on May 31 of year one the annual percentage rate for
purchases on a credit card account is 15%. On June 1, the card issuer
offers the consumer a 5% rate for six months on a balance transfer. The
15% rate will apply thereafter. On June 15, a $3,000 balance is
transferred to the account. On July 15, a $200 purchase is charged to
the account. Section 226.55(b)(1) would not permit the card issuer to
begin accruing interest the 15% rate on the $3,000 transferred balance
until December 15. However, the card issuer may accrue interest at the
15% rate on the $200 purchase beginning on July 15.
3. Deferred interest and similar promotional programs.
i. Application of Sec. 226.55. The general prohibition in Sec.
226.55(a) applies to the imposition of accrued interest upon the
expiration of a deferred interest or similar promotional program 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. However, the exception in Sec. 226.55(b)(1)
also applies to these programs, provided that, prior to the
commencement of the deferred interest period, the card issuer discloses
the length of the period and the rate at which interest will accrue on
the balance subject to the deferred interest program if that balance is
not paid in full prior to expiration of the deferred interest period.
See comment 9(c)(2)(v)-7.
ii. Examples.
A. Deferred interest offer at account opening. Assume that, at
account opening on January 1 of year one, the card issuer discloses the
following with respect to a deferred interest program: ``No interest on
purchases made in January of year one if paid in full by December 31 of
year one. If the balance is not paid in full by that date, interest
will be imposed from the transaction date at a rate of 20%.'' On
January 15 of year one, 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 226.55 does not permit the card
issuer to charge to the account interest that has accrued on the $2,000
purchase at this time. Furthermore, if the consumer pays the $2,000
purchase in full on or before December 31 of year one, Sec. 226.55
does not permit the card issuer to charge to the account any interest
that has accrued on that purchase. If, however, the $2,000 purchase has
not been paid in full by January 1 of year two, Sec. 226.55(b)(1)
permits the card issuer to charge to the account the interest accrued
on that purchase at the 20% rate during year one (to the extent
consistent with other applicable law).
B. Deferred interest offer after account opening. Assume that a
card issuer 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 card
issuer's control. The card issuer also discloses that, to the extent
consistent with Sec. 226.55 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 June 30 of year two, the consumer uses the
account for a $1,000 purchase in response to an offer of a deferred
interest program. Under the terms of this program, interest on the
purchase will accrue at the variable rate for purchases but the
consumer will not be obligated to pay that interest if the purchase is
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 226.55 does not
permit the card issuer to charge to the account interest that has
accrued on the $1,000 purchase at this time.
[[Page 54321]]
Furthermore, if the consumer pays the $1,000 purchase in full on or
before December 31 of year two, Sec. 226.55 does not permit the card
issuer to charge to the account any interest that has accrued on that
purchase. On December 31 of year two, the $1,000 purchase has been paid
in full. Under these circumstances, the card issuer may not charge any
interest accrued on the $1,000 purchase.
4. Contingent or discretionary rate increases. Section Sec.
226.55(b)(1) permits a card issuer to increase a temporary annual
percentage rate upon the expiration of a specified period of time.
However, Sec. 226.55(b)(1) does not permit a card issuer to apply an
increased rate that is contingent on a particular event or occurrence
or that may be applied at the card issuer's discretion. The following
examples illustrate rate increases that are not permitted by Sec.
226.55:
i. Assume that a card issuer discloses at account opening on
January 1 of year one that a non-variable annual percentage rate of 15%
applies to purchases but that all rates on an account may be increased
to a non-variable penalty rate of 30% if a consumer's required minimum
periodic payment is received after the payment due date, which is the
fifteenth of the month. On March 1, the account has a $2,000 purchase
balance. The payment due on March 15 is not received until March 20.
Section 226.55 does not permit the card issuer to apply the 30% penalty
rate to the $2,000 purchase balance. However, pursuant to Sec.
226.55(b)(3), the card issuer could provide a Sec. 226.9(c) or (g)
notice on or before November 16 informing the consumer that, on January
1 of year two, the 30% rate (or a different rate) will apply to new
transactions.
ii. Assume that a card issuer discloses at account opening on
January 1 of year one that a non-variable annual percentage rate of 5%
applies to transferred balances but that this rate will increase to a
non-variable rate of 18% if the consumer does not use the account for
at least $200 in purchases each billing cycle. On July 1, the consumer
transfers a balance of $4,000 to the account. During the October
billing cycle, the consumer uses the account for $150 in purchases.
Section 226.55 does not permit the card issuer to apply the 18% rate to
the $4,000 transferred balance or the $150 in purchases. However,
pursuant to Sec. 226.55(b)(3), the card issuer could provide a Sec.
226.9(c) or (g) notice on or before November 16 informing the consumer
that, on January 1 of year two, the 18% rate (or a different rate) will
apply to new transactions.
55(b)(2) Variable rate exception.
1. Increases due to increase in index. Section 226.55(b)(2)
provides that an annual percentage rate that varies according to an
index that is not under the card issuer's control and is available to
the general public may be increased due to an increase in the index.
This section does not permit a card issuer to increase the rate by
changing the method used to determine a rate that varies with an index
(such as by increasing the margin), even if that change will not result
in an immediate increase. However, a card issuer may change the day of
the month on which index values are measured to determine changes to
the rate.
2. External index. A card issuer may increase the annual percentage
rate if the increase is based on an index or indices outside the card
issuer's control. A card issuer may not increase the rate based on its
own prime rate or cost of funds. A card issuer is permitted, however,
to use a published prime rate, such as that in the Wall Street Journal,
even if the card issuer's own prime rate is one of several rates used
to establish the published rate.
3. Publicly available. The index or indices must be available to
the public. A publicly-available index need not be published in a
newspaper, but it must be one the consumer can independently obtain (by
telephone, for example) and use to verify the annual percentage rate
applied to the credit card account.
4. Changing a non-variable rate to a variable rate. Section 226.55
generally prohibits a card issuer from changing a non-variable annual
percentage rate to a variable annual percentage rate because such a
change can result in an increase. However, a card issuer may change a
non-variable rate to a variable to the extent permitted by one of the
exceptions in Sec. 226.55(b). For example, Sec. 226.55(b)(1) permits
a card issuer to change a non-variable rate to a variable rate upon
expiration of a specified period of time. Similarly, following the
first year after the account is opened, Sec. 226.55(b)(3) permits a
card issuer to change a non-variable rate to a variable rate with
respect to new transactions (after complying with the notice
requirements in Sec. 226.9(b), (c) or (g)).
5. Changing a variable rate to a non-variable rate. Nothing in
Sec. 226.55 prohibits a card issuer from changing a variable annual
percentage rate to an equal or lower non-variable rate. Whether the
non-variable rate is equal to or lower than the variable rate is
determined at the time the card issuer provides the notice required by
Sec. 226.9(c). For example, assume that on March 1 a variable annual
percentage rate that is currently 15% applies to a balance of $2,000
and the card issuer sends a notice pursuant to Sec. 226.9(c) informing
the consumer that the variable rate will be converted to a non-variable
rate of 14% effective April 15. On April 15, the card issuer may apply
the 14% non-variable rate to the $2,000 balance and to new transactions
even if the variable rate on March 2 or a later date was less than 14%.
6. Substitution of index. A card issuer may change the index and
margin used to determine the annual percentage rate under Sec.
226.55(b)(2) if the original index becomes unavailable, as long as
historical fluctuations in the original and replacement indices were
substantially similar, and as long as the replacement index and margin
will produce a rate similar to the rate that was in effect at the time
the original index became unavailable. If the replacement index is
newly established and therefore does not have any rate history, it may
be used if it produces a rate substantially similar to the rate in
effect when the original index became unavailable.
55(b)(3) Advance notice exception.
1. Relationship to Sec. 226.9(h). A card issuer may not increase a
fee or charge required to be disclosed under Sec. 226.6(b)(2)(ii),
(b)(2)(iii), or (b)(2)(xii) pursuant to Sec. 226.55(b)(3) if the
consumer has rejected the increased fee or charge pursuant to Sec.
226.9(h).
2. Notice provided pursuant to Sec. 226.9(b) and (c). If an
increased annual percentage rate, fee, or charge is disclosed pursuant
to both Sec. 226.9(b) and (c), that rate, fee, or charge may only be
applied to transactions that occur more than 14 days after provision of
the Sec. 226.9(c) notice.
3. Account opening.
i. Multiple accounts with same card issuer. When a consumer has a
credit card account with a card issuer and the consumer opens a new
credit card account with the same card issuer (or its affiliate or
subsidiary), the opening of the new account constitutes the opening of
a credit card account for purposes of Sec. 226.55(b)(3)(iii) if, more
than 30 days after the new account is opened, the consumer has the
option 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 card issuer. On July 1 of year one, the
consumer opens a second credit card account with that card issuer. On
July 15, a $1,000 balance is transferred from the first account to the
second account. The opening of the second account
[[Page 54322]]
constitutes the opening of a credit card account for purposes of Sec.
226.55(b)(3)(iii) so long as, on August 1, the consumer has the option
to engage in transactions using either account. Under these
circumstances, the card issuer could not increase an annual percentage
rate or a fee or charge required to be disclosed under Sec.
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) on the second account
pursuant to Sec. 226.55(b)(3) until July 1 of year two (which is one
year after the second account was opened).
ii. Substitution, replacement or consolidation.
A. Generally. A credit card account has not been opened for
purposes of Sec. 226.55(b)(3)(iii) when a credit card account issued
by a card issuer is substituted, replaced, or consolidated with another
credit card account issued by the same card issuer (or its affiliate or
subsidiary). Circumstances in which a credit card account has not been
opened for purposes of Sec. 226.55(b)(3)(iii) 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 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 card
issuer.
B. Limitation. A card issuer that replaces or consolidates a credit
card account with another credit card account issued by the card issuer
(or its affiliate or subsidiary) may not increase an annual percentage
rate or a fee or charge required to be disclosed under Sec.
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) in a manner otherwise
prohibited by Sec. 226.55. For example, assume that, on January 1 of
year one, a consumer opens a credit card account with an annual
percentage rate of 15% for purchases. On July 1 of year one, the
account is replaced with a credit card account that offers different
features (such as rewards on purchases). Under these circumstances, the
card issuer cannot increase the annual percentage rate for new
purchases to a rate that is higher than 15% pursuant to Sec.
226.55(b)(3) until January 1 of year two (which is one year after the
first account was opened).
4. Examples.
i. Change-in-terms rate increase; temporary rate increase. Assume
that a 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 card issuer
provides a notice pursuant to Sec. 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 that thereafter the card issuer
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 card issuer's control. The fourteenth day after
provision of the notice is March 29 and, on that date, the consumer
makes a $200 purchase. On March 30, the consumer makes a $1,000
purchase. On May 1, the card issuer may begin accruing interest at 18%
on the $1,000 purchase made on March 30 (pursuant to Sec.
226.55(b)(3)). Section 226.55(b)(3)(i) and (ii) do not permit the card
issuer to apply the 18% rate to the $2,200 purchase balance as of March
29 because that balance reflects transactions that occurred prior to or
within 14 days after the provision of the Sec. 226.9(c) notice. After
six months (November 2), the card issuer 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 (pursuant
to Sec. 226.55(b)(1)).
ii. Checks that access a credit card account. Assume that a card
issuer discloses at account opening on January 1 of year one that the
annual percentage rate that applies to cash advances is a variable 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
card issuer's control. On July 1 of year two, the card issuer provides
checks that access the account and, pursuant to Sec.
226.9(b)(3)(i)(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 9 of year two, the consumer uses one of the checks
to pay for a $500 transaction. Beginning on January 1 of year three,
the card issuer may apply the cash advance rate determined using the
14-point margin to any remaining portion of the $500 transaction
(pursuant to Sec. 226.55(b)(1) and (b)(3)).
iii. Hold on available credit. Assume that a credit card account is
opened on January 1 of year one. On September 14 of year two, the
account has a purchase balance of $2,000 at a non-variable annual
percentage rate of 17%. On September 15, the card issuer provides a
notice pursuant to Sec. 226.9(c) informing the consumer that the rate
for new purchases will increase to a non-variable rate of 20% on
October 30. The fourteenth day after provision of the notice is
September 29. On September 28, the consumer uses the credit card to
check into a hotel and the hotel obtains authorization for a $1,000
hold on the account to ensure there is adequate available credit to
cover the anticipated cost of the stay.
A. The consumer checks out of the hotel on October 2. The actual
cost of the stay is $1,100 because of additional incidental costs. On
October 2, the hotel charges the $1,100 transaction to the account. For
purposes of Sec. 226.55(b)(3), the transaction occurred on October 2.
Therefore, on October 30, Sec. 226.55(b)(3) permits the card issuer to
apply the 20% rate to new purchases and to the $1,100 transaction.
However, Sec. 226.55(b)(3)(ii) does not permit the card issuer to
apply the 20% rate to any remaining portion of the $2,000 purchase
balance.
B. Same facts as above except that the consumer checks out of the
hotel on September 29. The actual cost of the stay is $250, but the
hotel does not charge this amount to the account until November 1. For
purposes of Sec. 226.55(b)(3), the card issuer may treat the
transaction as occurring more than 14 days after provision of the Sec.
226.9(c) notice (i.e., after September 29). Accordingly, the card
issuer may apply the 20% rate to the $250 transaction.
5. Application of increased fees and charges. See comment 55(c)(1)-
3.
55(b)(4) Delinquency exception.
1. Receipt of required minimum periodic payment within 60 days of
due date. Section 226.55(b)(4) applies when a card issuer has not
received the consumer's required minimum periodic payment within 60
days after the due date for that payment. In order to satisfy this
condition, a card issuer that requires monthly minimum payments
generally must not have received two consecutive required minimum
periodic payments. Whether a required minimum periodic payment has been
received for purposes of Sec. 226.55(b)(4) depends on whether the
amount received is equal to or more than the first outstanding required
minimum periodic payment. For example, assume that the required minimum
periodic payments for a credit card account are due on the fifteenth
day of the month. On May 13, the card issuer has not received the $50
required minimum periodic payment due on March 15 or the $150 required
minimum periodic
[[Page 54323]]
payment due on April 15. If the card issuer receives a $50 payment on
May 14, Sec. 226.55(b)(4) does not apply because the payment is equal
to the required minimum periodic payment due on March 15 and therefore
the account is not more than 60 days delinquent. However, if the card
issuer instead received a $40 payment on May 14, Sec. 226.55(b)(4)
would apply because the payment is less than the required minimum
periodic payment due on March 15. Furthermore, if the card issuer
received the $50 payment on May 15, Sec. 226.55(b)(4) would apply
because the card issuer did not receive the required minimum periodic
payment due on March 15 within 60 days after the due date for that
payment.
2. Relationship to Sec. 226.9(g)(3)(i)(B). A card issuer that has
complied with the disclosure requirements in Sec. 226.9(g)(3)(i)(B)
has also complied with the disclosure requirements in Sec.
226.55(b)(4)(i).
3. Reduction in rate pursuant to Sec. 226.55(b)(4)(ii). Section
226.55(b)(4)(ii) provides that, if the card issuer receives six
consecutive required minimum periodic payments on or before the payment
due date beginning with the first payment due following the effective
date of the increase, the card issuer must reduce any annual percentage
rate, fee, or charge increased pursuant to Sec. 226.55(b)(4) to the
annual percentage rate, fee, or charge that applied prior to the
increase with respect to transactions that occurred prior to or within
14 days after provision of the Sec. 226.9(g) notice.
i. Six consecutive payments immediately following effective date of
increase. Section 226.55(b)(4)(ii) does not apply if the card issuer
does not receive six consecutive required minimum periodic payments on
or before the payment due date beginning with the payment due
immediately following the effective date of the increase, even if, at
some later point in time, the card issuer receives six consecutive
required minimum periodic payments on or before the payment due date.
ii. Rate, fee, or charge that does not exceed rate, fee, or charge
that applied before increase. Although Sec. 226.55(b)(4)(ii) requires
the card issuer to reduce an annual percentage rate, fee, or charge
increased pursuant to Sec. 226.55(b)(4) to the annual percentage rate,
fee, or charge that applied prior to the increase, this provision does
not prohibit the card issuer from applying an increased annual
percentage rate, fee, or charge consistent with any of the other
exceptions in Sec. 226.55(b). For example, if a temporary rate applied
prior to the Sec. 226.55(b)(4) increase and the temporary rate expired
before a reduction in rate pursuant to Sec. 226.55(b)(4)(ii), the card
issuer may apply an increased rate to the extent consistent with Sec.
226.55(b)(1). Similarly, if a variable rate applied prior to the Sec.
226.55(b)(4) increase, the card issuer may apply any increase in that
variable rate to the extent consistent with Sec. 226.55(b)(2).
iii. Delayed implementation of reduction. If Sec. 226.55(b)(4)(ii)
requires a card issuer to reduce an annual percentage rate, fee, or
charge on a date that is not the first day of a billing cycle, the card
issuer may delay application of the reduced rate, fee, or charge until
the first day of the following billing cycle.
iv. Examples. The following examples illustrate the application of
Sec. 226.55(b)(4)(ii):
A. Assume that the billing cycles for a credit card account begin
on the first day of the month and end on the last day of the month and
that the required minimum periodic payments are due on the fifteenth
day of the month. Assume also that the account has a $5,000 purchase
balance to which a non-variable annual percentage rate of 15% applies.
On May 16 of year one, the card issuer has not received the required
minimum periodic payments due on the fifteenth day of March, April, or
May and sends a Sec. 226.9(g) notice stating that the annual
percentage rate applicable to the $5,000 balance and to new
transactions will increase to 28% effective July 1. On July 1, Sec.
226.55(b)(4) permits the card issuer to apply the 28% rate to the
$5,000 balance and to new transactions. The card issuer receives the
required minimum periodic payments due on the fifteenth day of July,
August, September, October, November, and December. On January 1 of
year two, Sec. 226.55(b)(4)(ii) requires the card issuer to reduce the
rate that applies to any remaining portion of the $5,000 balance to
15%. The card issuer is not required to reduce the rate that applies to
any transactions that occurred on or after May 31 (which is the
fifteenth day after provision of the Sec. 226.55(b)(4) notice).
B. Same facts as paragraph iv.A. above except that the 15% rate
that applied to the $5,000 balance prior to the Sec. 226.55(b)(4)
increase was scheduled to increase to 20% on August 1 of year one
(pursuant to Sec. 226.55(b)(1)). On January 1 of year two, Sec.
226.55(b)(4)(ii) requires the card issuer to reduce the rate that
applies to any remaining portion of the $5,000 balance to 20%.
C. Same facts as paragraph iv.A. above except that the 15% rate
that applied to the $5,000 balance prior to the Sec. 226.55(b)(4)
increase was a variable rate that was determined by adding a margin of
10 percentage points to a publicly-available index not under the card
issuer's control (consistent with Sec. 226.55(b)(2)). On January 1 of
year two, Sec. 226.55(b)(4)(ii) requires the card issuer to reduce the
rate that applies to any remaining portion of the $5,000 balance to the
variable rate determined using the 10-point margin.
55(b)(5) Workout and temporary hardship arrangement exception.
1. Scope of exception. Nothing in Sec. 226.55(b)(5) permits a card
issuer to alter the requirements of Sec. 226.55 pursuant to a workout
or temporary hardship arrangement. For example, a card issuer cannot
increase an annual percentage rate or a fee or charge required to be
disclosed under Sec. 226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii)
pursuant to a workout or temporary hardship arrangement unless
otherwise permitted by Sec. 226.55. In addition, a card issuer cannot
require the consumer to make payments with respect to a protected
balance that exceed the payments permitted under Sec. 226.55(c).
2. Relationship to Sec. 226.9(c)(2)(v)(D). A card issuer that has
complied with the disclosure requirements in Sec. 226.9(c)(2)(v)(D)
has also complied with the disclosure requirements in Sec.
226.55(b)(5)(i). See comment 9(c)(2)(v)-8.
3. Rate, fee, or charge that does not exceed rate, fee, or charge
that applied before workout or temporary hardship arrangement. Upon the
completion or failure of a workout or temporary hardship arrangement,
Sec. 226.55(b)(5)(ii) prohibits the card issuer from applying to any
transactions that occurred prior to commencement of the arrangement an
annual percentage rate, fee, or charge that exceeds the annual
percentage rate, fee, or charge that applied to those transactions
prior to commencement of the arrangement. However, this provision does
not prohibit the card issuer from applying an increased annual
percentage rate, fee, or charge upon completion or failure of the
arrangement, to the extent consistent with any of the other exceptions
in Sec. 226.55(b). For example, if a temporary rate applied prior to
the arrangement and that rate expired during the arrangement, the card
issuer may apply an increased rate upon completion or failure of the
arrangement to the extent consistent with Sec. 226.55(b)(1).
Similarly, if a variable rate applied prior to the arrangement, the
card issuer may apply any increase in that variable rate upon
completion or failure of the arrangement to the extent consistent with
Sec. 226.55(b)(2).
4. Examples.
[[Page 54324]]
i. Assume that, consistent with Sec. 226.55(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 card issuer 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 card issuer may increase the margin for the
variable rate that applies to the $5,000 balance up to 15 percentage
points.
ii. Assume that a consumer fails to make four consecutive monthly
minimum payments totaling $480 on a consumer credit card account with a
balance of $6,000 and that, consistent with Sec. 226.55(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 card issuer 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
card issuer 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.
55(b)(6) Servicemembers Civil Relief Act exception.
1. Rate that does not exceed rate that applied before decrease.
Once 50 U.S.C. app. 527 no longer applies, Sec. 226.55(b)(6) prohibits
a card issuer from applying an annual percentage rate to any
transactions that occurred prior to a decrease in rate pursuant to 50
U.S.C. app. 527 that exceeds the rate that applied to those
transactions prior to the decrease. However, this provision does not
prohibit the card issuer from applying an increased annual percentage
rate once 50 U.S.C. app. 527 no longer applies, to the extent
consistent with any of the other exceptions in Sec. 226.55(b). For
example, if a temporary rate applied prior to the decrease and that
rate expired during the period that 50 U.S.C. app. 527 applied to the
account, the card issuer may apply an increased rate once 50 U.S.C.
app. 527 no longer applies to the extent consistent with Sec.
226.55(b)(1). Similarly, if a variable rate applied prior to the
decrease, the card issuer may apply any increase in that variable rate
once 50 U.S.C. app. 527 no longer applies to the extent consistent with
Sec. 226.55(b)(2).
2. Example. Assume that on December 31 of year one the annual
percentage rate that applies to a $5,000 balance on a credit card
account is a variable rate that is determined by adding a margin of 10
percentage points to a publicly-available index that is not under the
card issuer's control. On January 1 of year two, the card issuer
reduces the rate that applies to the $5,000 balance to a non-variable
rate of 6% pursuant to 50 U.S.C. app. 527. On January 1 of year three,
50 U.S.C. app. 527 ceases to apply and the card issuer provides a
notice pursuant to Sec. 226.9 informing the consumer that on February
15 of year three the variable rate determined using the 10-point margin
will apply to any remaining portion of the $5,000 balance. On February
15 of year three, Sec. 226.55(b)(6) permits the card issuer to begin
accruing interest on any remaining portion of the $5,000 balance at the
variable rate determined using the 10-point margin.
55(c) Treatment of protected balances.
55(c)(1) Definition of protected balance.
1. Example of protected balance. Assume that, on March 15 of year
two, an account has a purchase balance of $1,000 at a non-variable
annual percentage rate of 12% and that, on March 16, the card issuer
sends a notice pursuant to Sec. 226.9(c) informing the consumer that
the annual percentage rate for new purchases will increase to a non-
variable rate of 15% on May 1. The fourteenth day after provision of
the notice is March 29. On March 29, the consumer makes a $100
purchase. On March 30, the consumer makes a $150 purchase. On May 1,
Sec. 226.55(b)(3) permits the card issuer to begin accruing interest
at 15% on the $150 purchase made on March 30 but does not permit the
card issuer to apply that 15% rate to the $1,100 purchase balance as of
March 29. Accordingly, the protected balance for purposes of Sec.
226.55(c) is the $1,100 purchase balance as of March 29. The $150
purchase made on March 30 is not part of the protected balance.
2. First year after account opening. Section 226.55(c) applies to
amounts owed for a category of transactions to which an increased
annual percentage rate or an increased fee or charge cannot be applied
after the rate, fee, or charge for that category of transactions has
been increased pursuant to Sec. 226.55(b)(3). Because Sec.
226.55(b)(3)(iii) does not permit a card issuer to increase an annual
percentage rate or a fee or charge required to be disclosed under Sec.
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) during the first year
after account opening, Sec. 226.55(c) does not apply to balances
during the first year after account opening.
3. Increased fees and charges. Once an account has been open for
more than one year, Sec. 226.55(b)(3) permits a card issuer to
increase a fee or charge required to be disclosed under Sec.
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) after complying with the
applicable notice requirements in Sec. 226.9(b) or (c), provided that
the increased fee or charge is not applied to a protected balance. A
card issuer is not prohibited from increasing a fee or charge that
applies to the account as a whole or to balances other than the
protected balance. For example, after the first year following account
opening, a card issuer may add a new annual or a monthly maintenance
fee to an account or increase such a fee so long as the fee is not
based solely on the protected balance. However, if the consumer rejects
an increase in a fee or charge pursuant to Sec. 226.9(h), the card
issuer is prohibited from applying the increased fee or charge to the
account and from imposing any other fee or charge solely as a result of
the rejection. See Sec. 226.9(h)(2)(i) and (ii); comment 9(h)(2)(ii)-
2.
55(c)(2) Repayment of protected balance.
1. No less beneficial to the consumer. A card issuer may provide a
method of repaying the protected balance that is different from the
methods listed in Sec. 226.55(c)(2) so long as the method used is no
less beneficial to the consumer than one of the listed methods. A
method is no less beneficial to the consumer if the method results in a
required minimum periodic payment that is equal to or less than a
minimum payment calculated using the method for the account before the
effective date of the increase. Similarly, a method is no less
beneficial to the consumer if the method amortizes the balance in five
years or longer or if the method results in a required minimum periodic
payment that is equal to or less than a minimum payment calculated
consistent with Sec. 226.55(c)(2)(iii). For example:
i. If at account opening the cardholder agreement stated that the
required minimum periodic payment would be either the total of fees and
interest charges plus 1% of the total amount owed or $20 (whichever is
greater), the card issuer may require the consumer to make a minimum
payment of $20 even if doing so would pay off the balance in
[[Page 54325]]
less than five years or constitute more than 2% of the balance plus
fees and interest charges.
ii. A card issuer could increase the percentage of the balance
included in the required minimum periodic payment from 2% to 5% so long
as doing so would not result in amortization of the balance in less
than five years.
iii. A card issuer could require the consumer to make a required
minimum periodic payment that amortizes the balance in four years so
long as doing so would not more than double the percentage of the
balance included in the minimum payment prior to the date on which the
increased annual percentage rate, fee, or charge became effective.
55(c)(2)(ii) Five-year amortization period.
1. Amortization period starting from effective date of increase.
Section 226.55(c)(2)(ii) provides for an amortization period for the
protected balance of no less than five years, starting from the date on
which the increased annual percentage rate or fee or charge required to
be disclosed under Sec. 226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii)
became effective. A card issuer is not required to recalculate the
required minimum periodic payment for the protected balance if, during
the amortization period, that balance is reduced as a result of the
allocation of payments by the consumer in excess of that minimum
payment consistent with Sec. 226.53 or any other practice permitted by
these rules and other applicable law.
2. Amortization when applicable rate is variable. If the annual
percentage rate that applies to the protected balance varies with an
index, the card issuer may adjust the interest charges included in the
required minimum periodic payment for that balance accordingly in order
to ensure that the balance is amortized in five years. For example,
assume that a variable rate that is currently 15% applies to a
protected balance and that, in order to amortize that balance in five
years, the required minimum periodic payment must include a specific
amount of principal plus all accrued interest charges. If the 15%
variable rate increases due to an increase in the index, the creditor
may increase the required minimum periodic payment to include the
additional interest charges.
55(c)(2)(iii) Doubling repayment rate.
1. Portion of required minimum periodic payment on other balances.
Section 226.55(c)(2)(iii) addresses the portion of the required minimum
periodic payment based on a the protected balance. Section
226.55(c)(2)(iii) does not limit or otherwise address the card issuer's
ability to determine the portion of the required minimum periodic
payment based on other balances on the account or the card issuer's
ability to apply that portion of the minimum payment to the balances on
the account.
2. Example. Assume that the method used by a card issuer to
calculate the required minimum periodic payment for a credit card
account requires the consumer to pay either the total of fees and
accrued interest charges plus 2% of the total amount owed or $50,
whichever is greater. Assume also that the account has a purchase
balance of $2,000 at an annual percentage rate of 15% and a cash
advance balance of $500 at an annual percentage rate of 20% and that
the card issuer increases the rate for purchases to 18% but does not
increase the rate for cash advances. Under Sec. 226.55(c)(2)(iii), the
card issuer may require the consumer to pay fees and interest plus 4%
of the $2,000 purchase balance. Section 226.55(c)(2)(iii) does not
limit the card issuer's ability to increase the portion of the required
minimum periodic payment that is based on the cash advance balance.
55(d) Continuing application.
1. Closed accounts. If a credit card account with a balance is
closed, Sec. 226.55 continues to apply to that balance. For example,
if a card issuer or a consumer closes a credit card account with a
balance, Sec. 226.55(d)(1) prohibits the card issuer from increasing
the annual percentage rate that applies to that balance or imposing a
periodic fee based solely on that balance that was not charged before
the account was closed (such as a closed account fee) unless permitted
by one of the exceptions in Sec. 226.55(b).
2. Acquired accounts. If, through merger or acquisition (for
example), a card issuer acquires a credit card account with a balance,
Sec. 226.55 continues to apply to that balance. For example, if a
credit card account has a $1,000 purchase balance with an annual
percentage rate of 15% and the card issuer that acquires that account
applies an 18% rate to purchases, Sec. 226.55(d)(1) prohibits the card
issuer from applying the 18% rate to the $1,000 balance unless
permitted by one of the exceptions in Sec. 226.55(b).
3. Balance transfers.
i. Between accounts issued by the same creditor. If a balance is
transferred from a credit card account issued by a creditor to another
credit account issued by the same creditor or its affiliate or
subsidiary, Sec. 226.55 continues to apply to that balance. For
example, if a credit card account has a $2,000 purchase balance with an
annual percentage rate of 15% and that balance is transferred to
another credit card account issued by the same creditor that applies an
18% rate to purchases, Sec. 226.55(d)(2) prohibits the creditor from
applying the 18% rate to the $2,000 balance unless permitted by one of
the exceptions in Sec. 226.55(b). However, the creditor would not
generally be prohibited from charging a new periodic fee (such as an
annual fee) on the second account so long as the fee is not based
solely on the $2,000 balance and the creditor has notified the consumer
of the fee either by providing written notice 45 days before imposing
the fee pursuant to Sec. 226.9(c) or by providing account-opening
disclosures pursuant to Sec. 226.6(b). See also Sec.
226.55(b)(3)(iii); comment 55(b)(3)-3; comment 5(b)(1)(i)-6. Additional
circumstances in which a balance is considered transferred for purposes
of Sec. 226.55(d)(2) include when:
A. A retail credit card with a 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 a balance is replaced or substituted
with another credit card account offering different features;
C. A credit card account with a 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 creditors. If a balance is
transferred to a credit card account issued by a creditor from a credit
card account issued by a different creditor or an institution that is
not an affiliate or subsidiary of the creditor that issued the credit
card account, Sec. 226.55(d)(2) does not prohibit the creditor to
which the balance is transferred from applying its account terms to
that balance, provided that those terms comply with this part. For
example, if a credit card account issued by creditor A has a $1,000
purchase balance at an annual percentage rate of 15% and the consumer
transfers that balance to a credit card account with a purchase rate of
17% issued by creditor B, creditor B may apply the 17% rate to the
$1,000 balance. However, creditor B may not subsequently increase the
rate on that balance unless permitted by one of the exceptions in Sec.
226.55(b).
[[Page 54326]]
Sec. 226.56 Requirements for over-the-limit transactions.
56(b) Opt-in requirement.
1. Policy and practice of declining over-the-limit transactions.
Section 226.56 does not apply to any creditor that has a policy and
practice of declining to pay any over-the-limit transactions for the
consumer's credit card account when the creditor has a reasonable
belief that completing a transaction will cause the consumer to exceed
the consumer's credit limit for that account. For example, if a
creditor generally declines any transaction that may exceed a
consumer's credit limit, it is not subject to the requirement to
provide consumers notice and an opportunity to affirmatively consent to
the creditor's payment of over-the-limit transactions.
2. Over-the-limit transactions not required to be paid or
authorized. Section 226.56 does not require a creditor to pay or
authorize an over-the-limit transaction even if the consumer has
affirmatively consented to the creditor's over-the-limit service.
3. Periodic fees or charges. A creditor may not impose a periodic
fee for paying over-the-limit transactions that is assessed whether or
not the consumer has exceeded the credit limit during the billing cycle
(for example, a monthly ``over-the-limit protection'' service fee)
unless the consumer has affirmatively consented to or opted in to the
service.
4. Examples of reasonable opportunity to provide affirmative
consent. A creditor provides a reasonable opportunity for the consumer
to affirmatively consent to the creditor's payment of over-the-limit
transactions if--
i. On the application. The creditor provides the notice on the
application form that the consumer can fill out to request the service
as part of the application;
ii. By mail. The creditor provides a form with the account-opening
disclosures or the periodic statement for the consumer to fill out and
mail to affirmatively request the service;
iii. By telephone. The creditor provides a readily available
telephone number that consumers may call to provide affirmative
consent.
iv. By electronic means. The creditor provides an electronic means
for the consumer to affirmatively consent. For example, a creditor
could provide a form that can be accessed and processed at its Web
site, where the consumer can check a box to opt in and confirm that
opt-in choice by clicking on a consent box.
5. Separate consent required. A consumer's affirmative consent, or
opt-in, to a creditor's payment of over-the-limit transactions must be
separate from other consents or acknowledgments obtained by the
creditor. For example, a consumer's signature on a credit application
to request a credit card would not by itself sufficiently evidence the
consumer's consent to the creditor's payment of over-the-limit
transactions. However, a creditor may comply with the requirement to
obtain separate consent if the creditor also includes a check box or
signature line on the application that the consumer can initial or sign
to request the over-the-limit service, provided that the box or line is
used solely to indicate the consumer's opt-in decision and not for any
other purpose, such as to also obtain consumer consents for other
account services or features.
56(b)(2) Completion of over-the-limit transactions without consumer
consent.
1. Examples of over-the-limit transactions paid without consumer
consent. Section 226.56(b)(2) provides that a creditor may pay an over-
the-limit transaction even if the consumer has not provided affirmative
consent, so long as the creditor does not impose a fee or charge for
paying the transaction. The prohibition on imposing fees for paying an
over-the-limit transaction applies even in circumstances where the
creditor is unable to avoid paying a transaction that exceeds the
consumer's credit limit.
i. Transactions not submitted for authorization. A consumer has not
affirmatively consented to a creditor's payment of over-the-limit
transactions. The consumer purchases a $3 cup of coffee using his debit
card. Because of the small dollar amount of the transaction, the
merchant does not submit the transaction to the creditor for
authorization. The transaction causes the consumer to exceed the credit
limit. Under these circumstances, the creditor is prohibited from
imposing a fee or charge on the consumer's credit card account for
paying the over-the-limit transaction because the consumer has not
opted in to the creditor's over-the-limit service.
ii. Settlement amount exceeds authorization amount. A consumer has
not affirmatively consented to a creditor's payment of over-the-limit
transactions. The consumer uses his credit card at a pay-at-the-pump
fuel dispenser to purchase $50 of fuel. Before permitting the consumer
to use the fuel pump, the merchant verifies the validity of the card by
requesting an authorization hold of $1. The subsequent $50 transaction
amount causes the consumer to exceed his credit limit. Under these
circumstances, the creditor is prohibited from imposing a fee or charge
on the consumer's credit card account for paying the over-the-limit
transaction because the consumer has not opted in to the creditor's
over-the-limit service.
2. Permissible fees or charges when a consumer has not consented.
Section 226.56(b)(2) does not preclude a creditor from assessing fees
or charges other than over-the-limit fees when an over-the-limit
transaction is completed. For example, if a consumer has not opted in,
the creditor could assess a balance transfer fee in connection with a
balance transfer, provided such a fee is assessed whether or not the
transfer exceeds the credit limit. The creditor may also assess
interest charges in connection with the over-the-limit transaction.
56(c) Method of election.
1. Creditor-determined methods. A creditor may determine the means
available to consumers to affirmatively consent, or opt in, to the
creditor's payment over-the-limit transactions. For example, a creditor
may decide to obtain consents in writing, electronically, or orally, or
through some combination of these methods. Section 226.56(c) further
requires, however, that such methods must be made equally available for
consumers to revoke a prior consent.
2. Electronic requests. A consumer consent or revocation request
submitted electronically is not considered a consumer disclosure for
purposes of the E-Sign Act.
56(d) Timing of notices.
1. Revocation notice on each statement. A creditor may, but is not
required to, include the notice informing the consumer of the right to
revoke the consumer's prior consent to the creditor's payment of over-
the-limit transactions on each periodic statement sent to the consumer,
even if the consumer has not incurred an over-the-limit fee during a
particular billing cycle.
56(e) Content.
1. Range of fees. If the amount of an over-the-limit fee may vary,
such as based on the amount of the over-the-limit transaction, the
creditor may indicate that the consumer may be assessed a fee ``up to''
the maximum fee or provide the range of fees.
2. Additional notice content. In addition to the content required
under Sec. 226.56(e)(1), a creditor may briefly describe in its opt-in
notice the benefits of the creditor's payment of over-the-limit
transactions. For example, the creditor may state that if the consumer
consents, or opts in, to the payment of over-the-limit transactions,
the consumer may avoid having
[[Page 54327]]
transactions declined when the issuer believes a transaction may cause
the consumer to exceed the credit limit. Creditors may also indicate
that there may be circumstances under which their creditor will decline
an over-the-limit transaction even if the consumer has opted in or that
the payment of over-the-limit transactions is at the discretion of the
creditor.
56(f) Joint relationships.
1. Authorized users. Section 226.56(f) does not permit a creditor
to treat a request to opt in to or to revoke a prior request for the
creditor's payment of over-the-limit transactions from an authorized
user that is not jointly liable on a credit card account as a consent
or revocation request for that account.
56(g) Continuing right to opt in or revoke opt-in.
1. Fees or charges for over-the-limit transactions incurred prior
to revocation. Section 226.56(g) provides that a consumer may revoke
his or her prior consent at any time. If a consumer does so, this
provision does not require the creditor to waive or reverse any over-
the-limit fees or charges assessed to the consumer's account prior to
the creditor's implementation of the consumer's revocation request. Nor
does this requirement prevent the creditor from assessing over-the-
limit fees in subsequent cycles if the consumer's account balance
continues to exceed the credit limit as a result of an over-the-limit
transaction that was completed prior to the consumer's revocation of
consent.
56(h) Duration of opt-in.
1. Creditor ability to stop paying over-the-limit transactions
after consumer consent. A creditor may cease paying over-the-limit
transactions for consumers that have previously opted in at any time
and for any reason. For example, a creditor may stop paying over-the-
limit transactions for a consumer to respond to changes in the credit
risk presented by the consumer.
56(j) Prohibited practices.
1. Examples of limits on fees or charges imposed per billing cycle.
Section 226.56(j)(1) generally prohibits a creditor from assessing a
fee or charge due to the same over-the-limit transaction for more than
three billing cycles. The following examples illustrate the
prohibition.
i. Assume that a consumer has opted into a creditor's payment of
over-the-limit transactions. The consumer exceeds the credit limit
during the December billing cycle and does not make sufficient payment
to bring the account balance back under the limit for four consecutive
cycles. The consumer does not engage in any additional transactions
during this period. In this case, Sec. 226.56(j)(1) would permit a
creditor to charge a maximum of three over-the-limit fees for the
December over-the-limit transaction.
ii. Assume the same facts as above except that the consumer makes
sufficient payment to reduce his account balance during the February
billing cycle. The creditor may charge over-the-limit fees for the
December and January billing cycles. However, because the consumer's
account balance was below the credit limit prior to the end of the
February billing cycle, the creditor may not charge an over-the-limit
fee for the February billing cycle.
iii. Assume the same facts as in paragraph i, except that the
consumer engages in another over-the-limit transaction during the
February billing cycle. Because the consumer has obtained an additional
extension of credit which causes the consumer to exceed his credit
limit, the creditor may charge over-the-limit fees for the December
transaction on the January, February and March billing statements, and
additional over-the-limit fees for the February transaction on the
April and May billing statements. The creditor may not charge an over-
the-limit fee for each of the December and the February transactions on
the March billing statement because it is prohibited from imposing more
than one over-the-limit fee during a billing cycle.
2. Replenishment of credit line. Section 226.56(j)(2) does not
prevent a creditor from delaying replenishment of a consumer's
available credit where appropriate, for example, where the creditor may
suspect fraud on the credit card account. However, a creditor may not
assess an over-the-limit fee or charge if the over-the-limit
transaction is caused by the creditor's decision not to promptly
replenish the available credit after the consumer's payment is credited
to the consumer's account.
3. Examples of conditioning. Section 226.56(j)(3) prohibits a
creditor from conditioning or otherwise tying the amount of a
consumer's credit limit on the consumer affirmatively consenting to the
creditor's payment of over-the-limit transactions where the creditor
assesses an over-the-limit fee for the transaction. The following
examples illustrate the prohibition.
i. Amount of credit limit. Assume that a creditor offers a credit
card with a credit limit of $1000. The consumer is informed that if the
consumer opts in to the payment of the creditor's payment of over-the-
limit transactions, the initial credit limit would be increased to
$1300. If the creditor would have offered the credit card with the
$1300 credit limit but for the fact that the consumer did not consent
to the creditor's payment of over-the-limit transactions, the creditor
would not be in compliance with Sec. 226.56(j)(3). Section
226.56(j)(3) prohibits the creditor from tying the consumer's opt in to
the creditor's payment of over-the-limit transactions as a condition of
obtaining the credit card with the $1300 credit limit.
ii. Access to credit. Assume the same facts as above, except that
the creditor declines the consumer's application altogether because the
consumer has not affirmatively consented or opted in to the creditor's
payment of over-the-limit transactions. The creditor is not in
compliance with Sec. 226.56(j)(3) because the creditor has required
the consumer's consent as a condition of obtaining credit.
Sec. 226.57 Special rules for marketing open-end credit to college
students.
57(a) Definitions.
57(a)(1) College student credit card.
1. Definition. The definition of college student credit card
excludes home-equity lines of credit accessed by credit cards and
overdraft lines of credit accessed by debit cards. A college student
credit card includes a college affinity card within the meaning of TILA
Section 127(r)(1)(A). In addition, a card may fall within the scope of
the definition regardless of the fact that it is not intentionally
targeted at or marketed to college students. For example, an agreement
between a college and a card issuer may provide for marketing of credit
cards to alumni, faculty, staff, and other non-student consumers who
have a relationship with the college, but also contain provisions that
contemplate the issuance of cards to students. A credit card issued to
a student at the college in connection with such an agreement qualifies
as a college student credit card.
57(a)(5) College credit card agreement.
1. Definition. Section 226.57(a)(5) defines ``college credit card
agreement'' to include any business, marketing or promotional agreement
between a card issuer and a college or university (or an affiliated
organization, such as an alumni club or a foundation) if the agreement
provides for the issuance of credit cards to full-time or part-time
students. Business, marketing or promotional agreements may include a
broad range of arrangements between a card issuer and an institution of
higher education or affiliated organization, including arrangements
that do not meet the criteria to be considered college affinity card
agreements as discussed in TILA Section 127(r)(1)(A). For example,
[[Page 54328]]
TILA Section 127(r)(1)(A) specifies that under a college affinity card
agreement, the card issuer has agreed to make a donation to the
institution or affiliated organization, the card issuer has agreed to
offer discounted terms to the consumer, or the credit card will display
pictures, symbols, or words identified with the institution or
affiliated organization; even if these conditions are not met, an
agreement may qualify as a college credit card agreement, if the
agreement is a business, marketing or promotional agreement that
contemplates the issuance of college student credit cards to college
students currently enrolled (either full-time or part-time) at the
institution. An agreement may qualify as a college credit card
agreement even if marketing of cards under the agreement is targeted at
alumni, faculty, staff, and other non-student consumers, as long as
cards may also be issued to students in connection with the agreement.
57(b) Public disclosure of agreements.
1. Public disclosure. Section 226.57(b) requires an institution of
higher education to publicly disclose any contract or other agreement
made with a card issuer or creditor for the purpose of marketing a
credit card. Examples of publicly disclosing such contracts or
agreements include, but are not limited to, posting such contracts or
agreements on the institution's Web site or making such contracts or
agreements available upon request, provided the procedures for
requesting the documents are reasonable and free of cost to the
requestor, and the requested contracts or agreements are provided
within a reasonable time frame.
2. Redaction prohibited. An institution of higher education must
publicly disclose any contract or other agreement made with a card
issuer for the purpose of marketing a credit card in its entirety and
may not redact any portion of such contract or agreement. Any clause
existing in such contracts or agreements, providing for the
confidentiality of any portion of the contract or agreement, would be
invalid to the extent it restricts the ability of the institution of
higher education to publicly disclose the contract or agreement in its
entirety.
57(c) Prohibited inducements.
1. Tangible item clarified. A tangible item includes any physical
item, such as a gift card, a t-shirt, or a magazine subscription, that
a card issuer or creditor offers to induce a college student to apply
for or open an open-end consumer credit plan offered by such card
issuer or creditor. Tangible items do not include non-physical
inducements such as discounts, rewards points, or promotional credit
terms.
2. Inducement clarified. If a tangible item is offered to a person
whether or not that person applies for or opens an open-end consumer
credit plan, the tangible item has not been offered to induce the
person to apply for or open the plan. For example, refreshments offered
to a college student on campus that are not conditioned on whether the
student has applied for or agreed to open an open-end consumer credit
plan would not violate Sec. 226.57(c).
3. Near campus clarified. A location that is within 1,000 feet of
the border of the campus of an institution of higher education, as
defined by the institution of higher education, is considered near the
campus of an institution of higher education.
4. Mailings included. The prohibition in Sec. 226.57(c) on
offering a tangible item to a college student to induce such student to
apply for or open an open-end consumer credit plan offered by such card
issuer or creditor applies to any solicitation or application mailed to
a college student at an address on or near the campus of an institution
of higher education.
5. Related event clarified. An event is related to an institution
of higher education if the marketing of such event uses the name,
emblem, mascot, or logo of an institution of higher education, or other
words, pictures, symbols identified with an institution of higher
education in a way that implies that the institution of higher
education endorses or otherwise sponsors the event.
6. Reasonable procedures for determining if applicant is a student.
Section 226.57(c) applies solely to offering a tangible item to a
college student. Therefore, a card issuer or creditor may offer any
person who is not a college student a tangible item to induce such
person to apply for or open an open-end consumer credit plan offered by
such card issuer or creditor, on campus, near campus, or at an event
sponsored by or related to an institution of higher education. The card
issuer or creditor must have reasonable procedures for determining
whether an applicant is a college student before giving the applicant
the tangible item. For example, a card issuer or creditor may ask
whether the applicant is a college student as part of the application
process. The card issuer or creditor may rely on the representations
made by the applicant.
57(d) Annual report to the Board.
57(d)(3) Contents of report.
1. Memorandum of understanding. Section 226.57(d)(3) requires that
the report to the Board include, among other items, a copy of any
memorandum of understanding between the card issuer and the institution
(or affiliated organization) that ``directly or indirectly relates to
the college credit card agreement or that controls or directs any
obligations or distribution of benefits between any such entities.''
Such a memorandum of understanding includes any document that amends
the college credit card agreement, or that constitutes a further
agreement between the parties as to the interpretation or
administration of the agreement. For example, a memorandum of
understanding required to be included in the report would include a
document that provides details on the dollar amounts of payments from
the card issuer to the university, to supplement the original agreement
which only provided for payments in general terms (e.g., as a
percentage). A memorandum of understanding for these purposes would not
include e-mail (or other) messages that merely discuss matters such as
the addresses to which payments should be sent or the names of contact
persons for carrying out the agreement.
Sec. 226.58 Internet posting of credit card agreements.
58(b) Definitions.
58(b)(1) Agreement.
1. Material included. For purposes of this section, the agreement
is deemed to include certain information, such as annual percentage
rates and fees, even if the issuer does not otherwise include this
information in the basic credit contract. This information is listed
under the defined term ``pricing information'' in Sec. 226.58(b)(4).
For example, the basic credit contract may not specify rates, fees and
other information that constitutes pricing information as defined in
Sec. 226.58(b)(4); instead, such information may be provided to the
cardholder in a separate document sent along with the card. However,
this information nevertheless constitutes part of the agreement for
purposes of Sec. 226.58.
2. Material excluded. Documents that may be sent to the consumer
along with the credit card or credit card agreement, but that are not
deemed part of the agreement for purposes of this section, include
items such as a cover letter, a validation sticker on the card, other
information about card security, offers for credit insurance or other
optional products, advertisements, and disclosures required under
Federal or State law that are not incorporated into the agreement
itself.
58(b)(3) Offers.
[[Page 54329]]
1. Cards offered to limited groups. A card issuer is deemed to
offer a credit card agreement to the public even if the issuer
solicits, or accepts applications from, only a limited group of
persons. For example, an issuer may market affinity cards to students
and alumni of a particular educational institution, or may solicit only
high-net-worth individuals for a particular card; in these cases, the
card agreement would be considered to be offered to the public.
2. Individualized agreements. A card issuer is deemed to offer a
credit card agreement to the public even if the terms of the agreement
are changed immediately upon opening of an account to terms not offered
to the public.
58(c) Registration with Board.
1. Subsequent registration requirement. An issuer that is required
to make a submission to the Board under Sec. 226.58(d) that has not
previously registered with the Board must register with the Board at
least 21 days before the quarterly submission deadline specified in
Sec. 226.58(d)(1) on which the card issuer's first submission is due.
This provision would apply, for example, if a new credit card issuer is
organized or if an existing issuer that previously qualified for the de
minimis exception under Sec. 226.58(e) ceased to qualify. For example,
a card issuer that previously qualified for the de minimis exception
ceases to qualify as of September 30. That issuer's first submission to
the Board is due on October 31, the next quarterly submission deadline.
The issuer must register with the Board no later than October 10, 21
days before October 31.
2. Updates to registration information. Issuers that have
registered with the Board under Sec. 226.58(c)(1) or (c)(2) must
provide updated registration information to the Board no later than the
first quarterly submission deadline specified in Sec. 226.58(d)(1)
after the information changes. For example, a card issuer that has
already registered with the Board changes its address on October 15.
The issuer must submit revised registration information advising the
Board of the address change no later than October 31, the next
quarterly submission deadline specified in Sec. 226.58(d)(1) after the
change.
58(d) Submission of agreements to Board.
1. Quarterly submission requirement. Section 226.58(d)(1) requires
card issuers to make quarterly submissions to the Board no later than
the first business day on or after January 31, April 30, July 31, and
October 31 of each year. For example, a card issuer has already
submitted three credit card agreements to the Board. On October 15, the
issuer stops offering agreement A. On November 20, the issuer makes
changes to the terms of agreement B. On December 1, the issuer starts
offering a new agreement D. The issuer must submit to the Board no
later than the first business day on or after January 31: (i)
notification that the issuer is withdrawing agreement A, because it is
no longer offered to the public; (ii) the revised version of agreement
B; and (iii) agreement D.
2. No quarterly submission required. Under Sec. 226.58(d)(1), an
issuer is not required to make any submission to the Board at a
particular quarterly submission deadline if, during the previous
calendar quarter, the issuer did not take any of the following actions:
(i) offering a new credit card agreement that was not submitted to the
Board previously; (ii) revising or amending an agreement previously
submitted to the Board; and (iii) ceasing to offer an agreement
previously submitted to the Board. For example, a card issuer offers
five agreements to the public as of September 30 and submits these to
the Board by October 31, as required by Sec. 226.58(d)(1). Between
September 30 and December 31, the issuer continues to offer all five of
these agreements to the public without amending or revising them and
does not begin offering any new agreements. The issuer is not required
to make any submission to the Board by the following January 31.
3. No requirement to resubmit unchanged agreements. Under Sec.
226.58(d)(3), if a credit card agreement has been submitted to the
Board, no changes have been made to the agreement, and the card issuer
continues to offer the agreement to the public, no additional
submission of that agreement is required. For example, a credit card
issuer begins offering an agreement in October and submits the
agreement to the Board the following January 31, as required by Sec.
226.58(d)(1). As of March 31, the issuer has not revised or amended the
agreement and is still offering the agreement to the public. The issuer
is not required to submit anything to the Board regarding that
agreement by April 30.
4. Submission of changed agreements. If an issuer makes changes to
a credit card agreement previously submitted to the Board (including
changes to the provisions of the agreement, the pricing information, or
both), Sec. 226.58(d)(3) requires the issuer to submit the entire
revised agreement to the Board by the first quarterly submission
deadline after the last day of the calendar quarter in which the change
becomes effective. For example, an issuer submits an agreement to the
Board on October 31. On November 15, the issuer changes the method used
to calculate required minimum payments under the agreement. Because an
element of the pricing information has changed, the issuer must submit
the entire revised agreement to the Board no later than January 31 of
the following year.
5. Change-in-terms notices not permissible. Section 226.58(d)(3)
requires that if a change is made to a credit card agreement previously
submitted to the Board, the card issuer must submit the entire revised
agreement to the Board. An issuer may not fulfill this requirement by
submitting a change-in-terms or similar notice covering only the terms
that have changed. In addition, amendments and revisions must be
integrated into the text of the agreement (or the single addendum
described in Appendix N, if applicable), not provided as separate
riders. For example, an issuer changes the purchase APR associated with
an agreement the issuer has previously submitted to the Board. The
purchase APR for that agreement was included in an addendum of pricing
information as described in Appendix N. The issuer may not submit a
change-in-terms or similar notice reflecting the change in APR, either
alone or accompanied by the original text of the agreement and original
addendum of pricing information. Instead, the issuer must revise the
addendum of pricing information to reflect the change in APR and submit
to the Board the entire text of the agreement and the entire revised
addendum, even though no changes have been made to the provisions of
the agreement and only one item on the addendum has changed.
6. Notice of withdrawal of agreement. Section 226.58(d)(4) requires
an issuer to notify the Board if any agreement previously submitted to
the Board by that issuer is no longer offered to the public by the
first quarterly submission deadline after the last day of the calendar
quarter in which the issuer ceased to offer the agreement. For example,
on January 5 an issuer stops offering to the public an agreement it
previously submitted to the Board. The issuer must notify the Board
that the agreement is being withdrawn by April 30, the first quarterly
submission deadline after March 31, the last day of the calendar
quarter in which the issuer stopped offering the agreement.
58(e) De minimis exception.
1. De minimis exception. Under Sec. 226.58(e)(1), an issuer is not
required
[[Page 54330]]
to submit any credit card agreements to the Board under Sec. 226.58(d)
if the card issuer has fewer than 10,000 open credit card accounts
under open-end (not home-secured) consumer credit plans, as of the last
business day of the calendar quarter. For example, an issuer offers
five credit card agreements to the public as of September 30. However,
the issuer has only 2,000 open credit card accounts under open-end (not
home-secured) consumer credit plans as of September 30. The issuer is
not required to submit any agreements to the Board by October 31
because the issuer qualifies for the de minimis exception.
2. Open accounts clarified. For purposes of the de minimis
exception, a credit card account is considered to be open even if the
account is inactive, as long as the account has not been closed by the
cardholder or the card issuer and the cardholder can obtain extensions
of credit on the account. If an account has been closed for new
activity (for example, due to default by the cardholder), but the
cardholder is still making payments to pay off the outstanding balance,
it need not be considered open. If an account has only been suspended
temporarily (for example, due to a report by the cardholder of
unauthorized use of the card), the account is considered open.
3. Date for determining whether issuer qualifies clarified. Whether
an issuer qualifies for the de minimis exception is determined as of
the last business day of each calendar quarter. For example, as of
December 31, an issuer offers three agreements to the public and has
9,500 credit card accounts under open-end (not home secured) consumer
credit plans. As of January 30, the issuer still offers three
agreements, but has 10,100 open accounts. As of March 31, the issuer
still offers three agreements, but has only 9,700 open accounts. Even
though the issuer had 10,100 open accounts at one time during the
calendar quarter, the issuer qualifies for the de minimis exception
because the number of open accounts was less than 10,000 as of March
31. The issuer therefore is not required to submit any agreements to
the Board under Sec. 226.58(d) by April 30.
4. Date for determining whether issuer ceases to qualify clarified.
Whether an issuer has ceased to qualify for the de minimis exception
under Sec. 226.58(e)(2) is determined as of the last business day of
the calendar quarter, as indicated in Sec. 226.58(e)(1). For example,
as of June 30, an issuer offers three agreements to the public and has
9,500 open credit card accounts under open-end (not home-secured)
consumer credit plans. The issuer is not required to submit any
agreements to the Board under Sec. 226.58(d) because the issuer
qualifies for the de minimis exception. As of July 15, the issuer still
offers the same three agreements, but now has 10,000 open accounts. The
issuer is not required to take any action at this time, because whether
an issuer qualifies for the de minimis exception under Sec.
226.58(e)(1) is determined as of the last business day of the calendar
quarter. As of September 30, the issuer still offers the same three
agreements and still has 10,000 open accounts. Because the issuer had
10,000 open accounts as of September 30, the issuer ceased to qualify
for the de minimis exception and must submit the three agreements it
offers to the Board by October 31, the next quarterly submission
deadline.
5. Option to withdraw agreements clarified. Section 226.58(e)(3)
provides that if a card issuer that did not previously qualify comes
within the de minimis exception, the card issuer may, but is not
required to, notify the Board that the card issuer is withdrawing each
agreement the card issuer previously submitted to the Board. Until the
issuer notifies the Board that each agreement it previously submitted
is being withdrawn, the issuer must continue to make quarterly
submissions to the Board under Sec. 226.58(d) and to provide updated
registration information under Sec. 226.58(c)(3). For example, an
issuer has 10,001 open accounts and offers three agreements to the
public as of December 31. The issuer has registered with the Board and
submitted each of the three agreements to the Board as required under
Sec. 226.58(c) and (d). As of March 31, the issuer has only 9,999 open
accounts. The issuer has two options. First, the issuer may notify the
Board that the issuer is withdrawing each of the three agreements it
previously submitted. Once the issuer has notified the Board, the
issuer is no longer required to make quarterly submissions to the Board
under Sec. 226.58(d) or to provide updated registration information to
the Board under Sec. 226.58(c)(3). Alternatively, the issuer may
choose not to notify the Board that it is withdrawing its agreements.
In this case, the issuer must continue making quarterly submissions to
the Board under Sec. 226.58(d) and providing updated registration
information to the Board under Sec. 226.58(c)(3). The issuer might
choose not to withdraw its agreements if, for example, the issuer
believes that it will likely cease to qualify for the de minimis
exception again in the near future.
58(f)(2) Agreements for all open accounts.
1. Credit card agreements provided upon request. Section
226.58(f)(2) states that card issuers may choose to make agreements
available to cardholders upon request. Agreements provided upon request
may be provided by the issuer in either electronic or paper form,
regardless of the form of the cardholder's request.
2. Requirement applies to all open accounts. The requirement to
provide access to credit card agreements under Sec. 226.58(f)(2)
applies to all open credit card accounts under open-end (not home-
secured) consumer credit plans, regardless of whether such agreements
are required to be submitted to the Board pursuant to Sec. 226.58(d).
For example, an issuer that is not required to submit agreements to the
Board because it qualifies for the de minimis exception under Sec.
226.58(e) would still be required to provide cardholders with access to
their specific agreements under Sec. 226.58(f)(2). Similarly, an
agreement that is no longer offered to the public would not be required
to be submitted to the Board under Sec. 226.58(d), but would still
need to be provided to the cardholder to whom it applies under Sec.
226.58(f)(2).
3. Deadline for providing requested agreements clarified. Section
226.58(f)(2) requires that credit card agreements provided upon request
must be sent to the cardholder or otherwise made available to the
cardholder no later than 10 business days after the cardholder's
request is received. For example, if an issuer chooses to respond to a
cardholder's request by mailing a paper copy of the cardholder's
agreement, the issuer must mail the agreement no later than 10 business
days after receipt of the cardholder's request. Alternatively, if an
issuer chooses to respond to a cardholder's request by posting the
cardholder's agreement on the issuer's Web site, the issuer must post
the agreement on its Web site no later than 10 business days after
receipt of the cardholder's request.
* * * * *
Appendix F--Optional Annual Percentage Rate Computations for Creditors
Offering Open-End Plans Subject to the Requirements of Sec. 226.5b
1. Daily rate with specific transaction charge. If the finance
charge results from a charge relating to a specific transaction and
the application of a daily periodic rate, see comment 14(c)(3)-2 for
guidance on an appropriate calculation method.
Appendices G and H--Open-end and Closed-end Model Forms and Clauses
1. Permissible changes. Although use of the model forms and
clauses is not required,
[[Page 54331]]
creditors using them properly will be deemed to be in compliance
with the regulation with regard to those disclosures. Creditors may
make certain changes in the format or content of the forms and
clauses and may delete any disclosures that are inapplicable to a
transaction or a plan without losing the act's protection from
liability, except formatting changes may not be made to model forms
and samples in G-2(A), G-3(A), G-4(A), G-10(A)-(E), G-17(A)-(D), G-
18(A) (except as permitted pursuant to Sec. 226.7(b)(2)), G-18(B)-
(C), G-19, G-20, and G-21. The rearrangement of the model forms and
clauses may not be so extensive as to affect the substance, clarity,
or meaningful sequence of the forms and clauses. Creditors making
revisions with that effect will lose their protection from civil
liability. Except as otherwise specifically required, acceptable
changes include, for example:
i. Using the first person, instead of the second person, in
referring to the borrower.
ii. Using ``borrower'' and ``creditor'' instead of pronouns.
iii. Rearranging the sequences of the disclosures.
iv. Not using bold type for headings.
v. Incorporating certain State ``plain English'' requirements.
vi. Deleting inapplicable disclosures by whiting out, blocking
out, filling in ``N/A'' (not applicable) or ``0,'' crossing out,
leaving blanks, checking a box for applicable items, or circling
applicable items. (This should permit use of multipurpose standard
forms.)
vii. Using a vertical, rather than a horizontal, format for the
boxes in the closed-end disclosures.
2. Debt-cancellation coverage. This regulation does not
authorize creditors to characterize debt-cancellation fees as
insurance premiums for purposes of this regulation. Creditors may
provide a disclosure that refers to debt cancellation or debt
suspension coverage whether or not the coverage is considered
insurance. Creditors may use the model credit insurance disclosures
only if the debt cancellation coverage constitutes insurance under
State law.
Appendix G--Open-end Model Forms and Clauses
1. Models G-1 and G-1(A). The model disclosures in G-1 and G-
1(A) (different balance computation methods) may be used in both the
account-opening disclosures under Sec. 226.6 and the periodic
disclosures under Sec. 226.7. As is clear from the models given,
``shorthand'' descriptions of the balance computation methods are
not sufficient, except where Sec. 226.7(b)(5) applies. For
creditors using model G-1, the phrase ``a portion of'' the finance
charge should be included if the total finance charge includes other
amounts, such as transaction charges, that are not due to the
application of a periodic rate. If unpaid interest or finance
charges are subtracted in calculating the balance, that fact must be
stated so that the disclosure of the computation method is accurate.
Only model G-1(b) contains a final sentence appearing in brackets,
which reflects the total dollar amount of payments and credits
received during the billing cycle. The other models do not contain
this language because they reflect plans in which payments and
credits received during the billing cycle are subtracted. If this is
not the case, however, the language relating to payments and credits
should be changed, and the creditor should add either the disclosure
of the dollar amount as in model G-1(b) or an indication of which
credits (disclosed elsewhere on the periodic statement) will not be
deducted in determining the balance. (Such an indication may also
substitute for the bracketed sentence in model G-1(b).) (See the
commentary to Sec. 226.7(a)(5) and (b)(5).) For open-end plans
subject to the requirements of Sec. 226.5b, creditors may, at their
option, use the clauses in G-1 or G-1(A).
2. Models G-2 and G-2(A). These models contain the notice of
liability for unauthorized use of a credit card. For home-equity
plans subject to the requirements of Sec. 226.5b, at the creditor's
option, a creditor either may use G-2 or G-2(A). For open-end plans
not subject to the requirements of Sec. 226.5b, creditors properly
use G-2(A).
3. Models G-3, G-3(A), G-4 and G-4(A).
i. These set out models for the long-form billing-error rights
statement (for use with the account-opening disclosures and as an
annual disclosure or, at the creditor's option, with each periodic
statement) and the alternative billing-error rights statement (for
use with each periodic statement), respectively. For home-equity
plans subject to the requirements of Sec. 226.5b, at the creditor's
option, a creditor either may use G-3 or G-3(A), and for creditors
that use the short form, G-4 or G-4(A). For open-end (not home-
secured) plans that not subject to the requirements of Sec. 226.5b,
creditors properly use G-3(A) and G-4(A). Creditors must provide the
billing-error rights statements in a form substantially similar to
the models in order to comply with the regulation. The model
billing-rights statements may be modified in any of the ways set
forth in the first paragraph to the commentary on appendices G and
H. The models may, furthermore, be modified by deleting inapplicable
information, such as:
A. The paragraph concerning stopping a debit in relation to a
disputed amount, if the creditor does not have the ability to debit
automatically the consumer's savings or checking account for
payment.
B. The rights stated in the special rule for credit card
purchases and any limitations on those rights.
ii. The model billing rights statements also contain optional
language that creditors may use. For example, the creditor may:
A. Include a statement to the effect that notice of a billing
error must be submitted on something other than the payment ticket
or other material accompanying the periodic disclosures.
B. Insert its address or refer to the address that appears
elsewhere on the bill.
C. Include instructions for consumers, at the consumer's option,
to communicate with the creditor electronically or in writing.
iii. Additional information may be included on the statements as
long as it does not detract from the required disclosures. For
instance, information concerning the reporting of errors in
connection with a checking account may be included on a combined
statement as long as the disclosures required by the regulation
remain clear and conspicuous.
* * * * *
5. Model G-10(A), samples G-10(B) and G-10(C), model G-10(D),
sample G-10(E), model G-17(A), and samples G-17(B), 17(C) and 17(D).
i. Model G-10(A) and Samples G-10(B) and G-10(C) illustrate, in the
tabular format, the disclosures required under Sec. 226.5a for
applications and solicitations for credit cards other than charge
cards. Model G-10(D) and Sample G-10(E) illustrate the tabular
format disclosure for charge card applications and solicitations and
reflect the disclosures in the table. Model G-17(A) and Samples G-
17(B), G-17(C) and G-17(D) illustrate, in the tabular format, the
disclosures required under Sec. 226.6(b)(2) for account-opening
disclosures.
ii. Except as otherwise permitted, disclosures must be
substantially similar in sequence and format to Models G-10(A), G-
10(D) and G-17(A). While proper use of the model forms will be
deemed in compliance with the regulation, card issuers and other
creditors offering open-end (not home-secured) plans are permitted
to disclose the annual percentage rates for purchases, cash
advances, or balance transfers in the same row in the table for any
transaction types for which the issuer or creditor charges the same
annual percentage rate. Similarly, card issuer and other creditors
offering open-end (not home-secured) plans are permitted to disclose
fees of the same amount in the same row if the fees are in the same
category. Fees in different categories may not be disclosed in the
same row. For example, a transaction fee and a penalty fee that are
of the same amount may not be disclosed in the same row. Card
issuers and other creditors offering open-end (not home-secured)
plans are also permitted to use headings other than those in the
forms if they are clear and concise and are substantially similar to
the headings contained in model forms, with the following
exceptions. The heading ``penalty APR'' must be used when describing
rates that may increase due to default or delinquency or as a
penalty, and in relation to required insurance, or debt cancellation
or suspension coverage, the term ``required'' and the name of the
product must be used. (See also Sec. Sec. 226.5a(b)(5) and
226.6(b)(2)(v) for guidance on headings that must be used to
describe the grace period, or lack of grace period, in the
disclosures required under Sec. 226.5a for applications and
solicitations for credit cards other than charge cards, and the
disclosures required under Sec. 226.6(b)(2) for account-opening
disclosures, respectively.)
iii. Models G-10(A) and G-17(A) contain two alternative headings
(``Minimum Interest Charge'' and ``Minimum Charge'') for disclosing
a minimum interest or fixed finance charge under Sec. Sec.
226.5a(b)(3) and 226.6(b)(2)(iii). If a creditor imposes a minimum
charge in lieu of interest in those months where a consumer would
otherwise incur an interest charge but that interest charge is less
than the minimum charge, the creditor should disclose this charge
under the heading ``Minimum Interest Charge'' or a
[[Page 54332]]
substantially similar heading. Other minimum or fixed finance
charges should be disclosed under the heading ``Minimum Charge'' or
a substantially similar heading.
iv. Models G-10(A), G-10(D) and G-17(A) contain two alternative
headings (``Annual Fees'' and ``Set-up and Maintenance Fees'') for
disclosing fees for issuance or availability of credit under Sec.
226.5a(b)(2) or Sec. 226.6(b)(2)(ii). If the only fee for issuance
or availability of credit disclosed under Sec. 226.5a(b)(2) or
Sec. 226.6(b)(2)(ii) is an annual fee, a creditor should use the
heading ``Annual Fee'' or a substantially similar heading to
disclose this fee. If a creditor imposes fees for issuance or
availability of credit disclosed under Sec. 226.5a(b)(2) or Sec.
226.6(b)(2)(ii) other than, or in addition to, an annual fee, the
creditor should use the heading ``Set-up and Maintenance Fees'' or a
substantially similar heading to disclose fees for issuance or
availability of credit, including the annual fee.
v. Although creditors are not required to use a certain paper
size in disclosing the Sec. Sec. 226.5a or 226.6(b)(1) and (2)
disclosures, samples G-10(B), G-10(C), G-17(B), G-17(C) and G-17(D)
are designed to be printed on an 8 [frac12] x 14 inch sheet of
paper. A creditor may use a smaller sheet of paper, such as 8
[frac12] x 11 inch sheet of paper. If the table is not provided on a
single side of a sheet of paper, the creditor must include a
reference or references, such as ``SEE BACK OF PAGE for more
important information about your account.'' at the bottom of each
page indicating that the table continues onto an additional page or
pages. A creditor that splits the table onto two or more pages must
disclose the table on consecutive pages and may not include any
intervening information between portions of the table. In addition,
the following formatting techniques were used in presenting the
information in the sample tables to ensure that the information is
readable:
A. A readable font style and font size (10-point Arial font
style, except for the purchase annual percentage rate which is shown
in 16-point type).
B. Sufficient spacing between lines of the text.
C. Adequate spacing between paragraphs when several pieces of
information were included in the same row of the table, as
appropriate. For example, in the samples in the row of the tables
with the heading ``APR for Balance Transfers,'' the forms disclose
two components: the applicable balance transfer rate and a cross
reference to the balance transfer fee. The samples show these two
components on separate lines with adequate space between each
component. On the other hand, in the samples, in the disclosure of
the late payment fee, the forms disclose two components: the late
payment fee, and the cross reference to the penalty rate. Because
the disclosure of both these components is short, these components
are disclosed on the same line in the tables.
D. Standard spacing between words and characters. In other
words, the text was not compressed to appear smaller than 10-point
type.
E. Sufficient white space around the text of the information in
each row, by providing sufficient margins above, below and to the
sides of the text.
F. Sufficient contrast between the text and the background.
Generally, black text was used on white paper.
vi. While the Board is not requiring issuers to use the above
formatting techniques in presenting information in the table (except
for the 10-point and 16-point font requirement), the Board
encourages issuers to consider these techniques when deciding how to
disclose information in the table, to ensure that the information is
presented in a readable format.
vii. Creditors are allowed to use color, shading and similar
graphic techniques with respect to the table, so long as the table
remains substantially similar to the model and sample forms in
appendix G.
6. Model G-11. Model G-11 contains clauses that illustrate the
general disclosures required under Sec. 226.5a(e) in applications
and solicitations made available to the general public.
8. Samples G-18(A)-(D). For home-equity plans subject to the
requirements of Sec. 226.5b, if a creditor chooses to comply with
the requirements in Sec. 226.7(b), the creditor may use Samples G-
18(A) through G-18(D) to comply with these requirements, as
applicable.
9. Samples G-18(D). Sample G-18(D) illustrates how credit card
issuers may comply with proximity requirements for payment
information on periodic statements. Creditors that offer card
accounts with a charge card feature and a revolving feature may
change the disclosure to make clear to which feature the disclosures
apply.
10. Forms G-18(F)-(G). Forms G-18(F) and G-18(G) are intended as
a compliance aid to illustrate front sides of a periodic statement,
and how a periodic statement for open-end (not home-secured) plans
might be designed to comply with the requirements of Sec. 226.7.
The samples contain information that is not required by Regulation
Z. The samples also present information in additional formats that
are not required by Regulation Z.
i. Creditors are not required to use a certain paper size in
disclosing the Sec. 226.7 disclosures. However, Forms G-18(F) and
G-18(G) are designed to be printed on an 8 x 14 inch sheet of paper.
ii. The due date for a payment, if a late payment fee or penalty
rate may be imposed, must appear on the front of the first page of
the statement. See Sample G-18(D) that illustrates how a creditor
may comply with proximity requirements for other disclosures. The
payment information disclosures appear in the upper right-hand
corner on Samples G-18(F) and G-18(G), but may be located elsewhere,
as long as they appear on the front of the first page of the
periodic statement. The summary of account activity presented on
Samples G-18(F) and G-18(G) is not itself a required disclosure,
although the previous balance and the new balance, presented in the
summary, must be disclosed in a clear and conspicuous manner on
periodic statements.
iii. Additional information not required by Regulation Z may be
presented on the statement. The information need not be located in
any particular place or be segregated from disclosures required by
Regulation Z, although the effect of proximity requirements for
required disclosures, such as the due date, may cause the additional
information to be segregated from those disclosures required to be
disclosed in close proximity to one another. Any additional
information must be presented consistent with the creditor's
obligation to provide required disclosures in a clear and
conspicuous manner.
iv. Model Forms G-18(F) and G-18(G) demonstrate two examples of
ways in which transactions could be presented on the periodic
statement. Model Form G-18(G) presents transactions grouped by type
and Model Form G-18(F) presents transactions in a list in
chronological order. Neither of these approaches to presenting
transactions is required; a creditor may present transactions
differently, such as in a list grouped by authorized user or other
means.
11. Model Form G-19. See Sec. 226.9(b)(3) regarding the
headings required to be disclosed when describing in the tabular
disclosure a grace period (or lack of a grace period) offered on
check transactions that access a credit card account.
12. Sample G-24. Sample G-24 includes two model clauses for use
in complying with Sec. 226.16(h)(4). Model clause (a) is for use in
connection with credit card accounts under an open-end (not home-
secured) consumer credit plan. Model clause (b) is for use in
connection with other open-end credit plans.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, September 28, 2009.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. E9-23733 Filed 10-20-09; 8:45 am]
BILLING CODE 6210-01-P