CUNA Comment Letter

Proposed Revisions to the Regulation Z Commentary

January 27, 2003

Ms. Jennifer J. Johnson
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551

Re: Docket No. R-1136, Proposed Revisions to the Regulation Z Commentary

Dear Ms. Johnson:

The Credit Union National Association (CUNA) appreciates the opportunity to comment on the proposed revisions to the official staff commentary to Regulation Z, which implements the Truth in Lending Act (TILA). The proposed revisions, which appeared in the Federal Register on December 6, 2002, would address how fees for expedited payment services and expedited delivery of credit cards should be disclosed, permit issuance of more than one credit card when issued as replacements for existing cards, clarify how private mortgage insurance (PMI) premiums should be disclosed, and provide additional guidance on how to determine if a mortgage loan should be classified as "high-cost" for purposes of the Home Ownership and Equity Protection Act (HOEPA).

CUNA represents more than 90 percent of our nation’s 10,000 state and federal credit unions. This letter reflects the views of our member credit unions and of CUNA's Consumer Protection Subcommittee, chaired by Kris Mecham, CEO of Deseret First Credit Union, Salt Lake City, Utah.

Summary of CUNA’s Position

Issuance of More Than One Credit Card

Until now, the official staff commentary has indicated that a lender may not issue more than one card as a renewal or substitute for a previously accepted card, unless more than one card was initially issued for multiple users on one account. Under the proposed changes, the official staff commentary would clarify that lenders may now replace an accepted card with more than one card on the same account under these circumstances, as long as the consumer’s total liability for unauthorized use with respect to the account does not increase. The commentary would also clarify that all replacement cards must access only the account of the previously accepted card and that the same terms and conditions must govern all cards under the same account.

CUNA supports this approach with regard to the issuance of more than one credit card and believes that lenders should be permitted to issue additional cards for an existing account at any time, even when it is not for the renewal or substitution of existing cards. The Federal Reserve Board (Fed) recognizes that advances in technology have now made it possible for lenders to issue cards in different sizes and formats, such as a smaller size that fits conveniently on a key ring. These new sizes and formats are often intended to supplement, but not necessarily replace, a cardholder’s existing card and this proposed revision to the commentary will help facilitate these changes.

The Fed also correctly recognizes that lenders now employ a number of security measures when issuing cards, such as sending cards that are not activated until the consumer undertakes certain actions to verify receipt of the card. We agree with the Fed that these measures should provide sufficient security when replacing an accepted card with more than one renewal or substitute card.

Credit unions recognize that some of their members may not expect or want these additional cards, especially when they are not issued in connection with a renewal of a previously issued card. Members may have specific concerns with regard to the security of the account and possible misplacement of these additional cards. Because member service is the top priority for credit unions, we believe that a number of credit unions will be sensitive to such concerns and will provide some type of prior notice to their members if they decide to issue additional cards, which will also provide an opportunity for members to reject these additional cards. It would not be in the credit union’s interest to provide products and services that are not wanted.

Disclosure of Expedited Charges

The proposed revisions to the official staff commentary would also provide guidance with regard to two fees that are commonly charged in connection with open-end credit plans, such as credit card accounts. One would be the fee imposed when a consumer requests that a particular payment on the credit plan be expedited, and the other would be the fee imposed when a consumer requests expedited mailing of a credit card.

For the fee regarding expedited payment, the Fed would not consider this to be a "finance charge," but would require that this fee be disclosed as an "other charge," similar to "over-the-limit" fees and charges imposed for late payments. We disagree with this approach. It is the cardholders’ decision to use an expedited payment option, and the fee is generally disclosed at the time that this method of payment is selected. It is not necessary to require double disclosure by including such a fee in the definition of "other charge."

Credit unions provide this service as a means to help members avoid a late payment situation, a situation that results from the lack of planning on the part of the member in which the credit union has no control. To require such a fee to be included as an "other charge" would require unnecessary operational and programming changes, which would provide credit unions with a disincentive to continue to provide this valuable service to the members.

We also believe an expedited payment service is more closely connected with a checking account, not a credit account, since the fee is actually debited from the checking account. This fee is no different than other fees that are incurred to expedite payments, such as overnight mail, wire, and online payment fees. These fees all serve the same purpose, which is to expedite the delivery of payments, but not all such fees are charged by creditors. We do not believe that the fee charged by the creditor in this situation should be treated differently and considered to be an "other charge," especially when such fees are not related to a credit plan but are actually fees for payment delivery services in which there are many market substitutes.

For similar reasons, we agree with the Fed’s approach regarding the fee that is imposed when a consumer requests expedited mailing of a credit card. Such a fee should not be included as either a "finance charge" or an "other charge."

"Bounce Protection" Services

In addition to the proposed changes to the official staff commentary, the Fed has requested comment and more information about "bounce protection" services and whether fees for such services should be considered "finance charges," as defined by Regulation Z. Although credit unions support disclosing such fees, and indeed are disclosing them, as required under the Truth in Savings Act, we strongly oppose requiring that these fees be disclosed as "finance charges" and included in the calculation of the APR, as it would be nearly impossible for credit unions to comply with such a requirement. Under such a scenario, credit unions and other financial institutions would likely discontinue such services, forcing consumers to seek such services from pawnshops, title lenders, and payday lenders at a much higher cost.

There are a number of compliance difficulties associated with requiring that these fees be considered "finance charges." The most significant problems would be how to disclose such fees and how they are to be incorporated for purposes of calculating the APR.

For example, it would be nearly impossible to provide initial disclosures before a check is paid under a bounce protection program, since the amount of the check and the resulting overdraft would be unknown until the check is paid. It would also be impractical to calculate the APR because one fee is charged for a virtually unlimited array of possible amounts that may be paid for all the overdrafts that would be covered under a bounce protection service. This problem would be compounded, as there would be no "repayment schedule." For example, an amount on an overdraft could be repaid in one day or it could be paid in 29 days, at the discretion of the member. It would be impractical to calculate an APR based on a time schedule that can vary to this extent.

We have heard from a number of credit unions on this issue and it is our understanding that in many situations, the fee that is charged under the bounce protection services is usually the same fee that is charged when a check bounces, which may range from $18 – $25. Therefore, the fee here would be the same in both a "credit" situation with a bounce protection service and a "non-credit" situation in which a fee is charged when the check bounces. Since a member will pay one set fee when he or she writes a check that exceeds the account balance, regardless of whether it is to cover the overdraft or whether it is a fee that is charged when the check bounces, it makes little sense that this fee should be treated differently and more onerously from a compliance perspective if it is a fee that results from the use of a bounce protection service.

Federal credit unions also have a unique issue in this area because under the Federal Credit Union Act, they are not permitted to offer loans with interest rates that exceed 18 percent. Some states impose similar limitations for their state-chartered credit unions. If fees for bounced protection services are considered "finance charges" and have to be included in the APR, then the APR will exceed these loan limitations by a substantial amount, thus preventing at least the federal credit unions and some state-chartered credit unions from offering bounce protection services. Charging a lower fee in order to meet the 18 percent threshold would not be an option because such a fee would only recoup a fraction of the cost of providing this service.

As mentioned above, bounce protection services offer significant benefits because they provide convenience and real cost savings for consumers. One example of such a program illustrates these benefits and demonstrates the measures that the credit union takes to ensure that these programs are offered in a responsible manner. Here, the credit union sets a $300 overdraft limit and only provides the bounce protection service after the account has been opened for at least sixty days and after at least twenty checks have cleared the account. This credit union will also not allow the account to be overdrawn as a result of using the ATM card or through a transaction with a teller. The overdraw on the account will only be permitted when a member writes a check to a third party for an amount that exceeds the account balance. The fee charged for this service is $18, the same amount that this credit union charges when a member’s check bounces.

This program, which the credit union clearly operates in a responsible manner, has saved the members a significant amount of money because the use of this service allows the members to avoid additional charges that would be imposed by merchants and others if these checks were allowed to bounce. This credit union alone estimates that its members have saved about $4 million in such fees for the one-year period from December 2001 through December 2002. This represents a tremendous cost savings for all consumers if this estimate is extrapolated to cover all financial institutions that offer similar overdraft protections. This is in addition to the intangible benefit to the consumer of avoiding the embarrassment and inconvenience that results when a check bounces and the arrangements that have to be made to ensure that sufficient funds are available to cover the check.

For this credit union, which has a field of membership that includes military personnel and their families, this service was especially helpful shortly after the September 11, 2001 terrorist attacks. Shortly after that time, military personnel were immediately activated for service, creating confusion for them and their families. However, the financial pressures were alleviated to some extent because the spouses were able to use the bounce protection service to pay the bills that were due during this time period, again saving these members a significant amount of money and inconvenience during this extremely stressful time period.

Again, these services would likely not be available, at least for credit union members, if the fees charged for bounce protection services are considered "finance charges" under Regulation Z. The beneficiaries under this scenario would be certain types of lenders, such as title lenders and payday lenders, many of whom have been associated with the problem of predatory lending. Bounce protection services provide real opportunities for credit unions to facilitate the government’s goal of eradicating predatory lending by preventing such an outcome, and this would be thwarted if the Fed revises Regulation Z or the official staff commentary in a manner that would further regulate these services.

PMI Payment Schedules and Requirements for HOEPA Loans

The revisions to the official staff commentary would clarify that with regard to the disclosure of PMI on the payment schedule, future payments would not have to be on the schedule if payments are collected in advance at the time the loan is closed and later applied to these future payments. We support this clarification and agree that advance payments should not have to be listed on the schedule. Incorporating this change will properly inform the consumer of the number of PMI payments that must be made.

We also agree with the change in the official staff commentary that would require lenders to rely solely on the Fed’s "Selected Interest Rates" publication in determining whether a mortgage loan exceeds comparable Treasury securities by eight percentage points for first-lien loans and ten percentage points for subordinate-lien loans, which would then subject these loans to the additional disclosure requirements under HOEPA. We encourage the Fed to continue to provide this information on its website.

However, for purposes of calculating these HOEPA thresholds, we do not agree that a 20-year Treasury security should be considered comparable to a 30-year mortgage loan now that the 30-year Treasury securities are no longer issued. We do not believe that a 20-year and 30-year Treasury security would have an identical interest rate, even if they had identical maturity dates, although we would welcome more information from the Fed if our conclusion were incorrect.

Thank you for the opportunity to comment on the proposed revisions to the official staff commentary to Regulation Z. If you or other Board staff have questions about our comments, please give Associate General Counsel Mary Dunn or me a call at (202) 638-5777.


Jeffrey Bloch
Assistant General Counsel