CUNA Regulatory Comment Call
April 29, 2009
NCUA Requests Comments on Unfair or Deceptive Acts or Practices Rule
- The National Credit Union Administration (NCUA), along with the Federal Reserve Board (Fed) and the Office of Thrift Supervision (OTS), has published a joint proposed rule that will amend the unfair or deceptive acts or practices (UDAP) final rule that was issued in December 2008.
- The proposal consists primarily of clarifications to the UDAP final rule. These changes will be finalized and effective as of July 1, 2010, along with the other changes outlined in the recent final rule.
- Along with this UDAP proposal, clarifications are also being proposed in connection with the Regulation Z final rule that was issued in December 2008 by the Fed, which affects disclosures for credit cards and other revolving credit plans. These proposed Regulation Z clarifications are addressed in a separate CUNA Regulatory Comment Call.
- Although NCUA and the other regulators have requested comments on these additional changes, the proposal is not intended to change the level of protections that are outlined in the final rule issued last year.
- Comments are due to the agency by June 4, 2009. Comments are due to CUNA by May 22, 2009.
Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Senior Vice President and Deputy General Counsel Mary Dunn at firstname.lastname@example.org and to Senior Assistant General Counsel Jeff Bloch at email@example.com; or mail them to Mary and Jeff in c/o CUNAs Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, 6th Floor, Washington, DC 20004. You may also contact us if you would like a copy of the proposal or you may access it here.
With respect to federal credit unions, the FTC Act gives NCUA the authority to define and prevent unfair and deceptive practices. NCUA, along with the Fed and OTS, issued a final rule in December 2008 under this authority to prohibit a number of practices that will apply to credit cards. The final rule also includes official staff commentary that interprets the rule and provides additional guidance. Click here for more information.
The proposal that has just been issued is intended to resolve uncertainties and to make other technical changes, with the goal of facilitating compliance by July 1, 2010. Although NCUA and the other regulators have requested comments on these additional changes, the proposal is not intended to change the level of protections that are outlined in the final rule issued last year.
DESCRIPTION OF THE PROPOSED RULE AND CHANGES TO THE OFFICIAL STAFF COMMENTARY
The proposal clarifies that the term rate has the same meaning as annual percentage rate (APR).
The protections outlined in the final rule will apply to outstanding balances following the closure or acquisition of the account or the transfer of the balance to another account issued by the same creditor, as well as a transfer to another type of account offered by the same creditor, such as from a credit card to a line of credit accessed solely by an account number. These protections include the restrictions on changing the APR for these outstanding balances. This applies whether the account is closed by the consumer or the creditor and also applies when there is a merger of financial institutions, an acquisition of one institution by another, or when a creditor purchases a credit card portfolio. However, these restrictions will not apply when a consumer chooses to transfer a balance to a different creditor.
The final rule prohibits creditors from considering a payment as late, unless the consumer is provided with a reasonable time to make payments. Creditors must be able to establish that they have complied with this requirement, and one means to establish compliance would be to have reasonable procedures to ensure that periodic statements are mailed or delivered to consumers at least 21 days before the due date.
The final rule indicates that the payment period may be less if periodic statements and payments are both made electronically. The proposal will include a specific reference that this account must comply with the Electronic Signatures in Global and National Commerce Act (E-Sign Act).
Allocation of Payments
The proposal clarifies that deferred and waived interest programs may continue to be offered, as long as they comply with the other requirements under Regulation Z and the UDAP final rule issued last year. There were provisions in these final rules to indicate that certain types of these programs may be prohibited, but that prohibition will no longer apply.
During the last two billing cycles of a deferred interest period, the proposal will require creditors to allocate payments above the minimum amount to the deferred balance. Otherwise, for payment allocation purposes, the deferred balance will be treated as a balance with a 0% rate.
Annual Percentage Rates
Creditors must disclose at account-opening the APR that will apply to each category of transactions on a credit card account. The proposal will define category of transactions as a type or group of transactions in which an APR applies that is different than the APR that applies to other transactions.
Also, when a consumer has a credit card account and opens a new credit card account with the same creditor, the opening of the new account constitutes an account-opening if the consumer retains the ability to access credit on both accounts. This means the APR may not be increased during the first year of the new account, as outlined under the final rule. However, an account will not be considered opened if the creditor transfers one credit card account to another or combines multiple credit card accounts into one account, even if there is a brief delay in which there may be access to both accounts during this short period of time.
The proposal clarifies that although creditors may not disclose a range of APRs or that a rate will be up to a specific amount, this restriction does not apply to penalty rates. If there is more than one penalty rate, creditors may disclose the highest rate that could apply, instead of disclosing the specific rates or the range of rates that may apply. This flexibility applies to any rate that may apply depending on a particular event or occurrence. The proposal also clarifies and corrects several examples in the official staff commentary.
Increase in Rates
The proposal clarifies that not charging interest during a grace period does not mean that the APR was lowered. Therefore, charging interest later does not indicate that the rate was increased, which means the notifications that are required to increase the rate do not apply.
Creditors may disclose at account-opening that it will increase the rate at a later time. However, creditors may not delay imposing the increase beyond the time indicated in the account-opening disclosure, although they may delay the increase until the first day of the following billing cycle.
As outlined in the final rule, the interest rate for new transactions may be increased after the first year, as long as the 45-day notice is provided. However, this new rate cannot apply to the outstanding balance, which is referred to in the final rule as the protected balance. Under the final rule, the outstanding balance in which a creditor could not apply an increased rate would be the amount owed as of seven days after the creditor provided the 45-day notice of the rate increase. The new rate would apply to transactions posted more than seven days after the notice is provided, regardless of when the transaction occurred.
The proposal clarifies that while the higher rate may apply to transactions after the seven-day period, it cannot accrue until 45 days after the notice is provided. This means the creditor may not reach back and charge the new rate during the period of time prior to when new rate is effective, which is 45 days after the notice is given.
Under the final rule, a creditor may apply the higher rate to transactions that are authorized within seven days after the notice is provided if they are settled after the seven-day period. Under the proposal, it will be the date that the transaction occurs that will determine if it is within or not within the seven-day period. This means that the date the transaction is authorized, settled, or posted to the account will not be relevant for purposes of this seven-day period.
If the merchant places a hold on the available credit in which the actual transaction amount will be determined later, the transaction date for purposes of the seven-day period will be the date that the merchant determines the actual transaction amount. The seven-day period also does not apply when rates are disclosed along with the delivery of supplemental access devices, such as convenience checks. Any increased rates for these devices may not apply at all to transactions that occur prior to when the notice is provided.
None of these restrictions apply if a creditor lowers a rate for existing or new transactions. However, the notice provisions apply if the lower rate is later increased. For existing balances, creditors must provide notice if the reduced rate will be increased at a later time, and it must specify the new rate and when it will apply. However, it may not be increased beyond the rate that applied before the decrease went into effect.
Notification of a rate increase does not have to be provided if the rate is increased for failure to abide by a workout arrangement, assuming the rate is no higher than what would have applied if there was no workout arrangement. The proposal clarifies that this exception to the notice requirement will apply whenever there are temporary hardship arrangements in which the rate is lowered for a specific period of time.
Servicemembers Civil Relief Act
The proposal clarifies that interest rates may be increased when these rates were lowered to no more than six percent under the Servicemembers Civil Relief Act (SCRA). Under the SCRA, rates are lowered when the consumer enters military service. These rates may then be increased at the time military service ends but under the proposal, they may not be increased beyond the rate that applied before it was lowered under the SCRA.
Treatment of Protected Balances
The final rule prohibits creditors from charging fees based solely on the balance on which an interest rate cannot be increased, referred to as the protected balance. The proposal clarifies that certain fees may be charged, such as a periodic fee if it was assessed prior to when there was a protected balance. Creditors may also assess other fees, such as late payment and over-the-limit fees, even if the protected balance is the only balance on the account.
QUESTIONS TO CONSIDER REGARDING THE UDAP PROPOSAL
(NCUA and the other regulators have specifically requested comment on
the issues raised in these questions)
- The protections in the final rule will apply to outstanding balances that are transferred to
another account by the same creditor but not when the account is transferred to a new creditor.
How will this affect the creditors ability to make promotional offers to their existing accountholders
to the extent they make them to new accountholders?
- The proposal clarifies that deferred and waived interest programs may continue to be offered,
as long as they comply with the other requirements under Regulation Z and the UDAP final rule issued
last year. Does this provide sufficient protections for consumers and the necessary flexibility for
- During the last two billing cycles of a deferred interest period, the proposal will require
creditors to allocate payments above the minimum amount to the deferred balance. Should this period
of time be longer or shorter? Do creditors offer grace periods in which consumers are required to pay
certain balances in full each billing cycle to avoid interest, instead of the entire balance? If so,
should excess payments be applied to these certain balances?
- Do creditors establish category of transactions based on factors other than APRs?
- When a consumer has a credit card account and opens a new credit card account with
the same creditor, the opening of the new account constitutes an account-opening if
the consumer retains the ability to access credit on both accounts. This means the APR
may not be increased during the first year of the new account. This will not apply if
an account is transferred from one credit card to another, even if there is a brief delay,
which means there may be access to both accounts during this short period of time. Should
this period of time be 15 days, 30 days, or some other period?
- Other comments?
Eric Richard General Counsel (202) 508-6742 firstname.lastname@example.org |
Mary Mitchell Dunn SVP & Deputy General Counsel (202) 508-6736 email@example.com
Jeffrey Bloch Assistant General Counsel (202) 508-6732 firstname.lastname@example.org
Luke Martone Senior Regulatory Counsel (202) 508-6743 email@example.com