CUNA Regulatory Comment Call

May 12, 2008

Unfair and Deceptive Practices for Credit Cards and Overdraft Protection Plans

NCUA Proposal Addressing Unfair and Deceptive Practices for Credit Cards and Overdraft Protection Plans


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 and to Senior Assistant General Counsel Jeff Bloch at; or mail them to Mary and Jeff in c/o CUNA’s 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 here.


With respect to federal credit unions, the FTC Act gives NCUA the authority to define and prevent unfair and deceptive practices. The proposal is being issued under this authority and is prohibiting seven practices that will apply to credit cards and two practices that will apply to overdraft protection plans.

Over the past several years, both NCUA and the Fed have issued rules, guidance, and proposals with regard to credit cards and overdraft protection plans. As part of an extensive overview of Regulation Z, the Fed last year issued a comprehensive proposal to the disclosure rules as they apply to credit cards. The Fed and NCUA have also in recent years issued guidance and rules that have imposed additional requirements in connection with overdraft protection plans. This latest proposal is intended to supplement the earlier rules and guidance.


I. Credit Cards

The proposal will address the following practices as they pertain to credit cards, although they will not apply to home-equity plans accessible by credit cards or to lines of credit that are accessible by debit cards.

Late Payments

The proposal will prohibit creditors from considering a payment as late, unless the consumer is provided with reasonable time to make payments, which should be at least 21 days before the due date. Creditors with reasonable procedures to ensure statements are delivered within a certain amount of days from the closing date of the billing cycle will be able to add that number to the 21-day period for purposes of determining the due date that complies with these provisions. This requirement does not apply to or require that creditors provide a “grace period” in which no interest is charged if payments are received by a certain date.

Allocation of Payments

For a credit card that includes balances subject to different interest rates, creditors will be required to allocate the amount in excess of the minimum payment under one of the three following methods or in another manner no less beneficial:

Creditors would no longer be permitted to apply payments to balances with the lowest interest rate before applying it to those subject to higher rates. Also, if an account includes a balance subject to a discounted rate or a balance in which interest is deferred for a period of time, creditors would be required to apply payments to all the other balances before applying payments to those subject to a discounted rate or deferred interest. However, creditors will be able to apply payments to the balance in which interest is deferred during the last two billing cycles of the deferred interest period. Creditors will also not be able to require consumers to repay a portion of the promotional rate balance or deferred interest amount in order to receive a grace period for purchases, which would happen if payments are first applied to these balances.

Increasing the Interest Rate on an Outstanding Balance

Creditors will not be able to increase the interest rate on an outstanding balance, unless: 1) it is a variable rate that rises due to a change in the underlying index, as long as the creditor does not change the method used to determine the indexed rate; 2) it is a promotional rate that expired or otherwise no longer applies according to the terms of the account agreement, as long as the rate is not increased to a penalty rate; and 3) the minimum payment was not received within thirty days after the due date. Creditors will also not be permitted to assess any fee or charge based solely on the outstanding balance. This is meant to address “universal default” provisions in which certain financial institutions have raised interest rates based on the consumer’s payment history with other creditors.

Under the proposal, the outstanding balance in which a creditor could not apply an increased rate would be the amount owed as of 14 days after the creditor provided the 45-day notice of the rate increase. The creditor would not need to determine the specific date the notice was received by the consumer for purposes of calculating the 14-day period. Instead, the creditor could determine this based on the time it takes to generate the notice. For example, if reasonable procedures are used to ensure the notice is generated three days after the rate is increased, the outstanding balance would be the amount owed as of 17 days after the rate is increased.

After the rate increase is in effect, creditors may require payment of the outstanding balance under one of the following methods or another method that is no less beneficial to the consumer:

Assessing Fees if the Credit Limit is Exceeded

The proposal will prohibit creditors from assessing a fee if the consumer exceeds the credit limit solely because a hold is placed on the available credit, such as when the hold placed by the merchant exceeds the amount the consumer is obligated to pay. The fee may be imposed if the actual amount of the transaction exceeded the credit limit.

Creditors will also not be able to impose a fee when the hold on the transaction causes a subsequent transaction to exceed the credit limit. These provisions will not prohibit the use of credit holds, just the imposition of a fee under these specific circumstances.

Prohibition of “Double-Cycle Billing”

Creditors will be prohibited from calculating interest charges based on balances in a billing cycle that precedes the most recent cycle. This is commonly referred to as “double-cycle billing.” There will be two exceptions, as follows:

Security Deposits and Fees for Issuing Credit

The proposal will prohibit creditors from charging fees or security deposits for the issuance of credit within the first year after the account is opened if these charges exceed the majority of the available credit. Fees or deposits that are more than 25% but less than 50% of the available credit must be spread out over one year. This will only apply to deposits and fees charged to the account and not to deposits and fees paid from separate funds. Fees will be defined as any annual or periodic fee, a fee based on account activity or inactivity, and any non-periodic fee that relates to opening the account.

Offers of Credit that Advertise Multiple Interest Rates or Multiple Credit Limits

Creditors that advertise multiple interest rates or multiple credit limits in firm offers of credit will be required to disclose the factors for qualifying for the lowest interest rate or the highest credit limit if those factors depend on creditworthiness, as opposed to being based on the features of the card. This disclosure must be understandable and designed to call attention to this information, and the following statement may be used to meet this requirement, assuming the factors mentioned in the statement are used by the creditor: “If you are approved for credit, your annual percentage rate and/or credit limit will depend on your credit history, income, and debts.”

II. Overdraft Protection Plans

The proposal will also address the following practices as they pertain to overdraft protection plans, which will not include overdrafts paid pursuant to a line of credit, such as transfers from a credit card account, a home equity line of credit, another account at the institution, or an overdraft line of credit:

Opt-out Right

Before charging a fee, creditors will be required to provide consumers with a notice and a reasonable opportunity to “opt-out” of the overdraft plan. This will apply to all transactions that overdraw the account, including checks, automated clearinghouse (ACH) transactions, ATM withdrawals, recurring payments, or point-of-sale (POS) debit card purchases. Consumers would also be permitted to limit the opt-out to ATM and POS debit card transactions, since consumers would not be subject to merchant fees or other adverse consequences if the overdraft is not paid for these transactions.

The opt-out notice must be provided both before a fee is charged for the first time and during each periodic statement cycle in which a fee is assessed, if the consumer does not choose to opt-out. If the consumer does not opt- out after the first opportunity but decides to opt-out after being assessed the fee and receiving the notice during the statement period, the opt-out would only be applicable to subsequent transactions and the consumer would remain responsible for paying the fee. Only one opt-out notice would need to be provided during the statement period, even if multiple fees are charged during that period.

The creditor must comply with the opt-out request as soon as reasonably practicable after it receives the request. The opt-out will remain in effect, unless it is revoked by the consumer in writing or electronically.

The following are exceptions in which a fee may be charged even if the consumer has elected to opt-out:

Overdrafts Due to Debit Holds

For debit card transactions, creditors will be prohibited from assessing a fee if the overdraft results solely by a hold placed on funds that exceed the actual purchase amount of the transaction. A fee may be imposed: 1) if the purchase amount itself would have caused the overdraft; 2) if other transactions have been authorized but not yet been presented for settlement; or 3) if a deposited check in the account is returned. This is assuming the consumer did not opt-out of paying overdrafts in these situations.


(NCUA has specifically requested comment on the issues raised in these questions.)

Eric Richard • General Counsel • (202) 508-6742 •
Mary Mitchell Dunn • SVP & Deputy General Counsel • (202) 508-6736 •
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 •
Lilly Thomas • Assistant General Counsel • (202) 508-6733 •
Luke Martone • Senior Regulatory Counsel • (202) 508-6743 •