CUNA Regulatory Comment Call
May 28, 2008
Fed Requests Comments on Open-End Credit Rules under Regulation Z, the Truth in Lending Act
- The Federal Reserve Board (Fed) has issued proposed amendments to the open-end credit rules under Regulation Z that includes changes specifically applying to credit cards and merchant-specific credit plans.
- The proposal includes changes to the format, timing, and content requirement for the open-end credit disclosures that are required under Regulation Z, the Truth in Lending Act (TILA). This proposal revises the comprehensive open-end proposal that was issued last year in order to complement and be consistent with the proposal that has also been issued recently by the National Credit Union Administration (NCUA), the Fed, and the Office of Thrift Supervision (OTS) that addresses unfair and deceptive practices as they pertain to credit cards and overdraft protection plans. The agencies intend to finalize all of these rules at the same time by the end of this year and intend to provide creditors with additional time to implement the required changes.
- This Regulatory Comment Call only describes the revisions. The provisions from the Regulation Z proposal issued last year that are not mentioned in this Comment Call are still being considered by the Fed and may be finalized later this year.
- Under the open-end credit proposal issued last year, credit unions that use open-end, multi- featured loan products would be required to provide additional closed-end disclosures for subaccounts that are created to finance specific items. This current proposal does not address these provisions, which means this requirement is still under consideration and may be included in the final rule that is issued later this year. CUNA and CUNA Mutual have been working closely with the Fed to address the problems that this requirement will have on credit union lending operations.
- Comments on this proposal will be due by July 18, 2008. Comments are due to CUNA by July 9, 2008. If commenting directly to the Fed, you must refer to Docket No. R-1286.
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 here.
Last year, the Fed issued proposed amendments to the open-end credit rules under Regulation Z, as well
as the official staff commentary, that includes changes specifically applying to credit cards and merchant-
specific credit plans. This is part of an overall review of Regulation Z, which will take place in stages
over the next year or so. The proposal last year included comprehensive changes to the format, timing, and
content requirement for five main types of open-end credit disclosures that are required under TILA. These
include credit card application and solicitation disclosures, account-opening disclosures, periodic
statements, change-in-term notices, and advertising provisions. Click the links below for more
information, as well for CUNAs comment letter in response this earlier proposal:
The proposal that has just been issued revises the comprehensive open-end proposal that was published last year in order to complement and be consistent with the proposal issued recently by NCUA, the Fed, and the OTS that addresses unfair and deceptive practices as they pertain to credit cards and overdraft protection plans. The agencies intend to finalize all of these rules at the same time by the end of this year.
DESCRIPTION OF THE PROPOSED RULE AND CHANGES TO THE OFFICIAL STAFF COMMENTARY
I. General Requirements
The proposal last year permitted certain charges to be disclosed either orally or in writing at the time the service is requested, as opposed to at the time the account is opened. The current proposal will clarify that it will be unnecessary to obtain the consumers consent to provide these electronically, if the consumer requests the service electronically, such as by using the creditors website.
Currently, consumers who agree to pay a membership fee for an open-end credit plan are able to reject the plan and not pay the fee. The proposal will clarify that other fees may still need to be paid and will also provide guidance as to when the plan is rejected. A plan would be considered rejected if the consumer has not used the account or made a payment during the 60-day period after the creditor mailed the account-opening disclosures. The consumer will not be considered to have used the account if he or she calls to activate a credit card or if the creditor bills the consumer for fees, assuming the consumer did not make a payment or otherwise use the account.
II. Applications and Solicitations
The phrase grace period will be eliminated as a heading in the summary table on the required application disclosures. The phrase how to avoid paying interest on purchases may be used if there is a grace period, or the phrase paying interest may be used if there is no grace period. Any similar terminology may be used instead, and this terminology should be used in subsequent disclosures instead of using the term grace period.
Creditors must also disclose the conditions on the applicability of the grace period or describe that no grace period applies. The official staff commentary will provide model language that may be used to comply with this requirement.
Minimum Interest Charge
Currently, creditors must disclose in the summary table on the application any minimum interest or finance charge. Under the proposal, the minimum interest or finance charge would only need to be disclosed if it exceeds $1. This threshold will be adjusted for inflation and will be changed when the cumulative adjustment exceeds the next whole dollar.
Foreign Transaction Fees
Creditors will be required to disclose fees for purchase transactions in a foreign currency or conducted outside the United States in the table that is provided on the application or solicitation disclosure.
Penalty Rate When Credit Privileges are Terminated
The proposal will require creditors to disclose in the application table the increased interest rate that will apply when credit privileges are terminated. This will also be required for the account-opening disclosures.
The proposal last year would have required disclosures if a creditor allocates payments to a lower rate balance first. This disclosure would have been required for the account-opening disclosures as well. This proposed requirement will be eliminated since the recent proposal on unfair and deceptive practices will prohibit creditors from allocating payments in this manner.
If fees or security deposits are charged that exceed 25% of the available credit, the application and solicitation must provide information of the amount of credit that would be available after paying the fees and deposits. The proposal will require this disclosure to be provided orally if the application is made by telephone.
III. Account-opening Disclosures
Creditors that assess fees and security deposits at account opening that are 25% or more of the minimum credit limit also be required to provide a notice of the consumers right to reject the account after receiving the disclosures, if the consumer has not used the account or paid a fee, other than certain application fees. Model language will be provided for this disclosure.
The changes described above for the account application disclosures as they pertain to the elimination of the term grace period will also apply to the table on the account-opening disclosures, as will the changes described above with regard to the disclosure of the minimum finance charge and any applicable foreign transactions fees.
Creditors will be required to describe the method used to determine the balance in which interest rates are applied. The Fed will revise the model clauses that describe these methods by adding a description of a daily balance method. The Fed will also add additional model clauses that will refer to interest charges, instead of finance charges, on the assumption this will be more understandable for consumers.
The proposal last year would require a tabular summary of key terms that are to be provided when an account is opened. The Fed at that time provided model clauses and is now proposing additional model clauses that are to be used for other types of open-end credit plans, such as lines of credit and overdraft plans.
IV. Subsequent Disclosures
Checks that Access Credit Card Accounts
For checks that access credit card accounts, creditors will be required to disclose the date in which the check must be used in order to receive a discounted rate. If the checks will be honored after that day, but at a different interest rate, the creditor must disclose the rate that will apply. The Fed has included model language that may be used in providing this disclosure.
The proposal last year would have required the term introductory or intro in immediate proximity to the rate that is disclosed for these checks. This proposal will change the term to promotional rate, as this may be more appropriate since these checks are sent to existing cardholders. The Fed will change the model language so it is consistent with this change.
The proposal last year would require that when a change-in-terms notice accompanies a periodic statement, creditors must provide a tabular disclosure on the front of the statement that lists the key terms being changed. This proposal will require disclosure on how existing or new balances would be affected by any increase in the interest rate. This is intended to be consistent with the unfair and deceptive practices proposal that was recently issued, which will restrict the ability of creditors to apply increased rates to existing balances.
Change-in-terms notices that are not sent with periodic statements must also disclose the balances to which the increased rate will apply and must disclose the existing balance that would continue to be subject to the current rate when the creditor is restricted from increasing the rate on these balances. The Fed will provide model language that may be used in providing these disclosures.
Increase in Rates Due to Delinquency, Default, or Penalty Pricing
The proposal issued last year would require creditors to provide 45 days advance notice when a rate is increased due to the consumers delinquency or default, including delinquency or default with other creditors, or if a rate is increased as a penalty for one or more events specified in the account agreement, such as late payment or exceeding the credit limit. The current proposal will add provisions creditors must disclose the existing balance that would continue to be subject to the current rate if the creditor is not able to raise the rate on that balance and will add provisions to indicate that the existing rate would no longer apply if payments are more than 30 days late. The proposal includes model forms and samples to illustrate these disclosure requirements.
V. Crediting Payments
For payments sent by mail, the proposal will prohibit creditors from setting a cut-off time before 5 PM on the due date for purposes of determining whether a payment will be considered late. The 5 PM cut-off would be based on the time zone of the location in which the creditor receives payments. This will not apply to payments made by telephone or electronically. Creditors that set due dates on weekends or holidays, but do not accept payments sent by mail on those days, would not be able to consider the payment late if it is received on the next business day.
VI. Investigating Unauthorized Transactions or Billing Errors
Currently, creditors must conduct a reasonable investigation before imposing liability for unauthorized transactions or for billing errors and may request the consumers cooperation. The proposal will clarify that the creditor may not require the consumer to comply with a request to sign a written affidavit or file a police report in order to ensure a favorable resolution of these matters.
VII. Advertising Provisions
The proposal will impose additional disclosures for advertisements in connection with deferred interest plans in which interest is not charged under certain circumstances, such as if full payment is received by a certain date (apart from any grace period is offered by the creditor). The date that all payments must be made to avoid interest charges must be disclosed clearly and conspicuously in immediate proximity to each statement of no interest, no payments, deferred interest, or similar term.
Placing this information within the same phrase will be considered in immediate proximity. These terms with the same phrase must be of equal prominence in order to be considered clear and conspicuous. The Fed has proposed model clauses that will comply with these provisions.
With regard to these deferred interest offers, the following must be disclosed in a prominent location closely proximate to the first mention of no interest, no payments, deferred interest, or similar term:
- A statement that interest will be charged from the date the consumer becomes obligated to pay the balance if the balance is not paid within the deferred interest period.
- Interest may also be charged during the deferred interest period if the account is in default.
- A statement that making only the minimum payments will not pay off the balance in time to avoid interest charges if the payments do not fully amortize the balance during the deferred interest period.
For purposes of the above disclosures, placing this information within the same paragraph of the first mention of no interest, no payments, deferred interest, or similar term would satisfy the requirement that it be in a prominent location closely proximate to these terms. The first mention of any of these terms would be the most prominent listing of one of these terms on the front side of the first page of the principal promotional document. If these terms are not on the principal promotional document, or if there is no such document, the first mention will be the most prominent listing on the front side of the first page of each document containing one of these terms. The listing with the largest type size may be considered the most prominent. These disclosure requirements will not apply to envelopes or to banner advertisements and pop-up advertisements that are linked to an electronic application or solicitation.
The proposal last year would have required creditors use the term introductory or intro to describe a rate used in advertisements that is lower than the rate that would otherwise apply. The current proposal will require this term be used for new accounts and the term promotional be used if it applies to existing accounts, since introductory would not be the appropriate term to apply to existing cardholders. The requirements for stating when the lower rate will end and the rate that will apply after that time will not apply to life-of-balance offers in which a lower rate is offered for as long as the balance exists.
QUESTIONS TO CONSIDER REGARDING THE REGULATION Z PROPOSAL
(The Fed has specifically requested comment on most of the
issues raised in these questions.)
- Currently consumers who agree to pay a membership fee for an open-end credit plan are able to
reject the plan and not pay the fee. A plan would be considered rejected if the consumer has not used
the account or made a payment during the 60-day period after the creditor mailed the account-opening
disclosures. Would another time period be more appropriate? Should this apply to all open-end credit,
as proposed, or should the scope be limited, such as to subprime credit card issuers?
- Currently, creditors must disclose in the summary table on the application any minimum interest or
finance charge. Under the proposal, the minimum interest or finance charge would only need to be
disclosed if it exceeds $1. Is $1 the appropriate threshold?
- Under the proposal, creditors that assess fees and security deposits at account opening that are
25% or more of the minimum credit limit will be required to provide a notice of the consumers right to
reject the account after receiving the disclosures, if the consumer has not used the account or paid a
fee, other than certain application fees. Do you agree with the scope of this requirement or should it
apply to accounts with different levels of fees or different features?
- For payments sent by mail, the proposal will prohibit creditors from setting a cut-off time before
5 PM on the due date for purposes of determining whether a payment will be considered late. What would
be the operational burden posed by this prohibition? Should creditors be required to disclose on the
periodic statement near the due date the cut-off hours before 5 PM that may apply to payments made by
telephone or electronically?
- Under the proposal, creditors that set due dates on weekends or holidays, but do not accept
payments sent by mail on those days, would not be able to consider the payment late if it is received
on the next business day. What would be the burden of changing your systems to either ensure a due
date does not fall on a weekend or holiday or ensure payments are not considered late if received on
the next business day? Should this provision address payments made by telephone or electronically,
such as through the Internet, even though consumers have more control regarding the timing of these
- The proposal will require the term promotional or introductory to be used when advertising a
lower rate and will also require other disclosures in these situations, such as how long that rate will
last and the rate that will apply afterwards. Should this also be required for advertisements that are
not in written or electronic form, such as telephone, radio, or television advertisements? If so, is
more guidance needed with regard to the proximity requirements? What additional guidance is needed?
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
Lilly Thomas Assistant General Counsel (202) 508-6733 email@example.com
Luke Martone Senior Regulatory Counsel (202) 508-6743 firstname.lastname@example.org