CUNA Regulatory Comment Call
July 30, 2009
Fed Requests Comments on Regulation Z Rules Implementing the New Credit Card Law
- The Federal Reserve Board (Fed) has issued an interim final rule amending Regulation Z, the Truth in Lending Act (TILA), that will require creditors to adopt reasonable policies and procedures to ensure that periodic statements for any open-end consumer credit account are mailed or delivered at least 21 days before the payment is due in order to be able to charge a late fee or to otherwise consider the payment as late. The rule will also require creditors to provide a 45-day notice of a change in the interest rate or other significant changes to the terms of the credit card agreement. These provisions will also allow consumers to reject these changes if they inform the creditor before they go into effect.
- This rule is the first stage in the implementation of the Credit Card Accountability, Responsibility and Disclosures Act of 2009 (CARD Act), which amended TILA to establish fair practices for credit cards and other open-end credit plans. This rule implements those provisions of the CARD Act that will go into effect on August 20, 2009. The Fed will issue additional rules to implement the provisions that go into effect on February 22 and August 22, 2010.
- The provisions in the CARD Act with regard to delivering periodic statements at least 21 days before the due date apply to all open-end credit, in addition to credit cards. The provisions with regard to providing a 45-day notice for change in terms will only apply to credit cards.
- CUNA has been in contact with the Fed and other key policymakers over the past several weeks to resolve the very difficult compliance challenges associated with providing periodic statements at least 21 days before the payment is due. The interim final rule provides very limited relief by indicating in the supplementary information that "for a short period of time after August 20," periodic statements for open-end credit other than credit cards may disclose due dates that are inconsistent with the 21-day requirement, as long as there is a prominent disclosure either on or with the statement that the payment will not be treated as late if received within 21 days after the statement is mailed. CUNA will continue to work with the Fed and other key policymakers to ensure that the final version of this rule provides additional flexibility.
- The interim final rule is effective as of August 20, 2009. Comments are due to the Fed by September 21, 2009 and are due to CUNA by September 9, 2009. If commenting directly to the Fed, you must refer to Docket No. R-1364.
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 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 interim final rule or you may access it here.
In January 2009, the Fed issued a final rule that included comprehensive changes to the open-end credit rules under Regulation Z, as well as the official staff commentary, which primarily affect credit cards and other revolving credit plans. These include comprehensive changes to the format, timing, and content requirements for the credit card application and solicitation disclosures, account-opening disclosures, periodic statements, change-in-term notices, and advertising provisions. Click here for more information:
At the same time, the National Credit Union Administration, the Fed, and the other federal financial institution regulators issued a final rule under the Unfair or Deceptive Acts or Practices (UDAP) Act that prohibits or restricts credit card practices. Click here for more information:
In May 2009, the CARD Act was enacted that amended TILA to include many of the acts or practices that were included in the UDAP rule that was issued in January 2009 and also included provisions of the Regulation Z rule that was issued at that time. However, there are a number of differences, such as expanding the requirement for sending periodic statements 21 days in advance to all open-end consumer credit, while the UDAP rule limited this provision to credit cards. The CARD Act also includes provisions that were not included in the rules issued in January 2009.
The Fed has now issued the first in a series of rules to implement the CARD Act. This interim final rule implements the provisions that will be effective on August 20, 2009. These include the requirement to provide periodic statements 21 days in advance and the requirement to provide a 45-day notice when the rate is increased or if there is another significant change to the terms of the credit card agreement. The Fed will later issue rules to implement the provisions that will be effective on February 22 and August 22, 2010. These rules will not affect provisions of the Regulation Z and UDAP rules that were issued in January 2009 to the extent they are not addressed in the CARD Act.
DESCRIPTION OF THE INTERIM FINAL RULE AND CHANGES TO THE OFFICIAL STAFF COMMENTARY
Mailing Periodic Statements at Least 21 Days Before Payment is Due
Under the CARD Act, creditors must adopt reasonable policies and procedures to ensure that periodic statements for any open-end consumer credit account are mailed or delivered at least 21 days before the payment is due in order to be able to charge a late fee, or to otherwise consider the payment late, and this will apply to all open-end consumer credit. This is in contrast to most other provisions of the CARD Act, which are limited to credit cards.
CUNA has been in contact with the Fed and other key policymakers over the past several weeks to resolve the very difficult compliance challenges associated with providing periodic statements at least 21 days before the payment is due. The interim final rule provides very limited relief by indicating in the supplementary information that "for a short period of time after August 20," periodic statements for open-end credit other than credit cards may disclose due dates that are inconsistent with the 21-day requirement, as long as there is a prominent disclosure either on or with the statement that the payment will not be treated as late if received within 21 days after the statement is mailed. CUNA will continue to work with the Fed and other key policymakers to ensure that the final version of this rule provides additional flexibility.
Under the CARD Act and the interim final rule, the 21-day requirement will apply to both the payment due date and the expiration of the grace period. If the account has a grace period, this means the statement needs to be delivered 21 days before the due date and 21 days before the grace period ends, if these dates differ, and neither a finance charge nor a late fee may be imposed if this requirement is not satisfied. If the account does not have a grace period, then the statement needs to be delivered 21 days before the due date in order to be able to impose a late fee. Until now, TILA had exceptions to the previous 14-day requirement if due to acts of God, war, natural disaster, strike, or other causes. The CARD Act has deleted these exceptions.
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. For example, if the procedure ensures that statements are delivered three days after the billing cycle ends, then the due date, and the date in which any grace period expires, may be 24 days after the billing cycle ends.
Under the CARD Act, the payment cannot be considered late for any purpose if the 21-day requirement is not satisfied. The official staff commentary indicates that treating a payment as late includes increasing the annual percentage rate (APR) as a penalty and reporting the consumer as delinquent to a credit bureau, in addition to imposing a late fee. However, imposing a finance charge in connection with a periodic interest rate will be acceptable for those accounts that do not have a grace period.
Under the official staff commentary, the "payment due date" will mean the date in which the creditor requires the consumer to make the required minimum periodic in order to ensure that the payment is not considered late. This date is based on the legal obligation between the parties, which means this date cannot be the end of any additional courtesy period that may extended. Similarly, some states require that a certain number of days elapse after the due date before a late fee may be imposed. Again, the due date will be based on the legal obligation between the parties and not the extended date that may be provided under state law.
The UDAP rules issued in January permitted a period shorter than 21 days if periodic statements are delivered electronically and if payments are received electronically. Under the CARD Act and the interim final rule, the 21- day period will apply even if statements are delivered and payments are made electronically. Also, the official staff commentary will permit creditors to allow consumers to pick up their statements. In these situations, the statements must be made available 21 days before the due date.
As for implementation, it will be the date that the periodic statement is sent that will determine if a creditor must comply with these new requirements. For example, if the statement is sent before August 20, 2009, then the CARD Act and interim final rule will not apply, even if the due date is after August 20th.
Providing 45-day Notice of Change in Interest Rate or Other Significant Terms
Under the CARD Act, creditors must provide consumers with a 45-day advance notice of a rate increase or other significant change to the terms of the credit card agreement. There must also be a disclosure of the consumer's right to cancel the account prior to the effective date of the rate increase or the change in the significant term. This notice requirement does not apply if the consumer has agreed to the particular change. The CARD Act and the interim final rule also provide the following three exceptions to the requirement to provide the notice of a rate increase:
- If the change is due to an expiration of a specified period of time, provided that the length of this time period and the rate that would then apply was disclosed to the consumer before this time period began. The disclosure must be in writing, and the rate that applies after the period ends may not exceed the rate before this time period began. Card issuers offering deferred interest or similar programs may use this exception.
- If the rate is variable and is increased according to the operation of a publicly available index that is not under the control of the creditor.
- If the rate increase is due to the completion of, or failure to comply with, the terms of a workout or temporary hardship arrangement, as long as the terms were disclosed in writing to the consumer before the commencement of the agreement. The rate that would then apply must not be higher than the rate that applied before the workout or temporary hardship arrangement. All these rates need to be disclosed and any rates disclosed that are variable must state that the rate may vary and how it is determined. The disclosure must also state that the consumer must make timely minimum payments to remain eligible for this arrangement, if applicable.
These notices must include a brief description of the right to cancel the account before the effective date of the rate increase or other change disclosed in the notice. The CARD Act also states that closing or cancelling the account pursuant to this right to cancel will 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 no less beneficial then either:
- a payment schedule that amortizes the balance over five years or more; or
- a minimum payment that is a percentage of the balance that is no more than twice the percentage that applied before the cancellation of the account.
Unlike the requirement to provide periodic statements 21-days before the due date, this provision on providing a 45-day notice before a rate increase or other significant change in the terms of a credit agreement will only apply to credit cards and not to home equity lines of credit (HELOCs), even if those accounts are accessed through a credit card device. The existing change-in-terms notice requirements will continue to apply to home-equity plans and other open-end plans that are not credit card accounts. However, with the exception of home-secured credit lines, open-end lines of credits that are not credit card accounts will be subject to the revised change-in-terms notice requirements that are outlined in the Regulation Z rule that was issued in January 2009 and which is effective as of July 1, 2010.
The interim final rule identifies the "significant changes" that will require the 45-day notice, which include:
- APRs for purchases, cash advances, or balance transfers. This includes any discounted initial rate, premium initial rate, or penalty rate.
- Fees in connection with the issuance and availability of a credit card account, including fees for account activity or inactivity.
- Fixed finance charges or a minimum interest charge if it exceeds $1.
- Transaction charges imposed for use of the account.
- Grace periods.
- Balance computation methods.
- Cash advance, late payment, over-the-limit, and balance transfer fees, as well as returned payment fees.
- Required insurance, debt cancellation, or debt suspension fees.
- Increases in the minimum payment
For terms that are not "significant," creditors may disclose these changes by either giving the 45-day advance notice or providing 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 the consumer would likely notice this disclosure. Examples of changes that are not "significant" includes charges for documentary evidence, reduction in finance charges, suspension of future credit privileges, termination of an account or plan, or when the change results from an agreement involving a court proceeding.
The 45-day notice must include the following information:
- A description of the change and state that it is being made to the account.
- The date the change becomes effective.
- The consumer's right to reject the change prior to the effective date, unless the change is an increase in the required minimum payment or the consumer fails to make a required minimum payment within 60 days after the due date.
- Instructions for rejecting the change, along with a toll-free telephone number the consumer may use to notify the creditor of the rejection.
- If applicable, a disclosure that if the consumer rejects the change, then the consumer's further use of the account will be terminated or suspended.
The 45-day notice is also required when the rate is increased due to a delinquency, default, or penalty and must be provided after the occurrence of the event that led to the rate increase. This notice will not be required for home equity plans accessible by credit cards. The notice in connection with a delinquency, default, or penalty must state the following:
- The increased rate has been triggered and the date that it will apply.
- The circumstances in which the increased rate will no longer apply.
- The consumer's right to reject the penalty rate prior to the effective date, unless the consumer makes a payment that is more than 60 days late.
- Instructions for rejecting the change, including a toll-free number that the consumer may use.
- If applicable, that the consumer's further use of the account will be terminated or suspended if he or she rejects the increased rate.
Again, this notice will not be required for rate increases due to the consumer's failure to comply with the terms of a workout or temporary hardship arrangement. For penalty rates imposed when a consumer exceeds the credit limit, this notice is not required if a consumer already received a 45-day notice in situations in which the creditor decides to decrease the credit limit and impose a penalty rate if this decreased limit is exceeded.
Whether provided in connection with a rate increase, change in significant terms, or due to delinquency or default, the interim final rule provides consumers with the substantive right to reject the change if the creditor is notified before the effective date. This expands the CARD Act provisions, which only included the disclosure requirements. If the change is rejected, the creditor may not apply that change, increase a rate, impose a fee, or otherwise treat the account in default. Creditors may, however, terminate or suspend the account if the consumer rejects the rate increase or changed term.
For a rate increase, change in significant terms, or for delinquencies or defaults, the creditor also may not require repayment of the account in full or in a manner no less beneficial than amortizing the balance for at least five years or no more than doubling the minimum percentage due each month, as described above, although a previously disclosed "floor" for minimum payments may still be imposed if at some point it exceeds the payment that would apply under one of these two repayment methods. In the alternative, creditors may use the repayment method that applied to the account before the change was made. For the five-year amortization period, creditors are also not required to recalculate these payments if the consumer makes more than the minimum payment, and payments may be adjusted if a variable rate changes to ensure that payments are completed by the end of the five-year period.
As mentioned above, these protections will not apply for accounts that are more than 60-days delinquent or for transactions that occur more than 14 days after the notice is provided. The creditor may also place reasonable requirements on how consumers may reject the change, such as requiring the primary accountholder to provide notification of the rejection or requiring the accountholder to supply the account number.
The official staff commentary clarifies that a consumer does not forfeit the right to reject the change or rate increase, or revoke a rejection, if transactions are made prior to the effective date, although creditors may also apply the terms of a pre-existing promotional rate or deferred interest or similar program in situations in which the consumer rejects the rate increase or changed term. However, if the account is used for transactions that occur more than 14 days after the notice is provided, then the creditor may apply the rate increase or changed term to those specific transactions even if the consumer rejects the change or increased term prior to the effective date. This is to mitigate the effects if a consumer deliberately conducts transactions after receiving the notice and then rejects the increased rate or changed term shortly before the effective date to ensure that the change does not apply to these recent transactions. Creditors may use the date the transaction is charged to the account to determine if it meets the 14-day requirement, as opposed to when the transaction is posted to the account.
Creditors may not apply the increased rate to the time period before the effective date of the change and other changes can only apply to transactions occurring after that time, not the entire account. For example, an increase in a transaction fee can apply to specific transactions, but an increase in a monthly fee cannot be imposed because it would apply to the entire account and not to a specific transaction.
The interim final rule will apply to change-in-terms notices that are issued on or after August 20, 2009. The rule will not apply to notices issued before that date, even if the change is not effective until after August 20th. However, for promotional rate programs that end after August 20th, a creditor will not be able to raise the rate after the promotional period, unless the creditor provides the notice as to the term and the rate or type of rate that will apply after the term ends, unless that information has already been disclosed, regardless of whether the notice is provided before or after August 20th. Also, the exception described above for payments that are more than 60 days late will apply even if the 60-day period began before August 20th.
QUESTIONS TO CONSIDER REGARDING THE REGULATION Z INTERIM FINAL RULE
- Please outline the operational problems associated with providing periodic statements at least 21 days before
the due date. How are these problems different for credit cards, as opposed to other open-end credit? How much
time will you need to comply with the new rule with regard to the 21-day requirement for credit cards and how
much time will be needed for other types of open-end credit?
- Please outline the operational problems associated with providing the 45-day change-in-terms notice. Will
you be able to comply with these provisions by August 20th? If not, how much more time will you need?
- Which provisions of the new rule require additional clarifications?
- 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