CUNA Regulatory Comment Call
December 20, 2004
Fed Requests Comments on Open-End Credit Rules under Regulation Z, the Truth in Lending Act
- The Federal Reserve Board (Fed) has issued an advance notice of proposed rulemaking (ANPR) requesting comments on possible changes to the open-end credit rules under Regulation Z, specifically rules applying to credit cards and merchant-specific credit plans. Fed will review the comments received and then consider issuing specific proposals for amending these rules.
- The Fed plans to review Regulation Z in stages over the next few years. The ANPR is the first stage of this review.
- The ANPR requests comment on numerous, specific issues related to the following broad categories with regard to open- end credit, as well as any other issues that should be considered:
- The format of open-end credit disclosures.
- The content of the disclosures.
- The substantive protections provided under the rules.
- If you are submitting comments directly to the Fed, the comment letter should refer to Docket No. R-1217. The proposal requests responses to specific questions that are numbered. Responses to these questions should refer to the appropriate number. Comment letters may be e-mailed directly to the Fed at email@example.com and should include the docket number in the subject line.
Comments on the proposal are due by March 28, 2005. Please submit your comments to CUNA by March 15, 2005. Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Senior Vice President and Associate General Counsel Mary Dunn at firstname.lastname@example.org or to Assistant General Counsel Jeff Bloch at email@example.com; or mail them to Mary or 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 on the Internet at the following address: http://www.federalreserve.gov/boarddocs/press/bcreg/2004/20041203/attachment.pdf
TILA is intended to promote the informed use of consumer credit by providing for disclosures about its terms and cost. TILA requires lenders to disclose the cost of credit as a dollar amount and as an annual percentage rate (APR) in a uniform manner. This uniformity is intended to assist consumers in comparison-shopping for credit. Regulation Z implements TILA, which contains official staff commentary that interprets the regulation and provides guidance in applying the regulation to specific transactions.
The Fed has issued an ANPR that will review the open-end credit rules under Regulation Z, which differ somewhat from the rules that apply to closed-end, or installment, loans. Open-end credit generally refers to a revolving line of credit, such as a credit card account in which repeated transactions are expected, the available credit is replenished as unpaid balances are repaid, and finance charges are assessed on unpaid balances. This also includes "charge cards" that typically require balances to be paid in full at the end of each billing cycle. The ANPR requests comment on numerous, specific issues related to the following broad categories with regard to open-end credit, as well as any other issues that should be considered:
- The format of open-end credit disclosures.
- The content of the disclosures.
- The substantive protections provided under the rules.
The Fed plans to review Regulation Z in stages over the next few years. The ANPR is the first stage of this review and will focus on open-end credit accounts that are not home secured, specifically general-purpose credit cards and merchant- specific credit plans.
DESCRIPTION OF THE REGULATION Z REVIEW
The Fed has requested comment on numerous issues with regard to open-end credit in the form of specific questions. The Fed has numbered these questions and grouped them in specific categories, as outlined below:
Scope of Regulation Z Review
Question 1 Should the review of Regulation Z be in stages, which begins with this review of open-end credit? Are some issues with regard to open-end credit so intertwined with other TILA issues such that another approach to this review should be considered? If so, what are those issues and what other approaches should be considered?
Note: For Questions 2-12 below, the Fed is also interested in receiving comments on particular concerns regarding the format of electronic disclosures.
Question 2 What formatting rules would enhance the ability of consumers to understand account-opening disclosures? Should certain key disclosures be segregated from contractual terms or other information so that these disclosures are more clear and conspicuous? Should certain disclosures be grouped together or appear on the same page? Are minimum type-size requirements necessary and what should those requirements be?
Question 3 What formatting or other navigational aids will make the account-opening disclosures more effective throughout the life of the account? One idea may be a table of contents that a consumer could refer to on an as- needed basis throughout the life of the account.
Question 4 Are there disclosures on the periodic statement that should be grouped together on the same page that would help consumer understanding? One idea may be to group together the "due date" and "please pay by date," which is the suggested date to submit payment in order for it to be received by the due date. Some consumers may now be confused and consider the "please pay by date" as the "due date" if these two dates are on different parts of the statement.
Question 5 Could the cost of credit by more effectively presented on the periodic statement if less emphasis were placed on how the fees are labeled and all fees were grouped together? What other approaches should the Fed consider?
Question 6 How can formatting tools and navigational aids make the periodic statements more effective for consumers?
Credit Card Application Disclosures/"Schumer Boxes"
Question 7 For credit card applications, certain disclosures must be presented in the form of a table, known as the "Schumer Box" (the Fed provides a model form for Schumer Boxes.) Is the Schumer Box effective, as currently designed? What format improvements should the Fed consider?
Question 8 Should balance transfer fees be included in the Schumer Box? (Under current rules, this is optional, as long as the fees are clearly disclosed elsewhere on or with the application.)
Subsequent Disclosures (including change in account terms and terms for new credit features or access devices offered after the account is opened)
Question 9 How can formatting tools or navigational aids be used to more effectively link information in the account-opening disclosures with the information provided in subsequent disclosures (including those that accompany convenience and balance transfer checks)?
Model Forms and Clauses
Question 10 The Fed provides model forms and clauses to facilitate TILA compliance. How can the existing clauses and forms be revised to improve their effectiveness?
Question 11 What additional model forms and clauses should the Fed develop?
Question 12 What additional information is available regarding the navigability and readability of different formats or ways in which the formatting can improve the effectiveness of disclosures? (For example, certain studies suggest that using bold headings is helpful, while the use of all capital letters is not helpful.)
Improving the Rules for Classifying Fees as "Finance Charges" and "Other Charges"
"Finance charges" are generally defined as charges imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit. These must be disclosed in the account-opening statement, and on the periodic statement if the fee is imposed during the billing cycle, in which case the fee must be labeled a "finance charge." These charges must be included in the calculation of the APR, and a change-in-terms notice is required if these charges are increased.
"Other charges" are any other additional fees that are not "finance charges," but are significant and imposed as part of the credit plan. These must be disclosed at account-opening and on periodic statements if such a fee is imposed, although it does not have to be labeled. A change in terms notice is required if certain of these "other charges" are increased.
Question 13 How can the Fed provide greater clarity with regard to categorizing fees as either "finance charges" or "other charges?" What types of fees should not be included as a "finance charge" and why should they be excluded? How should these fees be disclosed in order to provide uniformity with regard to disclosures and to facilitate compliance?
Question 14 How do consumers learn about open-end credit fees and about any changes in these fees?
Question 15 What significance do consumers attach to the term "finance charge," as opposed to "fee" or "charge?"
Question 16 Some have suggested classifying a fee as a finance charge if the payment is required to obtain credit. How would creditors determine if a fee was optional? Would this include a fee being excluded as a finance charge if the consumer was offered a credit plan without this feature? Would this approach result in useful disclosures for consumers and would they be able to compare costs of different credit plans? Would this approach be practical for creditors?
Question 17 Some have suggested classifying a fee as a finance charge if the fee affects the amount of credit available or the material terms of the credit. How would this operate in practice? For example, how would creditors distinguish finance charges from "other charges?" What terms would be considered "material?"
Question 18 The Regulation Z official staff commentary interprets "other charges" as those that are "significant" and related to the credit plan. Has this interpretation been effective? Is there a better interpretation? Other criteria to determine whether a fee should be considered an "other charge" may include the following: the amount of the fee, the frequency in which the fee is likely to be incurred by a consumer, the proportion of consumers likely to incur the fee, and when and how the creditor discloses the fee. Are these relevant factors and are there any others?
Question 19 What other issues should be considered with regard to classifying fees? For example, do home equity lines of credit present unique issues?
Question 20 How important is it that the classification of fees for open-end accounts mirrors the classifications for closed-end loans? For example, excluding certain charges from the APR for open-end accounts is not consistent with a Fed recommendation in 1998 that "all required fees" be included in the APR for closed-end loans.
Question 21 Fees for exceeding a credit limit are not considered "finance charges" but are considered "other charges." Should these fees always be excluded as a "finance charge," such as when a creditor does not require the consumer to bring the account balance below the established credit limit and then imposes the over-the-limit fee each month on a continuing basis?
Question 22 Credit card transactions may be authorized in situations in which the merchant or creditor cannot at that time determine if the credit limit will be exceeded by that transaction. How do card issuers explain their practice of approving transactions that may result in exceeding the credit limit and would, therefore, incur over-the-limit fees? Are these fees imposed at the time of the approved transactions or later, such as at the end of the billing cycle? Are additional disclosures needed regarding the circumstances in which these fees will be imposed?
Use of the "Effective" or "Historical" APR Disclosures on Periodic Statements
Question 23 For each billing cycle, an "effective" or "historical" APR is disclosed, which includes other "finance charges" that are imposed, in addition to the interest. This may result in a very high APR on periodic statements that is substantially higher than the interest rate on the account because non-interest finance charges are amortized over one billing cycle for purposes of calculating the historical APR for that cycle. How have changes in the market and consumers use of open-end credit affected the usefulness of the effective APR? Is there data on how disclosure of the effective APR affects consumer behavior? Is it useful to include transaction charges, such as cash advance and balance transfer fees?
Question 24 Are there ways to improve consumers understanding of the effective APR by providing additional context? For example, should the consumer be informed that the effective APR includes interest, as well as fees, and that the calculation assumes the fees relate to credit that was extended only for a single billing period, which results in an APR substantially higher than the interest rate?
Question 25 Are there other methods for disclosing the costs of credit on periodic statements that may be more effective than disclosing the individual fees and the effective APR? For example, would consumers benefit from a disclosure of the total dollar amount of fees imposed during the billing cycle, or a total dollar amount of fees by type? Would a cumulative year-to-date total of certain fees be useful for consumers?
Disclosures of Rate Changes
Question 26 Certain changes to the terms of an open-end plan require additional notice. For these change-in- terms notices, the general rule is that 15 days advance notice is required to increase the finance charge (including the interest rate) or an annual fee. Is this adequate to provide timely notice to consumers?
Question 27 There are exceptions to the 15-day notice requirement. If the interest rate or other finance charge increases due to default or delinquency, notice is required, but does not have to be given in advance. Also, a change-in-terms notice is not required if the creditor specifies in advance the circumstances in which an increase will occur. How are account-holders alerted to interest rate increases due to default on the account or on another account that the consumer has with another creditor? Are the existing rules for disclosing increases in interest rates and other finance charges adequate and timely for the consumer? How can they be improved?
Balance Calculation Methods
Question 28 Under TILA and Regulation Z, consumers receive information about how account balances are calculated, although there is no requirement as to which methods creditors must use. How significantly does the balance calculation method affect the cost of credit, given typical use patterns?
Question 29 Do consumers understand that different balance calculation methods affect the cost of credit and do they understand which methods are more or less favorable to them? What additional disclosures would be helpful for consumers?
Question 30 - Precise explanations with regard to balance calculation methods are required on account-opening disclosures and on periodic statements, which can be very complex. Should the Fed permit more abbreviated descriptions on periodic statements, with a reference to where consumers can obtain further information, such as the credit agreement or a toll-free telephone number?
Disclosing the Effects of Making Only Minimum Payments
Question 31 Should Regulation Z be amended to require: 1) that periodic statements should disclose the effects of making only the minimum payment, such as how long it will take to pay the balance or disclosing that making the minimum payment may result in additional penalty fees for exceeding the credit limit if the payment does not bring the balance under the limit; and 2) account-opening disclosures showing the total payments for those credit plans specifically established to finance purchases that are equal or nearly equal to the credit limit, assuming only minimum payments are made? Would these benefit consumers?
Question 32 Is information about amortization periods for an account readily available or would new systems need to be developed? What would the costs be to implement the changes in Question 31?
Question 33 Is there data on the percentage of cardholders that regularly or continually make only the minimum payments on open-end credit plans?
Question 34 Some accounts apply different interest rates to certain features, such as purchases, cash advances, and balance transfers. How a payment is allocated between these features on an account can affect the consumers cost of credit. Neither TILA nor Regulation Z requires a creditor to use a particular allocation method or disclose the method that is used. What are the common methods of payment allocation and how do they affect the cost of credit for a consumer?
Question 35 Do creditors typically disclose their allocation methods and how are they disclosed?
Question 36 Should Regulation Z require disclosure of the allocation method on the periodic statement? Would this benefit consumers and avoid consumer confusion or misunderstanding? (Misunderstandings often occur when consumers accept low promotional rates for cash advances for a limited time and payments are allocated to the cash advance before allocated to purchases that have a higher APR.) What would be the cost of providing the disclosure? What level of detail would provide useful information while avoiding information overload?
Question 37 TILA allows the Fed to permit tolerances for numerical disclosures other than the APR. What tolerances should the Fed consider? Should the Fed expressly permit an overstatement of the finance charge for open-end credit? Would that address concerns over proper disclosure of fees? How narrow should any tolerance be to ensure that uniformity of disclosures is preserved?
Other Questions Regarding the Content of Disclosures
Question 38 For any changes suggested regarding disclosures, what would be the costs and benefits of these changes, including one-time costs?
Question 39 Are there particular types of open-end accounts, such as subprime or secured credit card accounts, that should require special disclosure rules to ensure that consumers have adequate information about these products?
Question 40 Are there other issues the Fed should consider in reviewing the content of open-end credit disclosures? Is the information currently provided with credit card applications and solicitations adequate and effective for consumers?
Question 41 Are there classes of transactions in which the Fed should exercise the exemption authority it has in order to further TILAs purpose, facilitate compliance, prevent circumvention or evasion, or because TILA coverage does not provide meaningful information or protection?
Question 42 - Should the Fed exercise its authority to provide a waiver for certain borrowers whose income and assets exceed the specified amounts?
Modifying the Rules Regarding Substantive Protections
Question 43 The Fed is requesting comment on revising TILAs substantive provisions for open-end accounts. These include provisions regarding billing disputes, cardholder liability for unauthorized card use, issuing cards only upon the consumers request or for renewal or substitution of an accepted card, and the manner that consumers make and the manner that the creditor post payments. Are these provisions adequate and are the creditors responsibilities clear? Do these provisions need to be updated to address particular types of accounts, practices, or to address technological changes?
Accessing Credit Card Accounts
Question 44 The Fed is requesting information on the extent that the industry has developed open-end credit plans allowing consumers to conduct transactions using only account numbers and that do not involve physical devices, such as an actual credit card. For these types of plans, what are the policies for resolving accountholder claims when disputes arise?
Question 45 TILAs protections regarding merchant disputes, unauthorized use of the account, and prohibition against unsolicited issuances does not apply to convenience checks that are offered by credit issuers. Have consumers experienced any problems with convenience checks relating to unauthorized use or merchant disputes, for example? Should all of TILAs protections be extended to other extensions on credit card accounts, such as convenience checks?
Unsolicited Issuance of Credit Cards
Question 46 TILA generally prohibits creditors from issuing credit cards, except in response to a request or application. There is an exemption for cards issued as renewals or substitutions to replace an accepted card in which more than one card may be replaced, subject to certain conditions. This allows issuers to use new formats and technologies to issue cards to supplement the traditional card. Should Regulation Z be revised to allow creditors to issue additional cards at anytime, even if it is not for the renewal or substitution of the previously issued card? Should conditions or limitations be attached in these situations, such as a requirement that the card be sent unactivated or providing written, prior notice to the consumer that additional cards will be sent?
Prompt Crediting of Payments
Question 47 TILA requires that a payment made on an open end-credit plan must be credited to the account as of the date the payment is received by the creditor and that creditors may impose reasonable payment requirements. Creditors may also specify a "cut-off" hour for the payment to be received in order to be credited on that day. What are the cut-off hours used by most card issuers? How do issuers determine cut-off hours?
Question 48 Do card issuers payment instructions and cut-off hours differ according to whether the consumer makes payment by check, electronic fund transfer, telephone, or by the Internet? What proportion of consumers make payments by mail, as opposed to expedited options, such as electronic payments?
Question 49 Do the rules and creditor disclosures clearly inform cardholders of the date and time that payments must be received in order to avoid additional fees? How can the disclosure requirements be improved?
Question 50 Creditors may use third-party processors for payments. How, if at all, do the operating hours of third-party processors differ from those of creditors? Do creditors treat payments received by a third-party processor as if they were received by the creditor? What guidance is needed concerning the creditors obligation in posting and crediting payments when third-parties are used?
Question 51 Some creditors service centers are open 24 hours a day, 7 days a week, to receive mail delivery and electronic payments continuously. Should the Fed issue a rule requiring creditors to credit a payment as of the date it is received, regardless of the time?
Request for Comment on Additional Issues
Question 52 The Fed is often asked for informal advice on how to apply TILA to new products and circumstances that are not addressed in the rules. Are there issues in which the Feds informal advice should be formalized or addressed again? (If adopted after public comment, any such advice would apply prospectively and compliance not mandatory until after an appropriate implementation period.)
Question 53 The Fed provides exceptions based on de minimis, or minimum, dollar amounts. Examples include not requiring periodic statements if the balance is $1 or less and a simplified way to calculate the APR on periodic statements if the minimum finance charge is 50 cents or less. To what extent, if any, should amounts such as these be adjusted?
Question 54 How can Regulation Z and the official staff commentary be amended so that it is more effectively organized and easier to understand? Are there technical revisions to the rules or the official staff commentary that should be addressed?
Question 55 Are there any provisions of Regulation Z that are obsolete due to technological or other developments?
Question 56 Are there any legislative changes to TILA that the Fed should recommend to Congress? For example, for a rule based on a dollar amount that is in the TILA statute, should the Fed recommend adjustments to these dollar amounts and what should be the amount of the adjustments?
Question 57 Are there nonregulatory approaches that may improve the effectiveness of TILAs disclosures and substantive protections, such as best practices or consumer education efforts? For example, how might calculation tools that are widely available on the Internet be used to provide better education to consumers regarding the effect of making only minimum payments? Is there data as to the extent to which consumers use these and other types of calculation tools?
Question 58 Are there other areas of Regulation Z, in addition to the rules on open-end credit, that should be included in this initial stage of review? For example, creditors must provide new disclosures when a closed-end loan is refinanced, which occurs when an existing obligation has been satisfied and replaced by a new obligation based on the contract and applicable law. Different states may take different approaches as to when the obligation is "satisfied and replaced." Should the Fed adopt a different definition of "refinancing" that would lead to a more uniform approach as to when these new disclosures are needed? Also, Regulation Z specifies classes of transactions that are not covered under TILA. These include: 1) business, commercial, agricultural, or organizational credit; 2) credit over $25,000 that is not secured by real property; 3) public utility credit; 4) securities or commodities accounts; 5) home fuel budget plans; and 6) student loans. Should these be updated?
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