By: Doug Hattaway, Law Clerk
The Federal Reserve Board recently released the interim final rules for implementing the first wave of changes made by the Credit CARD Act of 2009. These changes are only the first step in the CARD Act’s three-stage implementation process, but they have already resulted in substantial revisions to Regulation Z—and their rapidly approaching August 20th deadline has created a compliance nightmare for credit unions. The good news is that the Board’s interim final rules provide much-needed guidance on how credit unions and other lenders can comply with the new regulations and even make several changes to the initial CARD Act requirements that are designed to ease the burden of compliance.
Background and Implementation of the Credit Card Act
The interim final rules confirm the changes being made to the Truth in Lending regulations and their applicable effective dates:
August 20, 2009
45 days’ advance notice of interest rate increases and change in terms (§127(i))
Amount of time consumers have to make payments (§163)
February 22, 2010
Majority of CARD requirements, including:
Interest rate increases (§171)
Over-the-limit transactions (§127(k))
Student cards (§127(c)(8)), (§127(p)), (§140(f))
August 22, 2010 (if Board issues final rules no later than February 22, 2010)
Reasonableness and proportionality of penalty fees and charges (§149)
Re-evaluation by creditors of rate increases (§148)
The Board also noted that, while §148 is not effective until August 22, 2010, it will apply to rate increases that have occurred since January 1, 2009. Specifically, §148 requires that if a creditor has increased a rate on a credit card account based on the credit risk of the consumer, market conditions, or other factors, the creditor must review the account at least once every six months and consider changes in such factors in subsequently determining whether to use that rate.
The Board begins the interim rules with an explanatory note regarding how the CARD Act will interact with other recently-promulgated rules. On December 18, 2008 the Board adopted two final rules pertaining to open-end credit and these rules were published in the Federal Register in January of 2009. The first makes comprehensive changes to Regulation Z’s provisions regarding open-end credit (“January Regulation Z Rule”) and the second is a joint rule published with the OTS, NCUA, and FTC that is currently found in Regulation AA and applies to consumer credit card accounts (“FTC Act Rule”) (referred to collectively as “January 2009 Rules”). The effective date for both of these rules is July 1, 2010. The CARD Act, however, has several provisions that are similar to provisions of the January 2009 Rules. It appears that the Board’s interim Rules implementing the CARD Act would technically be altered when the January 2009 Rules take effect in July 2010. The Board stated that it is not withdrawing any provisions of the January 2009 Rules at this time, but it anticipates that in finalizing rules for the CARD Act provisions that go into effect February 22, 2010 it will amend or withdraw portions of the January 2009 Rules that are inconsistent with the CARD Act. All portions of the January 2009 Rules that are unaffected by the CARD Act, however, will survive. The Board specifically stated that all of the requirements of the FTC Act Rule will be withdrawn from Regulation AA and moved into Regulation Z.
Notice and Opportunity Period
The Board stated that, pursuant to 5 U.S.C. §553(b)(B), it will not be providing a notice and an opportunity to comment prior to the implementation of §§ 101(a) and 106(b) of the CARD Act (new TILA §§ 127(i) and 163, effective 8/20/09).
Analysis of 12 C.F.R. 226 §226.5
General Disclosure Requirements
The Board has implemented amended TILA §163 by revising 12 C.F.R. §226.5(b)(2)(ii), which now states that a creditor who wishes to treat a payment as late or impose additional finance charges must adopt “reasonable procedures” designed to ensure that periodic statements are mailed 21 days before the payment due date and the expiration of the “grace period” (i.e. the period during which credit may be repaid to avoid incurring a finance charge due to a periodic interest rate but not including deferred interest or other promotional programs). The “due date” for purposes of §226.5 is the date the creditor requires a minimum payment, not the end of any “courtesy period” (i.e. a contractual or informal agreement not to consider a payment late for a certain period of time after the contractual due date, whether truly offered as a courtesy or mandated by state law) the creditor may offer. If a customer requests to pick up his or her statement instead, it must be made available to the consumer at least 14 days prior to the due date. A creditor may not require consumers to pick up their statements.
Under the “reasonable procedures” standard a creditor is not required to determine the specific date on which periodic statements are mailed to each individual consumer. Instead, the creditor is permitted to determine mailing dates and payment due dates based on the date of the close of the billing cycle (e.g. A creditor can develop procedures designed to ensure that statements are mailed three days after the close of the billing cycle as long as the payment due date is no less than 24 days after the close of the billing cycle).
It is of note that amended TILA §163 contains the “reasonable procedures” language in regard to late fees but not finance charges. The Board, however, is relying on its authority under TILA §105(a) to adjust the rules and apply the “reasonable procedures” standard to both.
Under §226.5(b)(2)(ii) the phrase “treat a payment as late” will include situations where the creditor increases the APR as a penalty, reports the consumer as delinquent to a credit reporting agency, or assesses a late fee. However, if the credit account is not eligible for a grace period, imposing a finance charge due to a periodic interest rate does not constitute treating a payment as late.
The Board also stated that the provisions of §226.5 apply to statements mailed on August 20th or later. Therefore if a statement is mailed on August 19th, the due date for that statement may be earlier than September 9th. Furthermore, the Board has recognized that it may be difficult for some creditors to update their systems fast enough to produce periodic statements by August 20th that comply with the interim final rule. Accordingly, for a short period of time after August 20th creditors may send out periodic statements that technically do not comply with the rule as long as they include a prominent disclosure on or with the periodic statement that informs the consumer that the payment will not be considered late if received within 21 days after mailing.
Finally, it is important to note that amended TILA §163 applies to all open-end consumer credit accounts, not just consumer credit card accounts.
§226.9 Subsequent Disclosure Requirements
The Board is implementing new TILA §127(i) by revising §226.9(c) and adopting §226.9(g) and (h). These new regulations require creditors to provide consumers with 45 days’ advance notice of rate increases and other significant changes to the terms of their credit card account agreements. Furthermore, §226.9(h) states that consumers will have the right to cancel their account before such significant changes take place (subject to exceptions, see below). Change-in-term notices must also disclose the consumer’s right to cancel the account before the changes take place, and such a cancellation may not constitute a default or trigger an acceleration of the debt.
There are three exceptions to the general rule requiring a 45-day advance notice. The first exception is when the APR is scheduled to automatically change after a set period of time. This exception applies as long as the creditor discloses when the change is to occur and what the subsequent APR is to be. The second exception occurs when the APR changes according to the operation of a publicly available index not under the control of the creditor. The third exception applies to rate increases due to the completion of or failure to comply with the terms of a workout or temporary hardship agreement. Again, this assumes that the creditor has previously disclosed what the new rate will be and what will trigger it or when it will become effective.
This 45-day advance notice requirement also applies to rate increases triggered by the consumer’s default or delinquency. While the effective date will technically apply to the date of the increase, the Board has made an exception to this rule: when the triggering behavior occurred prior to the notice and notice was granted before August 20th then a subsequent rate increase does not subject the creditor to the new regulations (e.g. if the consumer defaults on August 18th, the creditor can mail the consumer a notice on August 19th that a penalty rate has been triggered and will take effect on August 25th).
When a creditor chooses to reject changes in rates or significant terms, the creditor must accept and honor all such rejections up to the day before the proposed change, subject to the exceptions listed below. Rejections received after the change has been made do not have to be honored. Furthermore, creditors do not have to honor requests for rejection of rate increases associated with promotional APR’s and other such programs. In fact, creditors are generally not required to honor any request for rejection relating to a term with no disclosure requirement under 226.9(c)(2)(iv) or (g)(3) (the 45-day notice requirement for changes in rates and significant terms). Additionally, the right to reject does not apply when the creditor has not received the consumer’s minimum periodic payment within 60 days after the due date of that payment (even if the 60-day delinquency began prior to August 20th). Creditors reserve the right to cancel an account after a consumer has rejected changes, although there is no requirement that a creditor do so. If the consumer continues using the account 14 days after the creditor provides notice of the new terms, a creditor is free to apply the new terms to those transactions—even if a consumer has rejected the new terms. The new provisions, however, must be applied specifically to transactions occurring after the 14-day period; they cannot be applied to the account as a whole or individual transactions that occurred prior to the end of the 14-day period. This 14-day provision does not appear to be in the amended TILA, but the Board is again using its authority under TILA §105(a) to adjust the rules.
If the creditor or consumer does choose to cancel the account, the creditor must offer a repayment method that is no less beneficial to the consumer than the acceptable methods in amended TILA §171(c)(2). §171(c)(2) lists two acceptable methods for repaying balances: first, an amortization period of not less than five years; second, a required minimum periodic payment that includes a percentage of the balance that is not more than twice the prior percentage. The exception to this requirement is that a creditor may offer the same repayment method in effect prior to closing the account, even if it is more onerous than one of the methods listed in §171(c)(2).
Although not technically considered a change that requires a 45-day advance notice, under the interim final rule creditors must disclose any decrease in a consumer’s credit limit 45 days before the creditor may charge any over-the-limit fee imposed solely as the result of the balance exceeding the newly decreased credit limit.
The Board noted that, while these change-in-term notice requirements only apply to consumer credit cards, there are currently no plans to eliminate the notice requirements in the January Regulation Z Rule, which apply to open-end lines of credit that are not credit card accounts.
The Board has interpreted the phrase “credit card account under an open-end consumer credit plan” in new TILA §127(i) as not applying to accounts that are home-equity lines of credit subject to §226.5b, even if those accounts may be accessed by a credit card device. These accounts, therefore, are not subject to the 45-day notice requirements.
Finally, the notice provisions apply to all notices that are issued on or after August 20th. If a notice of a change in terms is issued prior to August 20th it is not subject to the new regulations, even if the relevant change of terms will occur after that date.
Doug Hattaway is a Law Clerk in the Columbus office of WWR. He can be reached at (614) 857-4419 or firstname.lastname@example.org.