I. INTRODUCTION
The Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) amended the Truth in Lending Act (TILA) to establish fair and transparent practices for open-end credit plans, including credit cards. The Federal Reserve Board (Board) has announced interim final regulations to implement those provisions of the Credit CARD Act that take effect on August 20, 2009, February 10, 2010 and August 22, 2010, respectively.
II. CHANGES EFFECTIVE ON AUGUST 20, 2009
A. Advance Notice of Rate Increase and Other Changes Required:
A creditor will be required to provide at least 45 days advance written notice of (1) an increase in an APR; and (2) other significant changes in the terms of the agreement (such as increases in fees or finance charges).
The 45-day advance written notice requirement is triggered by an increase in the required minimum periodic payment or changes to the following terms, except as provided at II.A.1, below: (1) Annual percentage rates – Each periodic rate that may be used to compute the finance charge on an outstanding balance for purchases, a cash advance or a balance transfer. This includes any discounted initial rate, premium initial rate, or penalty rate that may be applied to the account; (2) Fees for issuance or availability – Any annual or other periodic fee that may be imposed for the issuance or availability of a credit card account under an open-end (not home-secured) consumer credit plan, including any fee based on account activity or inactivity; (3) Fixed finance charge; minimum interest charge – Any fixed finance charge and any minimum interest charge if it exceeds one dollar that could be imposed during a billing cycle; (4) Transaction charges; (5) Grace period; (6) Balance computation method; (7) Cash advance fee; (8) Late payment fee; (9) Over-the-limit fee; (10) Balance transfer fee; (11) Returned-payment; and (12) Required insurance, debt cancellation, or debt suspension coverage fee.
If a creditor decreases the credit limit on an account, advance notice of the decrease must be provided before an over-the-limit fee or a penalty rate can be imposed solely as a result of the consumer exceeding the newly decreased credit limit. Notice must be provided orally or in writing at least 45-days prior to imposing the over-the-limit fee or penalty rate and must state that the credit limit on the account has been or will be decreased.
Whenever the creditor changes the consumer’s billing cycle, it must give notice if the change affects any of the terms above, unless a notice is not required under one of the exceptions discussed at II.A.1, below. The 45-day timing requirement does not apply if the consumer has agreed to a particular change; however, the notice must still be given before the effective date of the change and must contain the information discussed at II.A.2, below.
1. Exceptions
The 45-day advance notice is not required for:
a. Scheduled Increases The 45-day advance notice is not required for an APR increase upon the expiration of a specified period of time if:
i. Prior to the commencement of that period of time, the creditor has disclosed in writing to the consumer, in a clear and conspicuous manner, the length of the period and the APR that will apply after expiration of the period; and
ii. The increased APR does not exceed the rate disclosed; and
b. Variable Rate Plans The 45-day advance notice is not required for a variable rate APR increase in accordance with a credit card agreement that provides for changes according to an index not under the control of the creditor and available to the general public;
c. Workouts The 45-day advance notice is not required for an increase due to the completion of a workout or temporary hardship arrangement or the failure of the obligor to comply with the terms of a workout or temporary hardship arrangement, if:
i. The APR for any category of transactions following such increase does not exceed the rate, fee or finance charge that applied to that category of transactions prior to the arrangement; and
ii. The creditor has provided the obligor, before the arrangement, with clear and conspicuous disclosure of the terms of the arrangement (including any increases due to completion or failure).
2. Notice Content
The 45-day advance written notice must contain: (a) A description of the changed terms or any increase in the required minimum periodic payment; (b) A statement that changes are being made to the account; (c) The date that the changes will become effective; and (d) Except in the case of an increase in the required minimum periodic payment; (i) A statement that the consumer has the right to reject the change(s) prior to the effective date of the change(s), unless the consumer fails to make a required minimum payment within 60 days after the due date for that payment; (ii) Instructions for rejecting the change(s), and a toll-free telephone number that the consumer may use to notify the creditor of the rejection; and (iii) If applicable, a statement that if the consumer rejects the change(s) the consumer’s ability to use the account for further advances will be terminated or suspended.
B. Notice of Rate Increase Due to Default, Delinquency or Penalty
A creditor must also provide a 45-day advance written notice to each consumer who may be affected when a rate is increased due to a consumer’s delinquency or default, or is increased as a penalty for an event specified in the account agreement, such as making a late payment or obtaining an extension of credit that exceeds the credit limit. The notice, which must be provided after the occurrence of the event(s) that triggers the imposition of the rate increase and at least 45 days before the effective date of such increase, must contain the following: (1) A statement that the delinquency or default rate or penalty rate, as applicable, has been triggered; (2) The date on which the delinquency or default rate or penalty rate will apply; (3) The circumstances under which the delinquency or default rate or penalty rate, as applicable, will cease to apply to the consumer’s account, or that the delinquency or default rate or penalty rate will remain in effect for a potentially indefinite time period; (4) A statement that the consumer has the right to reject the increase in the APR prior to the effective date of that increase, unless the consumer fails to make a required minimum periodic payment within 60 days after the due date for that payment; (5) Instructions for rejecting the change(s), and a toll-free telephone number that the consumer may use to notify the creditor of the rejection; and (6) If applicable, a statement that if the consumer rejects the change(s), the consumer’s ability to use the account for further advances will be terminated or suspended.
The following are the only exceptions to the foregoing notice requirement:
(a) Workout or temporary hardship arrangements, if a rate applicable to a category of transactions is increased as a result of the consumer’s default, delinquency or as a penalty, in each case for a failure to comply with the terms of a workout or temporary hardship arrangement between the creditor and the consumer, provided that: (i) The rate following any such increase does not exceed the rate that applied to the category of transactions prior to commencement of the workout or temporary hardship arrangement or, if the rate that applied to a category of transaction prior to the commencement of the workout or temporary hardship arrangement was a variable rate, the rate following any such increase is a variable rate determined by the same formula (index and margin) that applied to the category of transactions prior to commencement of the workout or temporary hardship arrangement; and (ii) The creditor has provided the consumer, prior to the commencement of such arrangement, with a clear and conspicuous written disclosure of the terms of the arrangement (including any increases due to such failure); and
(b) A decrease in credit limit provided that: (i) The creditor provides written notice at least 45-days in advance of imposing the penalty rate, that includes: (a) A statement that the credit limit on the account has been or will be decreased; (b) A statement indicating the date on which the penalty rate will apply, if the outstanding balance exceeds the credit limit as of that date; (c) A statement that the penalty rate will not be imposed on the date specified if the outstanding balance does not exceed the credit limit as of that date; (d) the circumstances under which the penalty rate, if applied, will cease to apply to the account, or that the penalty rate, if applied, will remain in effect for a potentially indefinite time period; and (ii) The creditor does not increase the rate applicable to the consumer’s account to the penalty rate if the outstanding balance does not exceed the credit limit on the date set forth in the notice.
C. Notice of Right to Cancel
The 45-day advance notice described above must be clear and conspicuous and contain a statement of the consumer’s right to cancel the account before the effective date of the change. Creditors should be aware that exercising the right to close or cancel an account by a consumer cannot be deemed an event of default and cannot trigger the imposition of any other penalty or fee. It also cannot trigger an immediate obligation to pay the outstanding balance in full or through a method that is less beneficial than either:
1. A five-year amortization period, beginning on the effective date of the increase; or
2. A required minimum periodic payment that includes a percentage of the outstanding balance equal to no more than twice the percentage required on the date on which the creditor was notified of the cancellation.
III. LATE PAYMENTS/TIMING OF DISCLOSURES
A. Reasonable Procedures
A creditor is prohibited from treating a payment on an open-end consumer credit plan as late for any purpose unless the creditor has adopted reasonable procedures designed to ensure periodic statements are mailed or delivered no later than 21 days before the payment due date. This provision applies to period statements that are first mailed or delivered on or after August 20, 2009.
The interim final regulation indicates that a creditor is in compliance if it has adopted reasonable procedures designed to ensure that periodic statements are mailed or delivered to consumers no later than a certain number of days after the closing date of the billing cycle and adds that number of days to the required 21-day period when determining the payment due date and the date on which any grace period expires. For example, if a creditor has adopted reasonable procedures designed to ensure that periodic statements are mailed or delivered to consumers no later than 3 days after the closing date of the billing cycle, the payment due date and the date on which any grace period expires must be no less than 24 days after the closing date of the billing cycle.
Creditors must have in place on August 20, 2009, reasonable procedures designed to ensure that periodic statements are mailed or delivered at least 21 days before the payment due date and the date on which any grace period expires. Thus, if a periodic statement is mailed or delivered on August 20, 2009, the creditor must have reasonable procedures designed to ensure that the payment due date and the grace period expiration date are not earlier than September 10, 2009. However, if a periodic statement is mailed or delivered on August 19, 2009, this new requirement does not apply to that statement.
The Board has also noted that, with respect to open-end consumer credit plans other than credit cards, it may be difficult for some creditors to update their systems to produce periodic statements by August 20, 2009 that disclose payment due dates and grace period expiration dates (if applicable), that are consistent with the 21-day requirement. As a result, it is possible that, for a short period of time after August 20, 2009, some periodic statements for open-end consumer credit plans other than credit cards may disclose payment due dates and grace period expiration dates (if applicable), that are technically inconsistent with the interim final rule. In these circumstances, the creditor may remedy this technical issue by prominently disclosing elsewhere on or with the periodic statement that the consumer’s payment will not be treated as late for any purpose if received within 21 days after the statement was mailed or delivered. Under no circumstances is a creditor permitted to treat a payment as late for any purpose if that payment is received within 21 days after mailing or delivery of the periodic statement.
Subsequent to issuance of the final rule, provisions of the Credit CARD Technical Correction Act of 2009 clarified that for open-end consumer credit, the requirement for a creditor to send a billing notice 21 days in advance of the payment due date, only applies to a credit card account under an open-end consumer credit plan. The original rule would have applied to HELOC’s accessed by any means, not just by credit cards.
B. Special Rules for Accounts with Grace Periods
If a creditor offers a grace period (a period within which consumers may repay an outstanding balance without incurring any additional finance charge), any additional finance charge(s) may not be imposed unless the creditor mails or delivers a statement reflecting the charge(s) at least 21 days before the payment is due to avoid that finance charge. This provision affects not only credit cards, but open-end consumer credit generally, such as charge cards, home-equity credit lines and personal lines of credit. This provision applies to period statements that are first mailed or delivered on or after August 20, 2009.
IV. ADDITIONAL CREDIT CARD ACCOUNT GUIDANCE
A. Periodic Review of Accounts
Since issuance on July 22, 2009, of the interim final rules on the Credit CARD Act, the Office of the Comptroller of the Currency (OCC) has issued two clarifying bulletins.
The OCC issued Bulletin 2009-25 to remind national banks that effective August 22, 2010, they must conduct periodic reviews of accounts whose interest rates have been increased since January 1, 2009, based on factors including market conditions and borrower credit risk. If such factors have changed, the Credit CARD Act requires that the rates on the accounts must be reduced. The OCC requires national banks to maintain and have available information concerning any rate increases as needed to conduct the required periodic reviews.
Pursuant to the interim final rules, banks are required to notify customers 45 days in advance of any rate increase or significant changes in credit card account terms. The rules also require lenders to disclose that their customers have the right to reject those changes. However, under the rules, the new rates or terms can be applied to any transaction that occurs more than 14 days after the notice is provided – even if the customer ultimately rejects the changes. The rules do not require creditors to tell their customers that new terms can be applied during the 45-day period.
Under Bulletin 2009-29, the OCC directs national banks to include an additional disclosure to notify consumers of the foregoing consequence. The OCC believes this additional disclosure will prevent consumer confusion, particularly for customers who opt to reject the changes in terms.
To avoid unnecessary consumer confusion, national banks should include the following (or similar) additional information in 45-day advance notices to alert the consumer, if applicable, to the imposition of the new terms on transactions that occur more than 14 days after the notice is provided, regardless of whether the consumer rejects the changes:
NOTE: Even if you reject this change in terms, the new terms will be applied to any transactions on your account that occur on or after [INSERT DATE].
B. Treatment of Variable Rate Floors
The comments to final amendments to Regulation Z to implement the Credit Card Act, provide that a variable rate can only be used to raise rates on existing balances if the variable rate does not have a floor, or minimum rate, that is above the index rate plus the applicable margin. In addition, the variable rate must be based on the value of an index on a specified date or the average of the index over a specified period and not the highest rate during a specified period.
These limitations, coupled with limitations on raising rates on existing balances, with a February 22, 2010, effective date, have placed many credit card issuers in the difficult position of having a variable rate credit card program that does not qualify for the variable rate exception. This raised a number of questions as to how card issuers would need to change their programs to either continue to qualify for the variable rate exception going forward or to avoid impermissible increases in rates on existing balances.
The Federal Board staff clarified credit card issuers’ alternatives for dealing with these variable rate accounts. Under the guidance provided by Board staff, credit card issuers may proceed as follows:
V. CHANGES EFFECTIVE ON FEBRUARY 22, 2010
A. Increases in Annual Percentage Rates
1. Existing Balances. The final rule prohibits credit card issuers from applying increased annual percentage rates and certain fees and charges to existing credit card balances, except in the following circumstances: (a) when a temporary rate lasting at least six months expires; (b) when the rate is increased due to the operation of an index (i.e., when the rate is a variable rate); (c) when the minimum payment has not been received within 60 days after the due date (must terminate rate increase after six months if on-time payments are made); and (d) when the consumer successfully completes or fails to comply with the terms of a workout arrangement. In addition, when the annual percentage rate on an existing balance has been reduced pursuant to the Servicemembers Civil Relief Act (SCRA), the final rule permits the card issuer to increase that rate once the SCRA ceases to apply.
2. New transactions. The final rule implements the Credit Card Act’s prohibition on increasing an annual percentage rate during the first year after an account is opened. After the first year, the final rule provides that a card issuer is permitted to increase the annual percentage rates that apply to new transactions so long as the issuer provides the consumer with 45 days advance notice of the increase.
B. Evaluation of Consumer’s Ability to Pay
1. General requirements. The Credit CARD Act prohibits credit card issuers from opening a new credit card account or increasing the credit limit for an existing credit card account unless the issuer considers the consumer’s ability to make the required payments under the terms of the account. Because credit card accounts typically require consumers to make a minimum monthly payment that is a percentage of the total balance (plus, in some cases, accrued interest and fees), the final rule requires card issuers to consider the consumer’s ability to make the required minimum payments.
VI. CREDIT CARD ACT – “ABILITY TO PAY”
A. Introduction
The Consumer Financial Protection Bureau (CFPB) adopted amendments to the Truth in Lending Act (Regulation Z) eliminating the requirement that issuers consider applicants’ “independent” ability to pay for applicants who are 21 or older and permitting issuers to consider income and assets to which the applicants have a reasonable expectation of access. The amendments became effective on May 3, 2013, with compliance mandatory by November 4, 2013, and optional prior to that date.
B. General Rule For Applicants 21 or Older
Under the final rule, card issuers may only open an account for an applicant if they consider the applicant’s ability to make the required minimum periodic payments based on the applicant’s income or assets and the applicant’s current obligations. Issuers may consider income and assets “to which the applicant has reasonable expectation of access.”
The issuer may also limit itself to consideration of the applicant’s independent income and assets. Issuers are not required to consider non-applicant’s income or assets even if the applicant has a reasonable expectation of access to them.
Issuers may consider income and assets to which an applicant, accountholder, joint applicant, cosigner, or guarantor has reasonable expectation of access -- but are not required to do so.
1. Consideration of authorized users, household members or others not liable for debt only permitted under certain circumstances:
a. If federal or state law grants the applicant ownership interest;
b. Such income is deposited regularly into an account to which the applicant has reasonable expectation of access; or
c. The applicant has a reasonable expectation of access even if the applicant does not have a current or expected ownership interest in the income or assets.
The final rule clarifies, that issuers need not follow up with additional inquiry when requesting information using the terms “salary,” “income,” “assets,” “available income,” “accessible income,” or similar language.
If the issuer asked for “household income,” it must obtain additional information about an applicant’s current or reasonably expected income, including income and assets to which the applicant has a reasonable expectation of access (such as by contacting the applicant).
2. Examples of income the issuer may consider assuming applicant is 21 or older and not employed:
The final rule clarifies that issuers may consider an applicant’s reasonable expectation of access to other’s income of any non-applicant, including, but not limited to, a household member. In addition, it clarifies that income is not limited to salary, but includes other income (e.g. Social Security benefits, retirement income, etc.).
3. Example of income the issuer may not consider:
While issuers must consider applicants’ expenses when considering their ability to repay, it is not necessary to consider the expenses of non-applicants whose income the applicant relies on.
The final rule allows issuers to use a reasonable method for estimating a consumer’s minimum payments and establishes a safe harbor that issuers may use to satisfy this requirement. For example, with respect to the opening of a new credit card account, the safe harbor provided that it would be reasonable for an issuer to estimate minimum payments based on a consumer’s utilization of the full credit line using the minimum payment formula employed by the issuer with respect to the credit card product for which the consumer is being considered. In addition, the final rule provides that – if the applicable minimum payment formula includes fees and accrued interest – the estimated minimum payment must include mandatory fees and must include interest charges calculated using the annual percentage rate that will apply after any promotional or other temporary rate expires.
The final rule also specifies the types of factors card issuers must review in considering a consumer’s ability to make the required minimum payments. Specifically, it provides that an evaluation of a consumer’s ability to pay must include a review of the consumer’s income or assets as well as current obligations, and a creditor must establish reasonable policies and procedures for considering that information. When considering a consumer’s income or assets and current obligations, an issuer is permitted to rely on information provided by the consumer or information in a consumer’s credit report.
In addition, when evaluating a consumer’s ability to pay, the final rule requires issuers to consider the ratio of debt obligations to income, the ratio of debt obligations to assets, or the income the consumer will have after paying debt obligations (i.e., residual income). Furthermore, the final rule provides that it would be unreasonable for an issuer not to review any information about a consumer’s income, assets, or current obligations, or to issue a credit card to a consumer who does not have any income or assets. Finally, in order to provide flexibility regarding consideration of income or assets, the final rule permits issuers to make a reasonable estimate of the consumer’s income or assets based on empirically derived, demonstrably and statistically sound models.
C. Rule For Young Consumers (Those Less Than 21 Years Old)
The final rule prohibits a creditor from issuing a credit card to a consumer who has not attained the age of 21 unless the consumer has submitted a written application that meets certain requirements. Specifically, the application must include either: (1) financial information indicating the applicant’s “independent” ability to pay; or (2) the signed agreement of a cosigner, guarantor, or joint applicant, who is at least 21 years old and has an ability to repay.
1. Income and assets that may be considered for young consumers:
Issuers may only consider the current or reasonably expected income or assets of an applicant, which does not include income to which the applicant only has a reasonable expectation of access. Included in the sources of income that may be considered:
a) Current or reasonably expected income or assets of those applying for an account including those of an applicant, cosigner or guarantor. However, issuers may not consider income or assets of applicants, joint applicants, cosigners, or guarantors under the age of 21 if they only have a reasonable expectation of access;
Issuers may rely without further inquiry on information provided by applicants in response to a request for “salary,” “income,” “personal income,” “individual income,” “assets,” or other language requesting that the applicant provide information regarding his or her current or reasonably expected income or assets.
Issuers may not rely solely on information provided in response to a request for “household income,” “available income,” accessible income,” or similar language. In such cases, issuers would need to obtain additional information about the applicant’s current or reasonably expected income (such as by contacting the applicant).
2. Examples of income issuers MAY consider for young consumers assuming applicant is unemployed:
3. Examples of income issuers MAY NOT consider for young consumers assuming applicant is unemployed:
The final rule makes clear that the independent ability-to-pay standard applies to credit line increases while the consumer is under the age of 21 (no increase in line of credit for young consumers unless consumer has independent ability to pay or cosigner, guarantor, or joint accountholder 21 or older agrees in writing to assume liability).
The final rule clarifies that cards issuers do not violate Regulation B by applying a different underwriting standard to applicants under 21 than the standard applied to those 21 and older as permitted under Regulation Z.
D. Marketing to Students
1. Prohibited inducements. The Credit CARD Act limits a creditor’s ability to offer a student at an institution of higher education any “tangible item” to induce the student to apply for or open an open-end consumer credit plan offered by the creditor. Specifically, the Act prohibits such offers: (1) on the campus of an institution of higher education; (2) near the campus of an institution of higher education; or (3) at an event sponsored by or related to an institution of higher education.
For purposes of the final rule, the official staff commentary clarifies that “tangible item” means a physical item (such as a gift card, t-shirt, or magazine subscription) and does not include non-physical items (such as discounts, rewards points, or promotional credit terms). The commentary also clarifies that a location that is within 1,000 feet of the border of the campus of an institution of higher education is considered near the campus of that institution. Finally, the commentary states that an event is related to an institution of higher education if the marketing of such event uses words, pictures, or symbols identified with the institution in a way that implies that the institution endorses or otherwise sponsors the event.
2. Disclosure and reporting requirements. The final rule requires institutions of higher education to publicly disclose agreements with credit card issuers regarding the marketing of credit cards. The final rule states that an institution may comply with this requirement by, for example, posting the agreement on its Web site or by making the agreement available upon request.
In addition, the final rule requires card issuers to make annual reports to the Board regarding any business, marketing, or promotional agreements between the issuer and an institution of higher education (or an affiliated organization) regarding the issuance of credit cards to students at that institution. The first report must provide information regarding the 2009 calendar year and must be submitted to the Board by February 22, 2010.
E. Fees or Charges for Transactions That Exceed the Credit Limit
1. Consumer consent requirement. The final rule requires credit card issuers to obtain a consumer’s express consent (or opt-in) before imposing any fees on a consumer’s credit card account for making an extension of credit that exceeds the account’s credit limit. Prior to obtaining this consent, the issuer must disclose, among other things, the dollar amount of any fees or charges that will be assessed for an over-the-limit transaction as well as any increased rate that may apply if the consumer exceeds the credit limit. In addition, if the consumer consents, the issuer is also required to provide a notice of the consumer’s right to revoke that consent on any periodic statement that reflects the imposition of an over-the-limit fee or charge. The final rule applies these requirements to all consumers (including existing accountholders) if the issuer imposes a fee or charge for paying an over-the-limit transaction. Thus, after February 22, 2010, issuers are prohibited from assessing anyover-the-limit fees or charges on an account until the consumer consents to the payment of transactions that exceed the credit limit.
2. Prohibited practices. Even if the consumer has affirmatively consented to the issuer’s payment of over-the-limit transactions, the final rule prohibits an issuer from imposing more than one over-the-limit fee or charge per billing cycle. In addition, an issuer could not impose an over-the-limit fee or charge on the account for the same over-the-limit transaction in more than three billing cycles.
The final rule prohibits issuers from assessing over-the-limit fees or charges that are caused by the issuer’s failure to promptly replenish the consumer’s available credit. The rule also prohibits issuers from conditioning the amount of available credit on the consumer’s consent to the payment of over-the-limit transactions. Finally, the imposition of any over-the-limit fees or charges is prohibited if the credit limit is exceeded solely because of the issuer’s assessment of fees or charges (including accrued interest charges) on the consumer’s account.
F. Payment Allocation
When different rates apply to different balances on a credit card account, the final rule requires banks to allocate payments in excess of the minimum to the balance with the highest rate. In addition, when a balance on an account is subject to a deferred interest or similar program, excess payments must be allocated first to that balance during the last two billing cycles of the deferred interest period so that the consumer can pay the balance in full and avoid deferred interest charges.
In order to provide consumers who utilize deferred interest programs with an additional means of avoiding deferred interest charges, the final rule also permits issuers to allocate excess payments in the manner requested by the consumer at any point during a deferred interest period. This exception allows issuers to retain existing programs that permit consumers to, for example, pay off a deferred interest balance in installments over the course of the deferred interest period. However, this provision applies only when a balance on an account is subject to a deferred interest or similar program.
G. Timely Settlement of Estates
The Credit Card Act requires credit card issuers to establish procedures ensuring that any administrator of an estate can resolve the outstanding credit card balance of a deceased accountholder in a timely manner. The final rule requires the card issuer, upon request by the administrator, to disclose the amount of the balance in a timely manner. Second, if the administrator pays the balance stated by the issuer in full within 30 days, the issuer must waive any additional interest charges. However, the final rule prohibits the imposition of additional fees so that the account is not, for example, assessed late payment fees or annual fees while the administrator is settling the estate.
H. On-line Disclosure of Credit Card Agreements
The final rule requires issuers to post on their Web sites or otherwise make available their credit card agreements with current card holders. In addition, the final rule generally requires that - no later than February 22, 2010 – issuers submit to the Board for posting on its Web site all credit card agreements offered to the public as of December 31, 2009. Subsequent submissions are due on August 2, 2010, and on a quarterly basis thereafter.
The final rule also adopts certain exceptions to this submission requirement. First, the final rule adopts a de minimis exception for issuers with fewer than 10,000 open credit card accounts. The final rule also provides that issuers are not required to submit agreements for private label plans offered on behalf of a single merchant or a group of affiliated merchants or for plans that are offered in order to test a new credit card product so long as the plan involves no more than 10,000 credit card accounts. Second, the final rule excepts agreements that are not currently offered to the public from the submission requirement.
I. Additional Provisions
1. Limitations on fees. The final rule prohibits banks from charging to a credit card account during the first year after account opening any fees (other than fees for late payments, returned payments, and exceeding the credit limit), and limits the total fees to 25% of the initial credit limit. These limitations also apply to application and similar fees that a consumer is required to pay before a credit card account is opened. For example, a card issuer that charges a $75 fee to apply for a credit card with a $400 credit limit generally will not be permitted to charge more than $25 in additional fees during the first year after account opening.
2. Double-cycle billing. The final rule prohibits banks from imposing finance charges on balances for days in previous billing cycles as a result of the loss of a grace period (a practice sometimes referred to as “double-cycle billing”). In addition, when a consumer pays some but not all of a balance prior to expiration of a grace period, the final rule prohibits the issuer from imposing finance charges on the portion of the balance that has been repaid.
3. Fees for making payment. The final rule prohibits issuers from charging a fee for making a payment, except for payments involving an expedited service by a service representative of the issuer.
4. Minimum payments. The final rule requires the following new disclosures on the periodic statement: (1) the amount of time and the total cost (interest and principal) involved in paying the balance in full making only minimum payments; and (2) the monthly payment amount required to pay off the balance in 36 months and the total cost (interest and principal) of repaying the balance in 36 months.
VII. CHANGES EFFECTIVE ON AUGUST 22, 2010
The Board amended Regulation Z, which implements the Truth in Lending Act, and the staff commentary to the regulation in order to implement provisions of the Credit CARD Act of 2009 that go into effect on August 22, 2010. In particular, the final rule requires that penalty fees imposed by card issuers be “reasonable and proportional” to the violation of the account terms. The final rule also requires credit card issuers to reevaluate at least every six months annual percentage rates increased on or after January 1, 2009. The final rule also requires that notices of rate increases for credit card accounts disclose the principal reasons for the increase. The rule became effective on August 22, 2010.
B. Reasonable and Proportional Penalty Fees
The Credit Card Act provides that “[t]he amount of any penalty fee or charge that a card issuer may impose with respect to a credit card account under an open end consumer credit plan in connection with any omission with respect to, or violation of, the cardholder agreement, including any late payment fee, over-the-limit fee, or any other penalty fee or charge, shall be reasonable and proportional to such omission or violation.” The Credit Card Act further directs the Board to issue rules that “establish standards for assessing whether the amount of any penalty fee or charge . . . is reasonable and proportional to the omission or violation to which the fee or charge relates.”
A fee is any charge imposed by a card issuer based on an act or omission that violates the terms of the account or any other requirements imposed by the card issuer with respect to the account, other than charges attributable to periodic interest rates.
The following are examples of fees that are subject to the limitations in — or prohibited by — the final rule: (1) Late payment fees and any other fees imposed by a card issuer if an account becomes delinquent or if a payment is not received by a particular date; (2) returned payment fees and any other fees imposed by a card issuer if a payment received via check, automated clearing house, or other payment method is returned; (3) any fee or charge for an over-the-limit transaction, to the extent the imposition of such a fee or charge is permitted; (4) any fee or charge for a transaction that the card issuer declines to authorize; (5) any fee imposed by a card issuer based on account inactivity (including the consumer’s failure to use the account for a particular number or amount of transactions or a particular type of transaction) or the closure or termination of an account; and (6) fees imposed for declined access checks.
The following are examples of fees to which the final rule does not apply: (1) balance transfer fees; (2) cash advance fees; (3) foreign transaction fees; (4) annual fees and other fees for the issuance or availability of credit, except to the extent that such fees are based on account inactivity; (5) fees for debt cancellation or debt suspension coverage written in connection with a credit transaction, provided that such fees are not imposed as a result of a violation of the terms or other requirements of an account; (6) fees for making an expedited payment; (7) fees for optional services (such as travel insurance); and (8) fees for reissuing a lost or stolen card.
In issuing the final rules, the Credit Card Act requires the Board to consider a number of factors, including:
1. Cost Incurred as a Result of Violations
The final rule permits a credit card issuer to charge a penalty fee for a particular type of violation (such as a late payment) if it has determined that the amount of the fee represents a reasonable proportion of the costs incurred by the issuer as a result of that type of violation. Thus, the final rule permits issuers to use penalty fees to pass on the costs incurred as a result of violations while ensuring that those costs are spread evenly among consumers so that no individual consumer bears an unreasonable or disproportionate share.
The final rule provides guidance regarding the types of costs incurred by card issuers as a result of violations. For example, with respect to late payments, the final rule states that the costs incurred by a card issuer include collection costs, such as the cost of notifying consumers of delinquencies and resolving those delinquencies (including the establishment of workout and temporary hardship arrangements). Notably, the final rule also states that, although higher rates of loss may be associated with particular violations, those losses and related costs (such as the cost of holding reserves against losses) are excluded from the cost analysis. In order to ensure that penalty fees are based on relatively current cost information, the final rule requires card issuers to re-evaluate their costs at least annually.
2. Consumer Conduct
The Credit Card Act requires the Board to consider the conduct of the cardholder. The final rule does not require that each penalty fee be based on an assessment of the individual consumer conduct associated with the violation. Instead, the final rule takes consumer conduct into account in three ways. First, as discussed below, the Board has adopted safe harbors that generally allow card issuers to impose higher penalty fees when a consumer repeatedly engages in the same type of conduct during a particular period.
Second, the final rule prohibits issuers from imposing penalty fees that exceed the dollar amount associated with the violation. For example, under the final rule, a consumer who exceeds the credit limit by $5 cannot be charged an over-the-limit fee of more than $5. Similarly, a consumer who is late making a $20 minimum payment cannot be charged a late payment fee of more than $20.
Third, the final rule also prohibits issuers from imposing multiple penalty fees based on a single event or transaction. For example, the final rule prohibits issuers from charging a late payment fee and a returned payment fee based on a single payment.
A card issuer must not impose a fee for violating the terms or other requirements of a credit card account under an open-end (not home-secured) consumer credit plan when there is no dollar amount associated with the violation. For purposes of the final rule, there is no dollar amount associated with the following violations:
a. Transactions that the card issuer declines to authorize;
b. Account inactivity; and
c. The closure or termination of an account.
Card companies are prohibited from charging fees penalizing consumers for not using a card to make additional purchases. Fees arising out of account inactivity include declined transaction fees and fees based on the closure or termination of an account even if the consumer chooses to turn off the card. The definition of penalty fees sweeps so broadly that it includes “other requirements” implied in the card account terms. For example, in cases in which the account agreement does not expressly state that the consumer must use the card until it expires, charging a fee when the consumer elects not to use an account —a term not included in the card agreement — is tantamount to requiring the consumer to use the account.
3. Safe Harbors
Consistent with the safe harbor authority granted by the Credit Card Act, the final rule generally permits — as an alternative to the cost analysis discussed above — issuers to impose a $30 penalty fee for the first violation and a $41 fee for any additional violation of the same type during the next six billing cycles. For example, if a consumer paid late during the January billing cycle, a $30 late payment fee could be imposed. If one of the next six payments is late (i.e., the payments due during the February through July billing cycles), a $41 late payment fee could be imposed.
These amounts will be adjusted annually to the extent that changes in the Consumer Price Index would result in an increase or decrease of $1.
Although the safe harbors discussed above apply to charge card accounts, the final rule provides an additional safe harbor when a charge card account becomes seriously delinquent. Specifically, the final rule provides that, when a charge card issuer has not received the required payment for two or more consecutive billing cycles, it may impose a late payment fee that does not exceed 3% of the delinquent balance.
C. Reevaluation of Rate Increases
The Credit Card Act requires card issuers that increase an annual percentage rate applicable to a credit card account, based on the credit risk of the consumer, market conditions, or other factors, to periodically consider changes in such factors and determine whether to reduce the annual percentage rate. Card issuers are required to perform this review no less frequently than once every six months, and must maintain reasonable methodologies for this evaluation. The Credit Card Act requires card issuers to reduce the annual percentage rate that was previously increased if a reduction is “indicated” by the review. However, the statute expressly provides that no specific amount of reduction in the rate is required. This provision is effective August 22, 2010, but requires that creditors review accounts on which an annual percentage rate has been increased since January 1, 2009.
1. General Rule
Consistent with the Credit Card Act, the final rule applies to card issuers that increase an annual percentage rate applicable to a credit card account, based on the credit risk of the consumer, market conditions, or other factors. For any rate increase imposed on or after January 1, 2009, card issuers are required to review the account no less frequently than once each six months and, if appropriate, based on that review, reduce the annual percentage rate. The requirement to reevaluate rate increases applies both to increases in annual percentage rates based on consumer-specific factors, such as changes in the consumer’s creditworthiness, and to increases in annual percentage rates imposed based on factors that are not specific to the consumer, such as changes in market conditions or the issuer’s cost of funds. If, based on its review, a card issuer is required to reduce the rate applicable to an account, the final rule requires that the rate be reduced within 45 days after completion of the evaluation.
2. Factors Relevant to Reevaluation of Rate Increases
The final rule generally permits a card issuer to review either the same factors on which the rate increase was originally based, or to review the factors that the card issuer currently considers when determining the annual percentage rates applicable to similar new credit card accounts. The Board believes that it is appropriate to permit card issuers to review the factors they currently consider in advancing credit to new consumers, because a review of these factors may result in existing cardholders receiving the benefit of any reduced rate that they would receive if applying for a new credit card with the card issuer.
The final rule contains a special provision for rate increases imposed between January 1, 2009, and February 21, 2010. For rates increased during this period, the final rule requires an issuer to conduct its first two reviews by using the factors that the issuer currently considers when determining the annual percentage rates applicable to similar new credit card accounts, unless the rate increase was based solely upon consumer-specific factors, such as a decline in the consumer’s credit risk or the consumer’s delinquency or default.
3. Termination of Obligation to Reevaluate Rate Increases
The final rule requires that a card issuer continue to review a consumer’s account each six months unless the rate is reduced to the rate in effect prior to the increase. Accordingly, in some circumstances, the final rule requires card issuers to reevaluate rate increases each six months for an indefinite period.