CUNA Regulatory Comment Call
March 11, 2010
Fed Requests Comments on Third Set of Regulation Z Rules Implementing the New Credit Card Law
Executive Summary
- The Federal Reserve Board (Fed) has recently published a third and final set of proposed rules that implement provisions of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (CARD Act). The CARD Act was enacted last year, which prohibits and restricts a number of credit card practices.
- This new proposal would implement the provisions of the CARD Act that will become effective on August 22, 2010. These include provisions that are intended to protect credit card users from unreasonable penalty fees and that require card issuers to reconsider interest rate increases every six months after the increased rate becomes effective.
- This proposal follows two earlier rules that implement the CARD Act provisions, which were effective as
of August 20, 2009 and February 22, 2010. The links below provide more information about these two earlier
rules:
http://www.cuna.org/reg_advocacy/member/download/fed_012910.pdf
http://www.cuna.org/reg_advocacy/reg_call/rcc_073009.html
- Among other provisions, this proposal would:
- Provide three alternatives for determining the amount of penalty fees that may be charged by card issuers.
- Prohibit card issuers from charging penalty fees that exceed the dollar amount associated with the violation. For example, if the minimum payment is $20, the late payment fee could no longer exceed $20.
- Ban inactivity fees or fees for closing and terminating the account.
- Prevent card issuers from charging multiple penalty fees based on a single violation.
- Require card issuers to inform consumers of the reasons for an increased interest rate.
- Require issuers that have increased rates since January 1, 2009 to review these increases every six months and to reduce the rate if the reasons for the increase no longer apply.
- These rules apply to credit cards, but not to home equity lines of credit accessed by credit cards or to overdraft lines of credit accessed by debit cards.
- Comments on the proposed rules are due April 14, 2010 . Comments are due to CUNA by April 6, 2010. If commenting directly to the Fed, you must refer to Docket No. R-1384.
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 mdunn@cuna.com or Senior Assistant General Counsel Jeff Bloch at jbloch@cuna.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 proposed rules or you may access them here.
BACKGROUND
In January 2009, the Fed issued final rules that included comprehensive changes to the open-end credit rules under Regulation Z, as well as the official staff commentary, which primarily affected credit cards and other revolving credit plans. These included 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. At the same time, the National Credit Union Administration, the Fed, and the other federal financial institution regulators issued final rules under the Unfair and Deceptive Acts and Practices (UDAP) Act that prohibit or restrict a number of credit card practices.
In May 2009, the CARD Act was enacted that amended the Truth in Lending Act (TILA) to include many of the acts or practices that were included in the UDAP rules issued in January 2009 and this also included provisions of the Regulation Z rules that were issued at that time. The CARD Act also included additional restrictions and disclosure requirements that were not included in the rules issued in January 2009. The UDAP rules were later rescinded as they were duplicative of many of the CARD Act provisions.
The Fed has now issued the third in a series of rules to implement the CARD Act. These proposed rules
implement the provisions that will be effective on August 22, 2010. The Fed had earlier issued rules to
implement the provisions that became effective on August 20, 2009, as well as those provisions that were
effective on February 22, 2010. Click below for more information about these earlier rules:
http://www.cuna.org/reg_advocacy/member/download/fed_012910.pdf
http://www.cuna.org/reg_advocacy/reg_call/rcc_073009.html
DESCRIPTION OF THE PROPOSED RULES AND PROPOSED CHANGES TO THE OFFICIAL STAFF COMMENTARY
I. Requirements to Impose Reasonable and Proportional Penalty Fees
The CARD Act requires that penalty fees and charges imposed on credit card accounts be reasonable and proportional to the violation. This proposal would generally define such a fee as one based on an act or omission of the consumer that violates the terms of the account or other requirements imposed by the card issuer with regard to the account, other than charges attributable to changes in interest rates. These would include late payment fees, returned payment fees, and over-the-limit fees.
The proposal would not cover certain other fees. These include balance transfer fees, cash advance fees, foreign transaction fees, annual fees, fees for credit insurance, expedited payment fees, fees for optional services, or fees for reissuing a lost or stolen card. The proposal outlines the following three alternatives for determining the amount of the penalty fees.
Alternative One – Fees Based on Costs
Under the proposed rules, the penalty fee for a specific violation must represent a reasonable proportion of the costs incurred by the issuer as a result of the specific type of violation. This would not require that the fee be reasonable and proportional to the costs incurred as a result of a specific violation on a specific account. Here are the factors that would be relevant to making this determination:
- The number of violations of a particular type experienced by the card issuer during a prior period.
- The costs incurred by the card issuer during that period as a result of those violations. For example, if an issuer experiences one million late payment incidents over the course of the year and these late payments result in costs to the issuer of $23 million, then a fee per late payment would be $23.
The card issuer, at its option, may base the fees on a reasonable estimate of changes in the number of violations of that type and the resulting costs during an upcoming period. In the example described above, for instance, the late payment fee could be $25 if the costs are expected to increase to $25 million.
However, higher rates of losses and other related costs, such as the cost of holding reserves against these losses, must be excluded from this calculation.
The following outlines the costs that may be considered for purposes of determining late payment fees, returned payment fees, and over-the-limit fees:
- Late payment fees – These would include collection costs and costs incurred in resolving delinquencies, such as workouts or temporary hardship arrangements.
- Returned payment fees – This would include the costs of processing returned payments and reconciling the issuer’s system and accounts to reflect these payments, as well as costs of notifying consumers and arranging for a new payment.
- Over-the-limit fees (to the extent these are authorized by consumers, as required under other provisions of the CARD Act) – These would include costs associated with determining whether to authorize over-the-limit transactions, as well as the costs associated with notifying the consumer that the limit has been exceeded and arranging for payments to reduce the balance below the credit limit.
Amounts charged to card issuers by third parties as a result of violations of account terms may be considered costs incurred by the card issuer for purposes of calculating the penalty fees. However, if the amount charged is from an affiliate or subsidiary of the card issuer, such as a CUSO, then the issuer must determine that this amount represents a reasonable proportion of the costs incurred by the affiliate or subsidiary.
Alternative Two – Fees Based on Deterrence
Under this alternative, the card issuer may charge a fee in an amount that is reasonably necessary to deter the specific type of violation. This would not require that the fees be necessary or calibrated to deter individual consumers from engaging in specific violations.
For this alternative, the issuer must use an empirically derived and statistically sound model that reasonably estimates the effect of the fee on the frequency of violations. This model must also demonstrate that a lower fee, which must be above $0, would result in more violations. This would require issuers to test fees that are both above and below the actual fee.
For both the alternatives described above, the fees would have to be re-evaluated at least on an annual basis. If the re-evaluation results in a lower fee, then the new fee must be in effect within thirty days after the review. If this results in a higher fee, then the issuer must comply with the Regulation Z change- in-terms provisions.
Alternative Three – “Safe Harbor” Fees
The third alternative would be a specific fee as set by the regulation for each violation that would be considered compliant with these provisions, otherwise known as a “safe harbor” fee. The proposal does not now include these specific fees, but the Fed requests input on what the amount should be for these fees. Once they are determined, these fees will be adjusted for inflation, and the Fed will publish the adjusted fees. These fees will be increased or decreased by increments of $1, based on the cumulative inflation rate that occurred since the prior adjustment.
Under this alternative, a penalty fee could exceed the specific safe harbor amount in certain circumstances. Specifically, an issuer may impose a fee that does not exceed 5% of the dollar amount associated with the violation, up to a specific dollar amount, which is also not currently specified. For example, a late payment fee of $25 could be charged if the minimum payment amount was $500, even if the fee exceeds the safe harbor amount.
Additional Information Applicable to All Alternatives
Regardless of the alternative chosen by the card issuer, the proposed rules would prohibit the following:
- Imposing a penalty fee that exceeds the dollar amount of the violation. Here are examples of how this would apply:
- A late payment fee or returned payment fee may not exceed the amount of the required minimum payment for that billing cycle.
- If the credit limit is exceeded by $5, then the over-the-limit fee may not exceed $5, although under other CARD Act provisions these may not be incurred unless the consumer agrees to pay these over-the-limit fees. The determination of the extent that the limit is exceeded is determined as of the date the fee is assessed, which is at the discretion of the card issuer.
- Imposing multiple penalty fees based on a single event or transaction. For example, a late payment fee and a returned payment fee could not be charged based on a single payment. Also, an additional returned payment fee may not be assessed for payments that have been returned, resubmitted, and returned again. The official staff commentary provides additional examples, as well as examples in which multiple fees may be assessed for situations that would not be considered a single event or transaction. Issuers will also be in compliance if they only assess one fee in a billing cycle, under the assumption that fees charged in subsequent cycles will not be in connection with the same event or transaction.
- Imposing penalty fees in circumstances in which there is no dollar amount associated with the violation. This would include fees based on transactions that the issuer declines to authorize, inactivity fees, or fees due to the closing or termination of the account.
In general, fees may be rounded to the nearest whole dollar, and the proposal would clarify that assessing fees that are comparable to other card issuers would not be sufficient to comply with the proposed rules. The proposal would also amend the model forms to reflect these new changes. The application, solicitation, and account-opening disclosures would use bold type for the maximum fee limits and would be expressed as “up to $XX.” The model forms for periodic statements would be changed to require language to indicate a late payment fee may be lower than the disclosed amount. A range of late payment fees may also be disclosed. Corresponding changes would be made to the model language for change-in-terms notices for late payment fees and to the model forms that are used to obtain a consumer’s consent to the issuer’s payment of over-the-limit transactions. Click below for a copy of these amended model forms, which follows the text of the proposed rules.
II. Re-evaluation of Interest Rate Increases
Consistent with the CARD Act, the proposed rules would require card issuers to review an increase in the annual percentage rate (APR) no less frequently than once every six months until the time the rate is reduced to what it was before the increase or, for variable rates, until the time the index and margin is the same as that applied before the rate was increased. This would only apply to rate increases that require a 45-day notice under other provisions of Regulation Z, which means the proposed rules would not apply to rate increases based on changes in variable rates, expiration of properly disclosed introductory or promotional rates, or other situations that do not require such notice. These provisions would also only apply if an increased rate is actually imposed on the account.
These provisions would apply to increases based on the credit risk or creditworthiness of the consumer, market conditions, cost of funds, or other factors and applies to all such increases that have occurred since January 1, 2009. Card issuers must have reasonable, written policies and procedures for conducting these reviews. For rate increases imposed between January 1, 2009 and August 21, 2010, the first review must be conducted before February 22, 2011, which will be six months after the effective date of these provisions. In general, card issuers may review all their accounts at the same time every six months, review each account once every six months on a rolling basis based on the date in which the rate was increased for that account, or use another process to ensure compliance with the six-month timeframe.
The card issuer may either review the same factors on which the rate increase was originally based or review the factors that the card issuer currently considers when determining the APR for its credit card accounts. If the card issuer changes these factors from time to time, the issuer may for a brief transition time after each change use either the factors it considered immediately prior to the change or it may consider the new factors.
However, if the issuer uses different factors based on the type of account, then the issuer must use the factors that apply to the specific account. For example, an issuer may use different factors if the account has an annual fee or rewards. If the consumer does not have an annual fee, then the issuer must use the specific factors that it uses for all such accounts that do not have annual fees.
Card issuers must reduce the APR based on this review, if appropriate, and the rate must be reduced within thirty days after the evaluation. However, the rate would not necessarily have to be reduced to what it was prior to the increase, as long as the decrease is determined pursuant to the required policies and procedures. Also, these provisions would not require a change in the rate structure. For example, if a creditor is currently use the London Interbank Offered Rate (LIBOR) index but is reviewing rates that use the prime rate, the creditor can continue to use the prime rate when making any downward adjustments, as long as any adjustments are comparable to what they would have been if the creditor used the LIBOR index.
When providing the 45-day notice of a rate increase, the CARD Act requires the card issuer to disclose the reasons for the increase. To implement this provision, the proposed rules would require that no more than four reasons be disclosed, listed in the order of importance. There would be no minimum number of reasons that would have to be disclosed, so only one reason could be provided. This will also be the case if the rate increase is due to a delinquency, default, or as a penalty that is not due to a change in the contractual terms of the account.
The reasons provided must relate to and accurately describe the factors that were actually considered by the card issuer. However, they could be described in general terms, such as due to a “decline in your creditworthiness” or “decline in your credit score,” as opposed to indicating the specific number of points in which the credit score declined. Similarly, the reason could be “a change in market conditions” if the issue is a specific increase in the issuer’s cost of funds. In certain circumstances, the creditor may combine reasons in one statement, such as indicating that the rate increased both because of a late payment and the resulting decrease in the credit score. The proposed rules would also amend the applicable model forms and sample clauses to incorporate examples of the disclosure of the reasons for a rate increase.
Under other provisions of Regulation Z, the card issuer may increase rates if the minimum payment is not received within 60 days after the due date. Under these provisions, the card issuer must reduce the APR to the rate that applied before the increase if the consumer then makes six consecutive minimum payments. In these situations, the card issuer would not be required to review these rate increases under the provisions of this proposal unless the rate was not decreased based on the consumer making these six consecutive payments. If the rate is not decreased after this time period, then the review process under this proposal would apply to the subsequent six-month periods.
The obligation to re-evaluate increased rates would apply even to accounts acquired from other issuers. The acquirer may either use the factors that the original issuer considered or may use the factors it currently considers in determining APRs for its other credit card accounts. The proposal provides an alternative means to comply in these situations. Under this alternative, the acquirer may choose to review all of the acquired accounts as soon as reasonably practicable after they are acquired and would then have to conduct the periodic review required under this proposal for only those accounts in which the acquirer increased the rate as a result of this initial review.
However, the acquirer would have to conduct the periodic review required under this proposal for any acquired account that is the subject of a penalty rate or a rate that is due to the consumer’s delinquency or default. Also, if the acquirer raises a rate as a result of the initial review, it must comply with the other Regulation Z disclosure and substantive requirements as they apply to changes in rates.
The proposal provides the following two exceptions to the requirement to re-evaluate interest rate increases:
- Card issuers would not have to review rates that are increased as a result of the reinstatement of a prior rate that was temporarily decreased as required by the Servicemembers Civil Relief Act. However, the rate may not be increased to a level higher than the rate that applied prior to the decrease.
- The review requirements under this proposal would not apply to accounts charged-off in accordance with loan-loss provisions. In these situations, full payment is due immediately, and the review process would not apply since there would be no further activity on these accounts.
QUESTIONS TO CONSIDER REGARDING THE REGULATION Z PROPOSED RULES
(The Fed has specifically requested comment on these issues)
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Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com Mary Mitchell Dunn • SVP & Deputy General Counsel • (202) 508-6736 • mdunn@cuna.com Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com Luke Martone • Senior Regulatory Counsel • (202) 508-6743 • lmartone@cuna.com |
