CUNA Regulatory Comment Call
December 11, 2002
Fed Proposes Revisions to the Regulation Z Official Staff Commentary
(NOT A MAJOR RULE)EXECUTIVE SUMMARY
- The Federal Reserve Board (Fed) is proposing changes to the official staff commentary that accompanies Regulation Z, the Truth in Lending Act (TILA). The commentary interprets the regulation and provides guidance in applying the regulation to specific transactions.
- The changes will address how fees for expedited payment services and expedited delivery of credit cards should be disclosed, permit issuance of more than one credit card when issued as replacements for existing cards, clarify how private mortgage insurance (PMI) premiums should be disclosed, and provide additional guidance on how to determine if a mortgage loan should be classified as “high-cost” for purposes of the Home Ownership and Equity Protection Act (HOEPA).
- It is expected that final revisions to the commentary will be adopted in March 2003. The effective date for mandatory compliance will be October 1, 2003.
- If you are submitting comments directly to the Fed, the comment letter should refer to Docket No. R-1136. Comment letters may be e-mailed directly to the Fed at regs.comments@federalreserve.gov.
Comments on the proposal are due by January 27, 2003. Please submit your comments to CUNA by January 20, 2003. Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com or to Assistant General Counsel Jeff Bloch at jbloch@cuna.com; or mail them to Mary or 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 proposal or you may access it on the Internet at the following address: http://www.federalreserve.gov/boarddocs/press/bcreg/2002/20021126/attachment.pdf
BACKGROUND
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 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.
BRIEF DESCRIPTION OF THE PROPOSED CHANGES
As described below, the proposed changes will provide guidance with regard to the status of certain credit card-related fees; the replacement of an accepted credit card with more than one card; the treatment of private mortgage insurance payments when disclosing the payment schedule; and the selection of U.S. Treasury security yields for purposes of determining if a loan is “high-priced” and, therefore, covered under HOEPA.
Credit card-related fees
The proposed changes to the official staff commentary will provide guidance with regard to two fees that are commonly charged in connection with open-end credit plans, such as credit card accounts. One is the fee imposed when a consumer requests that a particular payment on the credit plan be expedited, and the other is the fee imposed when a consumer requests expedited mailing of a credit card. The term “expedited” means any form of payment or delivery other than standard mail service.
For open-end credit plans, such as credit card accounts, the lender must disclose the finance charges, which are charges that are imposed by the lender as “an incident to or a condition of the extension of credit.” Additional fees that do not meet the definition of “finance charge” must be disclosed as “other charges” if they are significant fees related to the credit plan. Fees that do not meet the definition of “finance charge” or “other charge” do not have to be disclosed.
The expedited payment service offered by lenders provides the consumer with an alternative to mailing a payment that may not reach the lender by the due date. This alternative, such as an electronic funds transfer, ensures that the payment is expedited and received by the lender prior to the due date. Under these proposed changes, the fee charged for this service would not be considered a “finance charge” but would be have to be separately disclosed as an “other charge,” provided that the method of payment was not authorized in advance as the regular payment method for the account. The Fed believes that this is a significant fee related to the credit plan and notes that this fee is an alternative to the consumer paying a late fee, which is also defined as an “other charge.” However, a change-in-terms notice will not be required if the only change is this fee for expediting a consumer’s payment.
Under these proposed changes, the fee charged by lenders for expediting the delivery of a credit card would not be considered either a “finance charge” or an “other charge,” since the card is available without charge for those who receive it by way of standard mail service.
Issuance of credit cards
Under the current TILA regulations, lenders are generally prohibited from issuing a credit card, unless it is in response to a request or application for the card. One exception is for the issuance of a card as a renewal or substitute for a previously issued card.
Until now, the official staff commentary has indicated that, in general, a lender may not issue more than one card as a renewal or substitute for a previously accepted card, unless more than one card was initially issued for multiple users on one account. However, advances in technology have now made it possible for lenders to issue cards in different sizes and formats, such as a smaller size that fits conveniently on a key ring. These new sizes and formats are often intended to supplement, but not necessarily replace, a cardholder’s existing card.
To address these developments, the official staff commentary will now indicate that lenders may replace an accepted card with more than one card on the same account, as long as the consumer’s total liability for unauthorized use with respect to the account does not increase. Also, all replacement cards must access only the account of the previously accepted card, and the same terms and conditions must govern all cards under the same account.
The “one card” limitation was required by the Fed until now because of security concerns of issuing more than one card, such as cards being stolen from a consumer’s mailbox. However, the Fed recognizes that lenders now employ a number of security measures when issuing cards, such as sending cards that are not activated until the consumer undertakes certain actions to verify receipt of the card. The Fed believes that these measures should provide sufficient security when replacing an accepted card with more than one renewal or substitute card.
Content of disclosures
Premiums paid for PMI, which protects the lender from the borrower’s default or other losses, are considered finance charges that must be disclosed on the payment schedule that is included among the disclosures that are provided for closed-end loans.
Under the Homeowners’ Protection Act of 1998, PMI must generally terminate before the loan expires and the payment schedule must reflect that situation. The official staff commentary will be revised to provide additional guidance on how these premiums should be disclosed on the payment schedule when some premiums are collected in advance and escrowed at the time the loan is closed.
In general, if these advance payments are applied to future payments, then the total number of payments on the schedule should be reduced by the number of future payments that are covered by the amount collected in advance. For example, if 130 payments are to be made and two are collected in advance, then the total on the schedule should reflect 128 payments.
HOEPA requirements
HOEPA requires additional disclosures and protections for certain home-secured loans that have rates and fees above certain thresholds. Currently, these thresholds are eight percentage points above comparable U.S. Treasury securities for first lien loans and ten percentage points for subordinate-lien loans.
In determining the U.S Treasury securities to use for purposes of calculating these thresholds, the official staff commentary will now require lenders to rely solely on the Fed’s “Selected Interest Rates,” which is published daily and is available on the Fed’s website at www.federalreserve.gov/releases/h15/update. This publication lists the yields on actively traded issues adjusted to constant maturity.
The U.S. Treasury has recently ceased offering 30-year securities, which have been considered to be comparable to 30-year mortgage loans. The official staff commentary will clarify that 20-year securities should be used, rather than an average long-term yield for maturities over 25 years or an estimate for a 30-year yield.
QUESTIONS TO CONSIDER REGARDING THE FED’S CHANGES TO THE REGULATION Z OFFICIAL STAFF COMMENTARY
- The official staff commentary will clarify that more than one credit card may now be issued as a renewal or substitute for a
previously accepted card. Do you agree that current security measures now used by lenders are sufficient to permit the issuance of more
than one card in these situations? Should this clarification also apply to allow additional cards to be issued for an existing account
when there is no renewal or substitution for the existing card?
- In addition to the proposed changes described above, the Fed is seeking more information and comment on whether fees for “bounce
protection” services should be considered “finance charges.” In providing these services, the lender sets a dollar limit and pays
overdrafts up to this limit without a case-by-case assessment, while preserving the right to not pay particular items. These services
are similar to overdraft protection, and a fee is charged for each overdraft that is paid. Does your credit union offer such services?
How are they designed and how do they operate? Should the fees that are assessed be considered “finance charges?”
- A fee charged for expedited payment services will now be disclosed as an “other charge,” rather than a “finance charge,” and a fee
charged for expediting the delivery of a credit card will not have to disclosed as either a “finance charge” or an “other charge.” Do
you agree with this approach?
- Do you agree with the change with regard to the disclosure of PMI on the payment schedule, in which future payments do not have to be
on the schedule if payments are collected in advance at the time the loan is closed and later applied to these future payments?
- Do you agree with the change in the official staff commentary that will require lenders to rely solely on the Fed’s “Selected Interest
Rates” publication in determining whether a mortgage loan exceeds the HOEPA thresholds? Do you agree that 20-year Treasury securities
should be considered comparable to 30-year mortgage loans now that 30-year Treasury securities are no longer issued?
- Other comments?
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Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com |
