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SUMMARY OF PROPOSED RULES ON UNFAIR OR DECEPTIVE ACTS OR PRACTICES

As mentioned in our May 2, 2008 Alert, the Office of Thrift Supervision (OTS), Federal Reserve Board (Board) and National Credit Union Administration have proposed identical rules on unfair or deceptive acts or practices (UDAP) that violate the Federal Trade Commission Act (FTCA). These rules would amend the agencies' respective Credit Practices Rules. See,e.g., 12 C.F.R. Part 227,Subpart B the (Board's Regulation AA); 12 C.F.R. Part 535 (OTS'rule). We briefly summarized the practices addressed by the rules in our May 2, 2008 Alert. Additional details are set forth below.The Board also issued separate proposals under the Truth in Lending Act (amending Regulation Z) and the Truth in Savings Act(amending Regulation DD), which will be outlined in future Alerts.

Authority for Proposals

The agencies proposed the rules under Section 18(f)(1) of the FTCA, which authorizes them to prescribe regulations to prevent unfair or deceptive acts or practices in or affecting commerce within the meaning of the FTCA. See 15 U.S.C. §§ 45(a), 57a(f)(1). In so doing, the agencies applied standards for unfairness and deception articulated by the Federal Trade Commission (FTC). See, e.g., FTC Policy Statement on Unfairness (www.ftc.gov/bcp/policystmt/adunfair.htm); FTC Policy Statement on Deception (www.ftc.gov/bcp/policystmt/ad-decept.htm).

Factors Influencing Proposals

According to the agencies, the proposals were prompted primarily by comments in response to (i) the Board's proposed amendments to the open-end (not home-secured) provisions of Regulation Z and (ii) the OTS' Advance Notice of Proposed Rulemaking (ANPR) requesting comment on a broad array of issues and practices, including practices related to marketing, originating and servicing of credit cards. See 72 F.R. 32948 (June 14, 2007) (Board's June 2007 proposal); 72 F.R. 43570 (Aug. 6, 2007) (OTSANPR). Other influences include (i) related actions by the agencies, such as a credit card forum, (ii) review of consumer complaints,(iii) Congressional hearings and (iv) Congressional bills. These factors convinced the agencies to take action to prevent perceived unfair or deceptive credit card and overdraft practices.

Interagency Approach

The agencies joined together to issue identical rules in an effort to achieve consistent interagency standards. The agencies also consulted with the two other federal banking agencies (the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation), as well as with the FTC.

Regulated Credit Card Practices

The agencies propose to regulate the following seven practices to enable consumers to make informed decisions about use of credit card accounts. The agencies propose to prohibit practices that appear to meet the FTC's unfairness standards ((1)-(6) below) and to require additional disclosures in connection with a practice that appears to meet the FTC's deception standards ((7) below).

1. Reasonable Time to Make Payments

Institutions would be prohibited from treating a payment as late unless consumers have been provided with a reasonable amount of time to make payment. There would be a safe harbor for institutions mailing statements 21 days before the payment due date. The 21-day period is intended to allow one week for delivery of statements to consumers, one week for consumers to review the statements and one week for delivery of payments to creditors. The agencies state that this proposal does not affect the 14-day rule established by the Truth in Lending Act (TILA) and Regulation Z, which requires creditors to mail or deliver periodic statements at least 14 days before the date by which payment is due for purposes of avoiding additional finance charges or other charges, such as late fees. See 15 U.S.C. § 1666b(a); 12 C.F.R. § 226.5(b)(2)(ii). Nonetheless, to avoid any potential conflict with the TILA, one provision of the rules provides that the prohibition on treating a payment as late does not apply to any time period provided by the institution within which the consumer may repay the new balance or any portion of the new balance without incurring finance charges (i.e., a grace period). The Board's Regulation Z proposal also includes two provisions regulating payment practices, one clarifying permissible cut-off times for mailed payments and one addressing holiday and weekend due dates.

2. Payment Allocation

When different APRs apply to different balances, institutions would be prohibited from allocating amounts in excess of the minimum payment in a manner that is less beneficial to consumers than (i) applying the entire amount first to the balance with the highest APR, (ii) splitting the amount equally among the balances or (iii) splitting the amount pro rata among the balances.

Institutions also would be required to allocate payments so that consumers fully benefit from promotional rates and deferred interest by allocating amounts in excess of the minimum payment first to balances on which the rate is not discounted or interest is not deferred (except, in the case of a deferred interest plan, for the last two billing cycles during which interest is deferred).

Finally, institutions also would be prohibited from denying consumers a grace period on purchases (if one is offered) solely because they have not paid off a balance at a promotional rate or a balance on which interest is deferred.

The Board's June 2007 proposal would have added a requirement that creditors explain payment allocation in applications and solicitations. However, the Board tested a revised payment allocation disclosure in March 2008 and determined that the revised disclosure still was not effective in communicating payment allocation information to consumers. Accordingly, the agencies propose to address payment allocation concerns by prohibiting specific practices as unfair acts or practices under the FTCA. To the extent the UDAP proposals ultimately are adopted, the Board would withdraw the requirements in the June 2007 proposal.

3. Rate Increases on Outstanding Balances

Institutions would be prohibited from increasing APRs on outstanding balances unless certain exceptions apply. The prohibition would not apply (i) when a rate increase is due to operation of an index not under the institution's control and available to the general public, (ii) when a promotional rate expires or is lost for a reason specified in the account agreement (e.g., late payment) or (iii) if a consumer's minimum payment is at least 30 days past due.

The proposal also specifies rules regarding treatment of outstanding balances following a rate increase. For example, an institution that has increased a cardholder's purchase rate may not (i) require payment of the outstanding purchase balance using a method that is less beneficial to the consumer than listed methods or (ii) assess a monthly maintenance fee or similar charge solely on the outstanding purchase balance.

The Board's June 2007 proposal included revisions to Regulation Z designed to improve consumers' awareness about changes in terms and increased rates, including rate increases imposed as a penalty for delinquency or other defaults. The Board proposed, among other things, to require creditors to give consumers 45 days' advance notice of a change in terms or an increased penalty rate. The Board's latest Regulation Z proposal includes additional revisions to provisions in the June 2007 proposal.

Because the agencies are concerned that disclosure alone may be insufficient to protect consumers from the harm caused by application of increased rates to pre-existing balances, however, the agencies are proposing to prohibit this practice except in certain limited circumstances.

4. Fees from Credit Holds

Institutions would be prohibited from assessing a fee if a consumer exceeds a credit limit because a hold was placed on the available credit, unless the amount of the transaction would have exceeded the credit limit in any case.

5. Prohibition on "Double-Cycle Billing"

Institutions would be prohibited from computing finance charges on outstanding balances based on balances in billing cycles preceding the most recent billing cycle, except (i) when a consumer does not pay a balance or transaction under a deferred interest promotion in full by the specified date and (ii) for finance charge adjustments following resolution of billing error disputes.

6. Fees/Deposits Charged to Account for Issuance of Credit

Institutions would be prohibited from charging to a credit card security deposits or account fees for the issuance or availability of credit (e.g., account-opening or membership fees) that utilize the majority of the available credit on the account. Fees or deposits that exceed 25% of the credit limit would be required to be spread over the first year, rather than charged as a lump sum at account opening. Institutions would not be prohibited from issuing credit cards that require a consumer to pay a security deposit if that deposit is not charged to the account.

The Board's latest Regulation Z proposal also would require creditors that collect or obtain a consumer's agreement to pay a fee before providing account-opening disclosures to (i) permit that consumer to reject the plan after receiving the disclosures and (ii) ensure that any consumer who rejects the plan is not obligated to pay the fee.

These changes in item (6) are aimed at so-called "subprime cards."

7. Firm Offers of Credit

Institutions making firm offers of credit that advertise multiple APRs or credit limit ranges would be required to disclose in the solicitation the factors that determine whether a consumer will qualify for the lowest APR and highest credit limit advertised.

Regulated Overdraft Practices

The agencies are proposing two provisions prohibiting unfair acts or practices related to consumer deposit account overdraft services that are intended to ensure that consumers understand overdraft services and have the choice to avoid the associated costs. The agencies generally would limit the scope of the overdraft services provisions to "accounts" as defined in TISA and Regulation DD (i.e., "a deposit account at a depository institution that is held by or offered to a consumer"). Although the agencies are aware that overdraft services sometimes are provided for prepaid cards, such card products are beyond the scope of this rulemaking.

1. Opt Out Required

Institutions would be prohibited from assessing a fee or charge on a consumer's account for paying an overdraft unless (i) the institution provides a right to opt out of payment of overdrafts and a reasonable opportunity to exercise the opt out and (ii) the consumer does not opt out. The proposed opt-out right would apply to all transactions that overdraw an account, regardless of the whether the a recurring payment or a debit card purchase at a point of sale.

2. Overdraft Fees in Connection with Debit Holds

Institutions also would be prohibited from assessing an overdraft fee if the overdraft is caused solely by a hold placed on funds that exceeds the actual purchase amount of the transaction, unless this purchase amount would have caused the overdraft.

The Board's Regulation DD proposal also addresses potentially misleading balance disclosures by generally requiring depository institutions to provide only balances that reflect the consumer's own funds (without funds added by the institution to cover overdrafts) in response to consumer inquiries received through an automated system such as a telephone response system, ATM or an institution's web site.

Comment Period

The Agencies solicit comment on the proposals, including, but not limited to, comment on (i) when any final rules should be effective and (ii) whether a one-year time period is appropriate or whether the period should be longer or shorter.

Upon publication in the Federal Register, the notice will be open for public comment for 75 days. Judy Scheiderer

Credit Union Administration have proposed identical rules on unfair or deceptive acts or practices (UDAP) that violate the Federal Trade Commission Act (FTCA). These rules would amend the agencies' respective Credit Practices Rules. See,e.g., 12 C.F.R. Part 227,Subpart B the (Board's Regulation AA); 12 C.F.R. Part 535 (OTS'rule). We briefly summarized the practices addressed by the rules in our May 2, 2008 Alert. Additional details are set forth below.The Board also issued separate proposals under the Truth in Lending Act (amending Regulation Z) and the Truth in Savings Act(amending Regulation DD), which will be outlined in future Alerts.

Authority for Proposals

The agencies proposed the rules under Section 18(f)(1) of the FTCA, which authorizes them to prescribe regulations to prevent unfair or deceptive acts or practices in or affecting commerce within the meaning of the FTCA. See 15 U.S.C. §§ 45(a), 57a(f)(1). In so doing, the agencies applied standards for unfairness and deception articulated by the Federal Trade omission (FTC). See, e.g., FTC Policy Statement on Unfairness (www.ftc.gov/bcp/policystmt/adunfair.htm); FTC Policy Statement on Deception (www.ftc.gov/bcp/policystmt/ad-decept.htm).

Factors Influencing Proposals

According to the agencies, the proposals were prompted primarily by comments in response to (i) the Board's proposed amendments to the open-end (not home-secured) provisions of Regulation Z and (ii) the OTS' Advance Notice of Proposed Rulemaking (ANPR) requesting comment on a broad array of issues and practices, including practices related to marketing, originating and servicing of credit cards. See 72 F.R. 32948 (June 14, 2007) (Board's June 2007 proposal); 72 F.R. 43570 (Aug. 6, 2007) (OTSANPR).

Other influences include (i) related actions by the agencies, such as a credit card forum, (ii) review of consumer complaints,(iii) Congressional hearings and (iv) Congressional bills. These factors convinced the agencies to take action to prevent perceived unfair or deceptive credit card and overdraft practices.

Interagency Approach

The agencies joined together to issue identical rules in an effort to achieve consistent interagency standards. The agencies also consulted with the two other federal banking agencies (the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation), as well as with the FTC.

Regulated Credit Card Practices

The agencies propose to regulate the following seven practices to enable consumers to make informed decisions about use of credit card accounts. The agencies propose to prohibit practices that appear to meet the FTC's unfairness standards ((1)-(6) below) and to require additional disclosures in connection with a practice that appears to meet the FTC's deception standards ((7) below).

1. Reasonable Time to Make Payments

Institutions would be prohibited from treating a payment as late unless consumers have been provided with a reasonable amount of time to make payment. There would be a safe harbor for institutions mailing statements 21 days before the payment due date. The 21-day period is intended to allow one week for delivery of statements to consumers, one week for consumers to review the statements and one week for delivery of payments to creditors. The agencies state that this proposal does not affect the 14-day rule established by the Truth in Lending Act (TILA) and Regulation Z, which requires creditors to mail or deliver periodic statements at least 14 days before the date by which payment is due for purposes of avoiding additional finance charges or other charges, such as late fees. See 15 U.S.C. § 1666b(a); 12 C.F.R. § 226.5(b)(2)(ii). Nonetheless, to avoid any potential conflict with the TILA, one provision of the rules provides that the prohibition on treating a payment as late does not apply to any time period provided by the institution within which the consumer may repay the new balance or any portion of the new balance without incurring finance charges (i.e., a grace period).

The Board's Regulation Z proposal also includes two provisions regulating payment practices, one clarifying permissible cut-off times for mailed payments and one addressing holiday and weekend due dates.

2. Payment Allocation

When different APRs apply to different balances, institutions would be prohibited from allocating amounts in excess of the minimum payment in a manner that is less beneficial to consumers than (i) applying the entire amount first to the balance with the highest APR, (ii) splitting the amount equally among the balances or (iii) splitting the amount pro rata among the balances.

Institutions also would be required to allocate payments so that consumers fully benefit from promotional rates and deferred interest by allocating amounts in excess of the minimum payment first to balances on which the rate is not discounted or interest is not deferred (except, in the case of a deferred interest plan, for the last two billing cycles during which interest is deferred).

Finally, institutions also would be prohibited from denying consumers a grace period on purchases (if one is offered) solely because they have not paid off a balance at a promotional rate or a balance on which interest is deferred.

The Board's June 2007 proposal would have added a requirement that creditors explain payment allocation in applications and solicitations. However, the Board tested a revised payment allocation disclosure in March 2008 and determined that the revised disclosure still was not effective in communicating payment allocation information to consumers. Accordingly, the agencies propose to address payment allocation concerns by prohibiting specific practices as unfair acts or practices under the FTCA. To the extent the UDAP proposals ultimately are adopted, the Board would withdraw the requirements in the June 2007 proposal.

3. Rate Increases on Outstanding Balances

Institutions would be prohibited from increasing APRs on outstanding balances unless certain exceptions apply. The prohibition would not apply (i) when a rate increase is due to operation of an index not under the institution's control and available to the general public, (ii) when a promotional rate expires or is lost for a reason specified in the account agreement (e.g., late payment) or (iii) if a consumer's minimum payment is at least 30 days past due.

The proposal also specifies rules regarding treatment of outstanding balances following a rate increase. For example, an institution that has increased a cardholder's purchase rate may not (i) require payment of the outstanding purchase balance using a method that is less beneficial to the consumer than listed methods or (ii) assess a monthly maintenance fee or similar charge solely on the outstanding purchase balance.

The Board's June 2007 proposal included revisions to Regulation Z designed to improve consumers' awareness about changes in terms and increased rates, including rate increases imposed as a penalty for delinquency or other defaults. The Board proposed, among other things, to require creditors to give consumers 45 days' advance notice of a change in terms or an increased penalty rate. The Board's latest Regulation Z proposal includes additional revisions to provisions in the June 2007 proposal.

Because the agencies are concerned that disclosure alone may be insufficient to protect consumers from the harm caused by application of increased rates to pre-existing balances, however, the agencies are proposing to prohibit this practice except in certain limited circumstances.

4. Fees from Credit Holds

Institutions would be prohibited from assessing a fee if a consumer exceeds a credit limit because a hold was placed on the available credit, unless the amount of the transaction would have exceeded the credit limit in any case.

5. Prohibition on "Double-Cycle Billing"

Institutions would be prohibited from computing finance charges on outstanding balances based on balances in billing cycles preceding the most recent billing cycle, except (i) when a consumer does not pay a balance or transaction under a deferred interest promotion in full by the specified date and (ii) for finance charge adjustments following resolution of billing error disputes.

6. Fees/Deposits Charged to Account for Issuance of Credit

Institutions would be prohibited from charging to a credit card security deposits or account fees for the issuance or availability of credit (e.g., account-opening or membership fees) that utilize the majority of the available credit on the account. Fees or deposits that exceed 25% of the credit limit would be required to be spread over the first year, rather than charged as a lump sum at account opening. Institutions would not be prohibited from issuing credit cards that require a consumer to pay a security deposit if that deposit is not charged to the account.

The Board's latest Regulation Z proposal also would require creditors that collect or obtain a consumer's agreement to pay a fee before providing account-opening disclosures to (i) permit that consumer to reject the plan after receiving the disclosures and (ii) ensure that any consumer who rejects the plan is not obligated to pay the fee.

These changes in item (6) are aimed at so-called "subprime cards."

7. Firm Offers of Credit

Institutions making firm offers of credit that advertise multiple APRs or credit limit ranges would be required to disclose in the solicitation the factors that determine whether a consumer will qualify for the lowest APR and highest credit limit advertised.

Regulated Overdraft Practices

The agencies are proposing two provisions prohibiting unfair acts or practices related to consumer deposit account overdraft services that are intended to ensure that consumers understand overdraft services and have the choice to avoid the associated costs. The agencies generally would limit the scope of the overdraft services provisions to "accounts" as defined in TISA and Regulation DD (i.e., "a deposit account at a depository institution that is held by or offered to a consumer"). Although the agencies are aware that overdraft services sometimes are provided for prepaid cards, such card products are beyond the scope of this rulemaking.

1. Opt Out Required

Institutions would be prohibited from assessing a fee or charge on a consumer's account for paying an overdraft unless (i) the institution provides a right to opt out of payment of overdrafts and a reasonable opportunity to exercise the opt out and (ii) the consumer does not opt out. The proposed opt-out right would apply to all transactions that overdraw an account, regardless of the whether the a recurring payment or a debit card purchase at a point of sale.

2. Overdraft Fees in Connection with Debit Holds

Institutions also would be prohibited from assessing an overdraft fee if the overdraft is caused solely by a hold placed on funds that exceeds the actual purchase amount of the transaction, unless this purchase amount would have caused the overdraft.

The Board's Regulation DD proposal also addresses potentially misleading balance disclosures by generally requiring depository institutions to provide only balances that reflect the consumer's own funds (without funds added by the institution to cover overdrafts) in response to consumer inquiries received through an automated system such as a telephone response system, ATM or an institution's web site.

Comment Period

The Agencies solicit comment on the proposals, including, but not limited to, comment on (i) when any final rules should be effective and (ii) whether a one-year time period is appropriate or whether the period should be longer or shorter.

Upon publication in the Federal Register, the notice will be open for public comment for 75 days. Judy Scheiderer and