FEDERAL RESERVE BOARD ISSUES PROPOSED RULE AMENDING REGULATION Z OPEN-END CREDIT PROVISIONS
The Federal Reserve Board (Board) has issued a lengthy proposed rule that would amend Regulation Z, which implements the Truth in Lending Act (TILA), and the staff commentary to the regulation, following a comprehensive review of TILA’s rules for open-end (revolving) credit that is not home secured. According to the Board, the proposed changes are intended to improve the effectiveness of the disclosures consumers receive in connection with credit card accounts and other revolving credit plans by ensuring that information is provided in a timely manner and in a form that is readily understandable. The Board reportedly based many of its changes on consumer testing.
The proposed revisions take into consideration public comments on two advance notices of proposed rulemaking. The first, published in December 2004, sought comment on a variety of issues relating to the format and content of open-end credit disclosures and the substantive protections provided under Regulation Z. The second, published in October 2005, addressed amendments to TILA’s open-end credit rules in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
As briefly summarized below, the Board is proposing changes to format, timing and content requirements for the five main types of open-end credit disclosures governed by Regulation Z: (1) credit and charge card application and solicitation disclosures; (2) account-opening disclosures; (3) periodic statement disclosures; (4) change-in-terms notices; and (5) advertising provisions. In addition, the Board is proposing changes to coverage of credit insurance, debt cancellation and debt suspension products.
Applications and Solicitations:
- New format requirements for the summary table, including type size, boldface type, placement of information and the use of cross-references; and
- Revised content requirements, including a disclosure of the duration of penalty rates, a shorter variable rate disclosure, new disclosures on the effect of payment allocation practices and a reference to consumer education materials on the Board’s web site.
- New requirement for disclosure of certain key terms in a summary table; and
- A different approach to disclosing fees that identifies fees that must be disclosed in the summary table and others that may be disclosed in writing or orally.
Periodic Statement Disclosures:
- New requirement to itemize interest charges for different types of transactions and provide separate totals of fees and interest for the month and year-to-date;
- Revised disclosure of the “effective APR,” including format and terminology. (The Board also is soliciting comment on whether this rate should be required to be disclosed); and
- New disclosure (required by the Bankruptcy Act) of the effect of making only the minimum required payment on repayment of balances.
Changes in Terms:
- Increased advance notice period (45 days) for changing terms, including a rate increase due to the consumer’s delinquency or default; and
- New requirement that a tabular disclosure of key terms being changed must appear on the front of a periodic statement that accompanies a change-in-terms notice.
- New requirement that advertisements stating a minimum monthly payment also must state, in equal prominence, the time period required to pay the balance and the total of payments if only minimum payments are made; and
- Prohibition on referring to a rate as “fixed” unless (i) the advertisement specifies a time period for which the rate is fixed and the rate will not increase for any reason during that time or (ii) the rate will not increase for any reason while the plan is open.
Credit Insurance, Debt Cancellation and Debt Suspension Coverage:
- Expanded coverage of existing rules for debt cancellation to “debt suspension” for both open-end credit and closed-end transactions. New requirement that, to exclude the cost of debt suspension from the finance charge, creditors must inform consumers that debt suspension suspends, but does not cancel, the debt; and
- A broader interpretation of existing language about when charges for credit insurance and debt cancellation coverage are deemed to be finance charges (i.e., when the coverage is “written in connection with a credit transaction”) that would require creditors to provide disclosures and obtain evidence of consent on sales of credit insurance or debt cancellation or suspension during the life of an open-end account, and not just at the time an open-end account is opened.
The Board invites comment on the proposed changes. The comment period ends 120 days after publication of the proposal in the Federal Register, which is expected shortly.
Our Firm will be analyzing the proposal in depth and engaging in conversations about the implications of the proposed changes for the industry.
- Judy Scheiderer