NEW CREDIT CARD RULES: NEGOTIATING THE INTRICACIES — MAKING THE RULES WORK FOR YOU (Third in a Series)
Longer Notice – Protected Balance – Special Repayment – Oh My!
In the wake of the new credit card rules, many of you still may be scratching your heads over the confluence of requirements for longer change-in-terms notice periods and restrictions on increasing interest rates – protected balances, repayment methods, notice dates, effective dates, balances subject to increased rates versus those subject to current rates, over the limit fee restrictions – need we go on?
A quick comparison of current and new change-in-terms rules shows that amended Regulation Z grants consumers more time to adjust to changes. But in so doing, it further limits your ability to respond promptly to adverse economic conditions and increased risk. For example, you will give consumers 45 days’ notice instead of 15 days’ notice when you increase interest rates; 45 days’ notice instead of no notice when you increase late payment or over the limit charges; and 45 days’ notice instead of notice before the effective date when you impose a penalty rate. And you will give consumers 45 days’ notice when you decrease credit limits before you impose over the limit charges or penalty rates triggered by consumers exceeding their new credit limits. 74 Fed. Reg. 5244 (Jan. 29, 2009); 12 C.F.R. § 226.9 (eff. July 1, 2010).
And that’s not the end of the story. A quick review of the new credit card practices rules (Regulation AA) reveals that the new rules purport to preserve the “benefit of the bargain” for the cardholder. But in so doing, they prohibit you from increasing interest rates on existing balances in the absence of significant default and otherwise restrict your ability to manage risk. You no longer will be allowed to increase interest rates except under certain circumstances. You may increase a rate, for example, when the account has been opened for one year and the new rate applies only to transactions that occur more than seven days after you provide notice, or when you have not received the consumer’s required minimum periodic payment within 30 days after its due date. 74 Fed. Reg. 5498 (Jan. 29, 2009); 12 C.F.R. § 227.24.
So, you’re increasing rates or imposing a penalty rate that the consumer has triggered. How does that work? Well, first, you’ll have to hold harmless from rate increases all new accounts for one year. Then, on many accounts, you’ll have a balance to protect – the balance that exists seven days after you provide notice of the increase. You’ll also have a protected balance when you impose a penalty rate, unless the consumer is at least 30 days delinquent on payments. These “protected balances” will be subject to the unchanged interest rates and special repayment rules until they have been fully paid. And you will not be allowed to impose any fee or charge based solely on these protected balances. And in either of these circumstances you will have to give advance notice under Regulation Z. Clear enough?
Now, what can you do to synthesize the new disclosure and practice rules? And how can you prepare your business for compliance? You can study, compile, chart, compare, predict, amend, draft, revise and … more. Or, you can explore outside the proverbial “box.” Through creative planning – with fair dealing and full disclosure as your benchmarks – we believe you can plan a program that preserves the benefit of an even better bargain for you and your cardholders.
- Margaret Stolar and Judy Scheiderer