SUMMARY OF LATEST PROPOSED RULES AMENDING REGULATION Z
The Federal Reserve Board (Board) has issued proposed rules under the Truth in Lending Act (TILA) amending Regulation Z. Some of the rules address practices also addressed in proposals issued on the same day by (i) the Board, Office of Thrift Supervision and National Credit Union Administration on unfair or deceptive acts or practices (UDAP) (collectively, the UDAP proposals) and (ii) the Board amending Regulation DD (implementing the Truth in Savings Act). See our May 2 and 13 Alerts for more on the UDAP proposals. Information on the Regulation DD proposal will follow in a future Alert. In addition, some of the proposed rules supplement, revise or replace provisions of earlier rulemaking efforts, including the Board’s June 2007 proposed amendments to the open-end (not home-secured) provisions of Regulation Z (June 2007 proposal).
The Board now seeks additional comment on (i) disclosure requirements, (ii) payment practices, (iii) replacement card issuance and (iv) investigation procedures, as explained below.
Application and Account-Opening Disclosure Requirements
1. Grace Period Labels
Card issuers would be required to use the phrase “how to avoid interest” (or “paying interest” if no grace period exists) instead of “grace period” as a heading in the summary tables provided at application and account opening or with checks that access credit card accounts.
Although the phrase “grace period” is required by the TILA, the Board indicated that the phrase may be confusing to customers. The proposed phrases are intended to be more understandable to consumers.
2. Minimum Interest Charge
Card issuers would be required to disclose a minimum finance charge in the application and account-opening tables only if the charge exceeds a de minimis dollar amount of $1 (subject to periodic adjustment).
3. Foreign Transaction Fees
Card issuers would be required to disclose fees for foreign-currency or cross-border purchase transactions in the application table, as well as the account-opening table. (The June 2007 proposal would have required creditors to disclose these fees in the account-opening table, but not the application table.)
4. Penalty Rate When Credit Privileges Are Terminated
Card issuers would be required to disclose in the application table increased rates that apply when credit privileges are terminated. (The June 2007 proposal contained an exception for such disclosures.)
Additional Oral Disclosures and Opt Out Required for So-Called “Subprime” Cards
Card issuers that require fees or a security deposit for issuance that are 25% or more of the minimum credit limit offered for the account would be required (i) to disclose the amount of available credit after paying the fees or security deposit, assuming the consumer receives the minimum credit limit when providing oral application or solicitation disclosures, and (ii) to provide notice of the consumer’s right to reject the plan after receiving disclosures if the consumer has not used the account or paid a fee (other than certain application fees). The UDAP proposals also have provisions aimed at so-called “subprime” cards.
Rules Regarding Accounts Where Membership Fee Assessed Before Account-Opening Disclosures Provided
The proposal also includes provisions clarifying rights of consumers who pay or promise to pay membership fees before account-opening disclosures are provided (which falls within an exception to the general rule that disclosures must be provided before the first transaction), including (i) a definition of “membership fees,” (ii) examples of “first transactions,” (iii) an explanation that consumers who reject the plan are not obligated to pay any fee other than an application fee and (iv) guidance on what constitutes rejection or use of a plan.
Access Check “Use by Date” Disclosure
Card issuers would be required to disclose on checks that may be used to access credit card accounts any date by which a consumer must use the check to receive the disclosed rates, in addition to the requirements in the June 2007 proposal to disclose information such as the rates that will apply if the checks are used, any transaction fees and whether or not a grace period exists.
Change-In-Terms Notice Disclosures
For consistency with the UDAP Proposal provisions on application of rate increases to existing balances, card issuers would be required to clarify the effect of a rate increase on existing or new balances, in addition to the requirements in the June 2007 proposal to, e.g., provide a tabular disclosure of key changes on the front of an accompanying periodic statement.
Advertising of Promotional Rates
Card issuers advertising deferred interest plans would be subject to new notice and format requirements, including requirements to state (i) the circumstances under which interest is charged from the date of purchase and (ii) if applicable, that the minimum payments required will not pay off the balance in full by the end of the deferral period.
In addition, the proposal would revise provisions of the June 2007 proposal regarding introductory rates. Specifically, the proposal would define separately “promotional” and “introductory” rates. Certain advertising requirements in the June 2007 proposal (which were required by earlier amendments to the TILA in the Bankruptcy Act) then will apply only to “promotional rates” that are “introductory rates.”
The UDAP proposals also contain provisions related to promotional rates, including, but not limited to, payment allocation requirements.
The proposal includes several new or revised comments about electronic disclosure of information that may be provided orally (e.g., charges that may be imposed as part of the plan that need not be provided in writing, such as charges to make an online payment on the account). Such comments generally would clarify that this type of disclosure may be provided in electronic form without regard to E-Sign Act requirements.
1. Reasonable Cut-off Times
Creditors currently may require consumers to comply with reasonable payment instructions, including a cut-off hour for receiving payments. The proposed rules would provide that a cut-off hour for mailed payments before 5 p.m. on the due date would be an unreasonable instruction.
2. Crediting of Payments with Weekend/Holiday Due Dates
Creditors that set due dates on a weekend or holiday but do not accept mailed payments on those days would not be able to consider a payment received on the next business day as late for any reason.
The UDAP proposals also have provisions governing payment practices.
The proposal also would provide that card issuers wishing to replace a private-label credit card on an inactive account with a general-purpose card may not take advantage of the “one-for-one substitution” exception from the prohibition on unauthorized issuance of credit cards. That is, the issuer could not properly substitute the new card for the accepted card without a specific request or application if the account has been inactive for a 24-month period preceding the issuance of the substitute card.
Currently, creditors must conduct a reasonable investigation before imposing liability for an unauthorized transaction and may reasonably request a consumer’s cooperation. A proposed rule would clarify that a creditor may not deny a claim solely because the consumer does not comply with a request to sign a written affidavit or file a police report. The proposal also extends guidance for reasonably investigating claims of unauthorized transactions to allegations of billing errors.
Comment Period and Rulemaking Process
Comments submitted in response to the June 2007 proposal remain under consideration and need not be submitted a second time. Comments on the May 2008 proposal must be received within 60 days after the proposal is published in the Federal Register.
At the end of the 60-day comment period for the May 2008 Regulation Z proposal and the 75-day comment period for the UDAP proposals, the Board will review the comments received and continue to conduct additional consumer tests on revised disclosures to consider any appropriate changes. Following the Board’s analysis of the comments (including comments from the June 2007 proposal) and the results of consumer testing, the Board anticipates adopting at the same time final rules for these related proposals. The Board promises to provide creditors and processors with adequate time to implement the necessary changes.
Please contact us with any questions or if you would like a copy of the proposed rules.