The Fed has issued final Regulation Z amendments “to clarify and facilitate compliance” with the new Reg Z rules adopted in 2010 to implement the Credit CARD Act. The amendments have an October 1, 2011, mandatory compliance date.
Card issuers will need to review their application and solicitation disclosures, card agreements, periodic statements, advertisements, systems, and procedures to determine whether any changes are needed to bring their operations into compliance.
Highlights of the final rule, issued on March 18, 2011, include the following:
- The existing regulation is revised to include, in the limit on total fees that may be charged during the first year an account is open, application and similar fees that must be paid before opening. That limit restricts such fees to 25 percent of the account’s initial credit limit (or 25 percent of any lower credit limit that applies during the first year). The final rule also provides that (1) an account is considered open no earlier than the date on which the consumer may first use it to make transactions, and (2) the total fee limit includes not only fees charged to the account but also fees collected from other sources, such as those charged to a consumer’s deposit account. To address industry concerns regarding the difficulty of tracking when an account is considered open, the Fed added a new comment to the Reg Z Official Staff Commentary that was not part of the proposal. The comment allows a card issuer to consider an account open on any of the following dates: (1) the date it is first used by the consumer for a transaction, (2) the date the consumer complies with any reasonable activation procedures imposed by the issuer for preventing fraud or unauthorized use, or (3) the date that is seven days after the issuer mails or delivers the account-opening disclosures if the consumer can use the account after complying with any reasonable activation procedures. (Issuers with procedures designed to ensure account-opening disclosures are mailed or delivered within a certain number of days after an account is booked can consider the account open seven days after that number of days.)
- The sweep of the CARD Act provisions applicable to “credit cards” is substantially expanded by the addition of new language to the Commentary that includes as a “credit card” an account number that can access an open-end line of credit to purchase goods and services, even if there is no plastic or other tangible card.
- A card issuer can increase a temporary or promotional fee without the 45 days’ advance notice generally required for certain fee increases if the issuer provided the consumer with an advance disclosure of the period during which the lower fee would apply and the fee that would apply afterward. A revision to Reg Z that was not part of the proposal expands the exception from the 45 days’ advance notice requirement for workout or temporary hardship arrangements to include waivers of late fees, over-the-limit fees, and returned payment fees.
- An open-end (not home-secured) plan with a variable rate that is subject to a fixed minimum interest rate, or “floor,” will not qualify for the variable-rate exception to the 45-day advance notice requirement. That exception applies to increases in a variable annual percentage rate based on an index that is not under the creditor’s control and available to the general public.
- Promotional programs that waive or rebate finance charges for a specified period are subject to the same limitations on rate or fee increases as promotional programs that charge a reduced rate or fee for a specified period. Thus, a card issuer that offers to waive interest charges if the cardholder pays for a purchase within a promotional period may not (1) provide a promotional period of less than six months; (2) prospectively terminate a promotional benefit, except for a payment delinquency of at least 60 days or failure to meet the promotional terms for the entire promotional period; and/or (3) retroactively terminate promotional benefits for any reason. A Commentary revision that was not part of the proposal provides that the limitations apply to both temporary and permanent terminations of waivers or rebates as well as to both partial and full terminations.
- The “conforming” payments that must be credited as of the date of receipt are not limited to payments received by a means specified on or with the periodic statement but include any specific payment method that a creditor “promotes” (such as by stating in its advertisements that payments can be made at its branches). New Commentary that was not part of the proposal addresses when payments made through a third-party payment method would be “conforming.”
- A third-party service provider or other third party is prohibited from charging a separate fee for receiving a credit card payment on behalf of a card issuer unless it is for allowing the consumer to pay using a method that involves expedited service by the issuer’s customer service representative. Examples added to the Commentary that were not part of the proposal are intended to clarify that the restriction on third-party fees does not apply when the third party is processing or receiving payments on behalf of the consumer rather than the card issuer.
- A card issuer relying on the safe harbor that permits an increase in penalty fees from $25 for the first violation to $35 for an additional violation of the same type can impose the higher fee only if it has previously imposed the lower fee. A Commentary revision that was not part of the proposal provides that a fee will be deemed “imposed” even if the card issuer waives or rebates all or part of the fee. In its discussion of the final rule, the Fed notes that to demonstrate that the $35 fee was not imposed for the first violation, a card issuer could disclose the initial $25 fee and waiver on the consumer’s periodic statement.
- A card issuer can allocate the amount paid by a consumer in excess of the required balance to a secured balance if requested by the consumer, even if the rate on other unsecured balances is higher.
- In evaluating a consumer’s ability to make the required payments before opening a new credit card account or increasing the credit limit on an existing account, a card issuer must consider the consumer’s independent ability to make the payments and may not consider only household income. A Commentary revision that was not part of the proposal states that a card issuer may not use income or assets of a person who is not liable on the account to satisfy the ability to pay requirement, unless federal or state law grants a consumer who is liable on the account an ownership interest in such income or assets.
- A gap inadvertently created by the CARD Act and CARD Act rules is closed through the addition of language requiring that, for open-end consumer credit plans not accessed by a credit card, creditors must adopt reasonable procedures to ensure that periodic statements are mailed or delivered at least 14 days before the date on which the required minimum periodic payment must be made to avoid being treated as late for any purpose, and that payments received within 14 days after mailing or delivery of the periodic statement are not treated as late for any purpose. In a change from the Fed’s proposal, the 14-day requirement applies regardless of whether an account has a grace period.
The final rule also contains clarifications to various other Reg Z provisions, including those dealing with (1) the tabular disclosures that must be provided with credit and charge card applications and solicitations and the initial disclosures for open-end (not home-secured) credit; (2) billing error resolution procedures; (3) required disclosures in periodic statements, change-in-terms, and other subsequent notices and advertising; (4) limits on increasing rates and fees; (5) Internet posting of credit card agreements and the submission of such agreements to the Fed; and (6) reevaluation of rate increases.
Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). For more information, please contact Group Chair Alan S. Kaplinsky, 215.864.8544 or email@example.com; Vice Chair Jeremy T. Rosenblum, 215.864.8505 or firstname.lastname@example.org; John L. Culhane, Jr., 215.864.8535 or email@example.com; Mercedes K. Tunstall, 202.661.2221 or firstname.lastname@example.org; Barbara S. Mishkin, 215.864.8528 or email@example.com; or Mark J. Furletti, 215.864.8138 or firstname.lastname@example.org.
Copyright © 2011 by Ballard Spahr LLP.
(No claim to original U.S. government material.)
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.
This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.