The Federal Reserve Board has issued a final rule that substantially overhauls the requirements for open-end credit in Regulation Z (Truth in Lending). The rule, issued on January 12, 2010,  implements the provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 that take effect on February 22, 2010, and makes changes to Regulation Z provisions that were part of a final rule the Fed published in January 2009. These latter provisions were originally set to take effect on July 1, 2010; the Fed has decided to retain that date and not to advance the mandatory compliance date to February 22, as previously contemplated.

Effective February 22, 2010, credit card issuers must comply with new CARD Act restrictions that closely parallel restrictions on unfair or deceptive practices in a final rule jointly published by the Fed and other federal banking agencies under the Federal Trade Commission Act (FTC Act) in January 2009.  These restrictions include the following:

  • The interest rate or certain fees and charges may not be increased during the first year after an account is opened and any such increase may not be applied to an existing card balance.
  • A new credit card account may not be opened and the credit limit on an existing account may not be increased unless the creditor considers the consumer’s ability to make the required minimum payments and, if the consumer is under age 21, a credit card may not be issued unless the underage consumer has submitted a written application that includes a co-signer who is at least 21 years old or contains information showing that the underage consumer can make the required payments.
  •  Over-the-limit fees may not be imposed unless the consumer has affirmatively consented or opted in to the creditor’s honoring of over-the-limit transactions.
  • Fees that total more than 25 percent of the initial credit limit generally may not be charged during the first year after an account is opened.. The new rule substantially expands the charges that count against the 25 percent limit, making it  far more restrictive than the pre-existing rule.
  • Payments greater than the minimum must first be allocated to the balance with the highest rate, although the Fed has provided increased flexibility over its proposed rule for allocation of excess payments in deferred or waived interest plans; “double-cycle” billing methods may not be used, although the rule affords issuers a mechanism for reaching the same economic result with a somewhat different disclosure regimen; and no fees for allowing a consumer to make a payment may be charged other than for payments involving an expedited service by the creditor’s customer service representative.

For all open-end credit, other than home equity credit lines, some of the most significant changes that become effective on July 1, 2010, include the following:

  • New format and content rules require account-opening disclosures to include a table containing a summary of key account terms and periodic statements to group charges in new categories described as "interest charges" and "fees."
  • A "change in terms notice" must be provided for changes in significant account terms or increases in the minimum payment, and a "rate increase notice" must be provided for rate increases due to delinquency or default or another contractually specified event. Such notices are subject to separate requirements that prescribe the notices' content and format and generally require 45 days’ advance notice of the change or increase.
  • Under new advertising rules, terms that trigger additional disclosures include negative terms such as "no interest" or "no annual fee," APRs may not be described as "fixed" without satisfying certain conditions, and additional disclosures must be included for certain programs such as those offering promotional rates or deferred or waived interest .
  • Consistent with its proposed rule and the CARD Act, the Fed has limited many of the most burdensome new requirements to credit card accounts. Requirements for credit card accounts (but not other open-end lines of credit) include elaborate minimum payment disclosures for periodic statements and a rule requiring statements to be sent at least 21 days before the payment due date.

Because this final rule incorporates the provisions of the Fed's January 2009 final Regulation Z rule and final FTC Act rule, the Fed has withdrawn both of those final rules. The final rule also includes new provisions that are intended to preserve the existing Regulation Z requirements for home equity lines of credit, pending the Fed's finalization of its proposed Regulation Z changes for HELOCs. The Fed is now expected to turn its attention to implementing the two remaining CARD Act provisions dealing with reasonable and proportional penalty fees and re-evaluation of rate increases. These provisions will become effective on August 22, 2010.

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; Vice Chair Jeremy T. Rosenblum, 215.864.8505 or; John L. Culhane, Jr., 215.864.8535 or; Barbara S. Mishkin, 215.864.8528 or; or Mark J. Furletti, 215.864.8138 or

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