Federal Reserve Releases Interim Final Rule Implementing Sections of Credit Card Act of 2009

The Board of Governors of the Federal Reserve (the Board) recently released an interim final rule (the Rule) amending Regulation Z to implement those sections of the Credit Card Act of 2009 (the Act) that take effect on Aug. 20, 2009. (The Act, enacted in May, amended the Truth in Lending Act (TILA), among other statutes, and mandated various studies on interchange regulation and other matters. The Act's TILA amendments take effect in three tranches, in August 2009, February 2010 and August 2010.)

The Rule generally addresses the timing and content of change-in-terms notices and the timely mailing of periodic statements. The Board has issued the Rule in interim final form due to the short implementation period allowed by Congress—90 days from enactment on May 22. While the Rule is effective Aug. 20, 2009, the Board has announced that it intends to consider comments on the Rule in connection with its rulemaking on the next tranche of TILA amendments. Comments are due Sept. 21, 2009.

In drafting the Rule and future amendments to Regulation Z, the Board “intends to use its January 2009 rules and the underlying rationale as the basis for its rulemakings under the [Act].” Accordingly, the Board has not withdrawn any provisions of the January 2009 rulemaking under Regulation Z or Regulation AA (except as overruled by the Act). Further, the Board's proposed clarifications to the January 2009 rules, issued in May, will be finalized during the Board's rulemaking on the next tranche of amendments. (The Rule, as summarized in this advisory, contains various provisions relating to promotional plans that are consistent with the Board’s May proposals. Please see our May 6 and May 8 advisories regarding the proposals.)

Following are summaries of key provisions of the Rule: For each topic, this advisory first summarizes the section of the Act that the Rule is implementing; then sets forth the general rule and exceptions, if any; then sets forth other relevant provisions or new or revised Board comments; and finally explains the implementation timeframe for that provision.

Advance notice of significant account changes

The Act

New TILA Sections 127(i)(1) and (2) generally require a creditor, with respect to an open-end consumer credit plan, to provide to the consumer written notice of an increase in an APR or “any significant change” to the terms of the cardholder agreement not later than 45 days prior to the effective date of the change. New Section 127(i)(1) provides exceptions for APR increases (i) upon the expiration of a previously disclosed time period, (ii) due to the operation of an index on a variable APR and (iii) due to the completion of a workout or temporary hardship arrangement (or the failure to complete such an arrangement). In addition, new Section 127(i)(3) requires that each notice of an APR increase or significant change “contain a brief statement of the right of the obligor to cancel the account” before the increase or change takes effect.

General rule

The Board implements the Act’s advance notice requirements in two Sections: §9(c)(2)(i) addresses advance notice of changes to the underlying cardholder agreement, while §9(g)(1) addresses changes contingent on cardholder behavior that are consistent with the cardholder agreement (i.e., penalty rates).

Under §9(c)(2)(i), a creditor must provide 45 days written notice in advance of the effective date of a change to an account term set forth in §9(c)(2)(ii) or an increase in the minimum required payment. The account terms in §9(c)(2)(ii) include key penalty fees, transaction fees and issuance or availability fees; any applicable “grace period”; the balance computation method; and all APRs (only increases require 45 days notice). These terms mirror the terms required to be disclosed in the account-opening table required by §§6(b)(1) and (2) of Regulation Z, as amended in January 2009. (Under §9(c)(2)(iii), new fees or increases to fees not listed in §9(c)(2)(ii) may be disclosed either by providing 45 days’ advance written notice or by providing oral or written notice of the amount of the charge “before the consumer agrees to or becomes obligated to pay the charge, at a time and in a manner that the consumer would be likely to notice the disclosure of the charge.”)

Under §§9(g)(1) and (2), a creditor must provide 45 days’ written notice in advance of changes to an APR due to a delinquency or default or as a penalty. Notice may not be sent until after the occurrence of the event that triggers the increase; accordingly, a creditor would not comply by sending the consumer a notice forewarning her of the conditions that could prompt penalty pricing. New TILA Section 171(b)(4), which is not effective until February 2010, prevents application of a penalty rate until the consumer is more than 60 days delinquent on the account. The Board did not take a position on how the 60-day waiting period required by Section 171(b)(4) relates to the 45-day advance notice period required by §9(g)(2), stating in the supplementary information that it “is not implementing certain [notice] content requirements at this time that pertain to whether the [penalty] rate applies to outstanding balances or only new transactions.”

Exceptions

• Agreement in advance. Under §9(c)(2), notice is not required “if the consumer has agreed to a particular change.” (Comment 9(c)(2)-1 states that, if a “specific change is set forth initially,” then no notice is required; however, notice must be given “if the contract allows the creditor to increase the rate at its discretion.”)
• Introductory and promotional rates. Under §9(c)(2)(v)(B), notice is not required in advance of an APR increase upon the expiration of a specified period of time, provided that prior to the commencement of that period, the creditor disclosed clearly and conspicuously in writing the length of the period and the APR that would apply after that period. After the period expires, the APR actually applied must not exceed the APR previously disclosed. Comment 9(c)(2)(v)-6 clarifies that an issuer offering a deferred interest or similar program may utilize this exception and provides examples.
• Variable rates. §9(c)(2)(v)(C) sets forth an exception for increases in variable APRs in accordance with a credit card agreement that provides for a change in the rate according to the operation of an index that is not under the control of the creditor and is available to the general public. (New Comment 9(c)(2)(v)-5 also clarifies that if a creditor discloses a variable APR pursuant to disclosures required under §§9(c)(2)(v)(B) (see "Introductory and promotional rates" above) and (D) (see "Temporary hardship/workout arrangements" below), the notice must also state that the rate may vary and how the rate is determined.)
• Temporary hardship/workout arrangements. §§9(c)(2)(v)(D) and 9(g)(4)(i) contain an exception for rate increases due to a consumer’s completion of, or failure to comply with, respectively, the terms of a workout or temporary hardship arrangement between the creditor and consumer. However, the applicable APR following such increase may not exceed the APR that applied to the same category of transactions prior to commencement of the arrangement (or, if the APR was variable, the same formula—index and margin—is used to determine the APR); and the creditor must provide to the consumer, prior to the commencement of the arrangement, a clear and conspicuous written disclosure of the terms of the arrangement (including any increases due to completion or failure). Comment 9(c)(2)(v)-7 clarifies that the creditor must disclose the rate that will apply to balances subject to the workout or temporary hardship arrangement as well as the rate that will apply if the consumer completes or fails to comply with the terms of the arrangement. The notice must also state, if applicable, that the consumer must make timely minimum payments in order to remain eligible for the arrangement.
• Reduction of credit limit. A reduction to a credit limit by itself is not a “significant” change in §9(c)(2)(ii) requiring 45 days’ advance notice. However, §§9(c)(2)(vi) and 9(g)(4)(ii) require 45 days’ advance written notice if the decrease would result in the imposition of a fee or penalty rate solely because the existing balance on the account exceeds the newly decreased credit limit.
• HELOC and non-credit card accounts. Existing change in terms notice requirements, or current §9(c)(1) and associated comments, continue to apply to home-equity plans and other open-end plans that are not credit card accounts, and the January 2009 amendments to Regulation Z will apply when effective (in July 2010). The Board notes that it is currently reviewing those portions of Regulation Z that pertain to home-equity lines of credit and may amend the applicable notice requirements for such products in subsequent rulemaking.

Contents of notice

Under §9(c)(2)(iv), a §9(c)(2)(i) notice must disclose a description of the changes; state that changes are being made to the account; state the date the changes will become effective; and, as explained in more detail below, state that the consumer has the right to reject the changes (except in the case of an increase in the required minimum periodic payment).

Under §9(g)(3), a §9(g) notice must state that the delinquency, default or penalty rate has been triggered; the date on which the increased rate will apply; the circumstances under which the increased rate will cease to apply to the consumer’s account or, if applicable, that the increased rate will remain in effect for a potentially indefinite period of time; and, as explained in more detail below, the consumer’s right to reject the penalty rate.

In the case of a notice pursuant to §9(g)(4)(ii)—i.e., a notice of a decrease in a credit line resulting in the imposition of a penalty—the notice must state that the credit limit will be or has been decreased; the date on which the penalty rate will apply if the outstanding balance exceeds the credit limit as of that date; a statement that the penalty rate will not be imposed on that date if the outstanding balance does not exceed the credit limit as of that date; and, as applicable, either (x) the circumstances under which a penalty rate would cease to apply to the account or (y) that the rate would remain in effect for a potentially indefinite period.

Implementation

• §9(c)(2) notice. The relevant date for determining whether a change-in-terms notice must comply with the new advance notice requirements of revised §9(c)(2) is generally the date on which the notice is provided, not the effective date of the change. Thus, any notice provided on or after Aug. 20, 2009, would be subject to all of the content and other requirements of revised §9(c)(2), as applicable. On the other hand, a notice of a change in terms (provided pursuant to existing §9(c)) prior to Aug. 20, 2009, need only be provided 15 days in advance of the effective date of the change, even if the change itself becomes effective after Aug. 20.
• §9(g) notice. The relevant date for purposes of determining whether new §9(g) applies to a penalty rate increase generally is the date on which the increase becomes effective. For example, if a consumer makes a late payment on Aug. 10, 2009, that triggers penalty pricing, a creditor may increase the rate effective on or before Aug. 19, 2009, in compliance with existing Regulation Z, and need not provide 45 days’ notice of the change. However, in some cases a consumer’s behavior prior to August 20, 2009, will trigger a penalty rate, but the creditor may be unable to implement a corresponding penalty rate prior to Aug. 20, 2009, for operational reasons. In those circumstances, a creditor must either provide the consumer, prior to Aug. 20, 2009, with a written notice disclosing the impending rate increase and its effective date, or must comply with new §9(g). In the example described above, therefore, a creditor could mail to the consumer a notice on Aug. 19, 2009, disclosing that the consumer has triggered a penalty rate increase that will be effective on Aug. 25, 2009. If the creditor mailed such a notice, it would not be required to comply with new §9(g). The Board’s transition guidance applies only to penalty rate increases triggered prior to Aug. 20, 2009; if a consumer engages in behavior that triggers penalty pricing on or after Aug. 20, 2009, the creditor must comply with new §9(g) and, accordingly, provide the consumer with a notice at least 45 days in advance of the effective date of the increase.
• Promotional rates. The Board addresses promotional rate programs that are in place before the effective date of the Rule, but under which the promotional rate will not expire until after Aug. 20, 2009. Creditors may be concerned whether the disclosures that they have provided to consumers qualify for the advance notice exception in §9(c)(2)(v)(B) (see "Introductory and promotional rates" above). Any creditor that provides a written disclosure to consumers who have an existing promotional rate program, prior to Aug. 20, 2009, stating the length of the promotional period and the rate or type of rate that will apply after that promotional rate expires is not required to provide an additional §9(c)(2) notice prior to applying the post-promotional rate. In addition, any creditor that can demonstrate that it provided, prior to Aug. 20, 2009, oral disclosures of the length of the promotional period and the rate or type of rate that will apply after the promotional period also need not provide an additional §9(c)(2) notice. However, a creditor that has not provided advance notice of the term of a promotion and the rate that will apply upon expiration of that promotion in the manner described above prior to Aug. 20, 2009, will be required to provide 45 days’ advance notice of such content.

Consumer right to reject changes

The Act

New TILA Section 127(i)(3) requires that notice of a rate increase or other significant change in the account terms also include notice of a right to cancel the account before the effective date of the increase or change.

General rule

§§9(c)(2)(iv) and 9(g)(3) set forth the disclosure requirements of the change-in-terms notices required pursuant to §9(c)(2)(i) and §9(g), respectively. In addition to the other required disclosures (described above), §§9(c)(2)(iv)(D) and 9(g)(3) require the notice to inform the consumer of the right to reject a change or rate increase (except for increases to the required minimum periodic payment) prior to its effective date. Both types of notices must also disclose instructions—and a toll-free number—for rejecting the change or rate increase and must disclose, if applicable, that if the consumer rejects the change or rate increase, the consumer’s ability to continue to use the account will be terminated or suspended. The substantive right to reject an account change or rate increase due to default or penalty is set forth in new §9(h)(1), which provides that if either §9(c)(2)(iv) or §9(g)(3) requires disclosure of a right to reject a change or rate increase, the consumer may reject the change or rate increase by notifying the creditor before the effective date of such change or rate increase.

Exceptions

§9(h)(1) rejection rights do not apply under the following circumstances:

• Delinquency. When the creditor has not received the consumer’s required minimum periodic payment within 60 days after the due date for that payment (§9(h)(3)(i)).
• Minimum payment. When the minimum periodic payment is increased (because §9(c)(2)(iv) does not require disclosure of the right to reject that change (Comment 9(h)(3)-1)).
• Transactions after 14 days. When a transaction occurs more than 14 days after provision of the change-in-terms notice (§9(h)(3)(ii)). Creditors may apply the changed term or increased rate to transactions that occur more than 14 days after provision of the §9(c) or (g) notice even in circumstances where the consumer has exercised the right to reject. However, Comment 9(h)(3)(ii)-1 clarifies that a creditor may not reach back to days before the effective date of the change in terms or rate increase when calculating interest charges. Additionally, because the exception only applies to terms and rates that can be applied to transactions, creditors may not apply a changed term that does not apply to transactions (i.e., an increase to a late payment fee or annual fee) to the entire account simply because the account was used for a transaction more than 14 days after a provision of a 9(c) or (g) notice. Comment 9(h)(3)(ii)-3 clarifies that whether a transaction occurred prior to provision of a notice or within 14 days after provision of a notice is generally determined by the date of the transaction. However, if a transaction that occurred within 14 days after provision of the notice is not charged to the account prior to the effective date of the change or rate increase, the creditor may treat the transaction as occurring more than 14 days after provision of the notice for purposes of §9(h)(3)(ii). In addition, when a merchant places a “hold” on an account’s available credit for an estimated transaction amount, the date of the transaction for purposes of §9(h)(3)(ii) is the date on which the actual transaction amount is charged to the account.
• HELOC. When a home-equity plan subject to the requirement of §5b is accessible by a credit or charge card (because §§9(c)(2) and 9(g) do not apply to such plans (Comment 9(h)(3)-1)).

 Effect of rejection

§9(h)(2)(i) provides that, if a creditor is appropriately notified of a rejection of a change in terms or rate increase, the creditor must not apply the changed term or increased rate to the account. Comment 9(h)(2)(i)-1 clarifies that a rejection does not prohibit a creditor from applying the terms of a pre-existing promotional rate or deferred interest or similar program; the comment also provides examples illustrating the application of §9(h)(2)(i) in these circumstances.

Rejection procedures

Comment 9(h)(1)-1 allows a creditor to establish “reasonable” requirements for rejecting a change. Explicit safe harbors allow a creditor to require that: (i) only the primary account holder may reject the account and must identify the account number; (ii) only the toll-free number (required to be disclosed) be used to reject the changes (though a creditor may designate (though not require use of ) additional channels for rejection); (iii) rejections be “received” before the effective date of the change or increase (but it is not reasonable to require that rejections be “submitted earlier than the day before the effective date”). If a creditor is unable to process all rejections received before the effective date, the creditor may either (x) delay implementation of the change or increase until all rejections have been processed or (y) implement the change or increase on the effective date and then reverse the change or increase and remove or credit any interest charges or fees imposed with respect to an account for which the creditor received a timely rejection.
 
Comment 9(h)(1)-2 clarifies that a consumer does not waive or forfeit the right to reject a change in terms or a rate increase, or to revoke a rejection, by using the account prior to the effective date of the change or rate increase.

Implementation

New §9(h) is predicated on the provision of a notice pursuant to §9(c) or §9(g) containing a disclosure of the consumer’s right to reject a change or rate increase. Thus, §9(h) takes effect within the same period and to the same extent as §§9(c) or 9(g), as applicable. Note that the exception in §9(h)(3)(i) for accounts that are more than 60 days delinquent applies even if the delinquency began prior to the Aug. 20, 2009, effective date. For example, if the required minimum periodic payment due on July 15, 2009, has not been received by Sept. 14, 2009, the exception in §9(h)(3)(i) would apply, and the consumer would not have a right to reject.

Prohibition on penalties and repayment of balance

The Act

Under new TILA Section 127(i)(4), a consumer’s closure or cancellation of an account pursuant to Section 127(i)(3) may not (i) constitute a default under the cardholder agreement, (ii) trigger imposition of a penalty or fee, or (iii) trigger an obligation to immediately repay the balance in full or through a method that is less beneficial to the consumer than either of two methods described in revised TILA Section 171(c)(2)—an amortization period of not less than five years or a required minimum periodic payment that includes a percentage of the balance that is not more than twice the prior percentage.

Prohibition on penalties

§9(h)(2)(ii) provides that, if a consumer rejects a significant change in terms or an increased APR, then the creditor must not impose a fee or charge or treat the account as in default solely as a result of the rejection. Comment 9(h)(2)(ii)-1 provides an example of one type of fee prohibited by the general rule: a monthly maintenance fee that would be charged only if the consumer rejected the change or rate increase. The comment also clarifies, however, that a creditor is not prohibited from continuing to charge a fee that was charged before the rejection (i.e., an annual fee already in place). Additionally, Comment 9(h)(2)(ii)-2 clarifies that, consistent with §9(h)(1), a creditor is not prohibited from terminating or suspending credit availability if the consumer rejects a change or rate increase (though a creditor is not required to terminate or suspend the account).

Repayment of balance

Under §9(h)(2)(iii), if a consumer rejects a change in terms or rate increase, the creditor must not require payment of the balance on the account using a method that is less beneficial to the consumer than one of three listed methods: first, the method of repayment for the account on the date on which the creditor was notified of the rejection; second, an amortization period of not less than five years, beginning no earlier than the date on which the creditor was notified of the rejection; or third, a required minimum periodic payment that includes a percentage of the balance that is equal to no more than twice the percentage required on the date on which the creditor was notified of the rejection. (Recognizing that in certain circumstances the repayment method used by the creditor prior to rejection could result in a higher payment than under one of the methods listed in the Act, the Board used its authority granted by TILA Section 105(a) to add the first repayment method listed above to Regulation Z.)

Comment 9(h)(2)(iii)-1 clarifies that a repayment method is no less beneficial to the consumer if (i) the method results in a required minimum periodic payment that is equal to or less than a minimum payment calculated using the method for the account prior to the date on which the creditor received the rejection, (ii) the method amortizes the balance in five years or longer, or (iii) the method results in a required minimum periodic payment that is equal to or less than a minimum payment calculated consistent with §9(h)(2)(iii)(C). Comment 9(h)(2)(iii)(B)-1 clarifies that although §9(h)(2)(iii)(B) provides for an amortization period of no less than five years, a creditor is not required to recalculate the required minimum periodic payment if, during the amortization period, the balance is reduced as a result of payments by the consumer in excess of that minimum payment. Furthermore, Comment 9(h)(2)(iii)(B)-2 clarifies that, if the annual percentage rate that applies to the balance subject to §9(h)(2)(iii) varies with an index, the creditor may adjust the interest charges included in the required minimum periodic payment for that balance to ensure that the balance is amortized in five years. Finally, Comment 9(h)(2)(iii)(C)-1 provides an example of how a creditor could adjust the required minimum periodic payment on a balance by no more than doubling the percentage of the balance included in that payment.

Mailing of periodic statements

The Act

Amended TILA Section 163(a) generally prohibits a creditor from treating a payment as late for any purpose unless the creditor has adopted reasonable procedures designed to ensure that a periodic statement is mailed or delivered to the consumer not later than 21 days before the payment due date. Section 163(b) states that, if a grace period applies to an account, no additional finance charge resulting from the loss of the grace period may be imposed unless a statement containing the amount upon which the finance charge is based is mailed or delivered not later than 21 days before the grace period expires. Section 163(b) differs from 163(a) in that creditors must mail or deliver the statement at least 21 days before the relevant date rather than “maintain reasonable procedures” to meet the timing requirement. The Act also deleted current Section 163(b) of TILA, which states that the 14-day mailing requirement currently in effect does not apply in certain force majeure circumstances such as war or natural disaster.

General rule

Section §5(b)(2)(ii) requires that creditors adopt reasonable procedures designed to ensure that periodic statements are mailed or delivered at least 21 days before the payment due date and the expiration of a grace period. (The Board used its authority granted by TILA Section 105(a) to reconcile the differing standards for meeting the timing requirement set forth in TILA Sections 163(a) and (b), as amended by the Act.)

The Board, citing the “reasonable procedures” language of §5(b)(2)(ii), explained that a creditor’s procedures for responding to the force majeure situations listed in deleted TILA Section 163(b) will be evaluated for reasonableness in addressing those situations, and accordingly deleted the language implementing current TILA Section 163(b) from footnote 10 to §5(b)(2)(ii). (The Board also deleted related Comment 5(b)(2)(ii)-2, which clarified that the emergency circumstances exception in footnote 10 does not extend to the failure to provide a periodic statement because of computer malfunction.) In addition, the Board made several other conforming changes.

• “Reasonable procedures.” Comment 5(b)(2)(ii)-1 clarifies that a creditor is not required to determine the specific date on which periodic statements are mailed or delivered to each consumer. Instead, a safe harbor provides that a creditor complies with §5(b)(2)(ii) if it has adopted reasonable procedures designed to ensure that periodic statements are mailed or delivered to consumers no later than a certain number of days after the closing date of the billing cycle and adds that number of days to the 21-day period when determining the payment due date and expiration of the grace period. For example, if a creditor has adopted reasonable procedures designed to ensure that periodic statements are mailed or delivered to consumers no later than three days after the closing date of the billing cycle, the payment due date and the date on which any grace period expires must be no less than 24 days after the closing date of the billing cycle.
• Treatment of payment as late. Comment 5(b)(2)(ii)-2 clarifies that “treating a payment as late for any purpose” includes increasing the annual percentage rate as a penalty, reporting the consumer as delinquent to a credit reporting agency, or assessing a late fee or any other fee based on the consumer’s failure to make a payment within a specified amount of time or by a specified date. However, because amended TILA Section 163 (like current TILA Section 163) does not require creditors to provide a grace period, the comment also clarifies that, when an account is not eligible or ceases to be eligible for a grace period, imposing a finance charge "due to a periodic interest rate" does not constitute treating a payment as late for purposes of §5(b)(2)(ii).
• Payment due date. Comment 5(b)(2)(ii)-3 clarifies that, for purposes of §5(b)(2)(ii), “payment due date” generally means the date by which the creditor requires the consumer to make the required minimum periodic payment in order to avoid that payment being treated as late for any purpose. Some creditors provide an additional period after the contractual due date during which a late payment fee will not be assessed. This “courtesy period” may be set forth in the account agreement or may be provided as an informal policy or practice. However, for purposes of §5(b)(2)(ii), the payment due date is the date according to the legal obligation between the parties, not the end of the additional courtesy period. The comment also notes that some state or other laws require that a certain number of days must elapse following a due date before a late payment or other fee may be imposed. As with courtesy periods, the comment clarifies that in these circumstances the payment due date is the due date according to the legal obligation between the parties.
• Definition of grace period. §5(b)(2)(ii) defines grace period as “a period within which any credit extended may be repaid without incurring a finance charge due to a periodic rate.” Comment 5(b)(2)(ii)-4 clarifies that a deferred interest or similar promotional program, under which the consumer is not obligated to pay interest that accrues on a balance if that balance is paid in full prior to the expiration of a specified period of time, is not a grace period for purposes of §5(b)(2)(ii). The comment also clarifies that a courtesy period is not a grace period for purposes of §5(b)(2)(ii).

Contents of statement

In the supplementary information to the Rule, the Board notes that TILA Section 163(b), as amended by the Act and effective August 20, 2009, contains explicit content requirements for statements relating to grace periods—e.g., that the statement include the date on which the grace period expires and the amount on which the finance charge will be based if the consumer loses the grace period. Those disclosures are already required by current §§7(e) and (j) of Regulation Z. Additionally, the Act amends TILA Section 127(b), effective February 2010, to require certain additional disclosures on periodic statements. Until the effective date of amended Section 127(b), however, timely periodic statements mailed pursuant to §5(b)(2)(ii) need only incorporate disclosures required under TILA Section 127(b) as currently in effect

Implementation

The relevant date for purposes of determining when a creditor must comply with revised §5(b)(2)(ii) is the date on which the periodic statement is mailed or delivered, not the due date or grace period expiration date reflected on the statement. Thus, if a periodic statement is mailed or delivered on Aug. 20, the creditor must have reasonable procedures designed to ensure that the payment due date and the grace period expiration date are not earlier than Sept. 10. However, if a periodic statement is mailed or delivered on Aug. 19, the Rule does not apply to that statement.

The Rule can be found here. The Act can be found here.

If you have any comments or would like more information please contact James H. Mann, Scot D. Tucker or Andrew Owens.