Alert May 06, 2008

FRB Proposes Rules for Credit Card and Overdraft Services

The FRB proposed rules regarding credit cards and overdraft services.  The proposals would amend Regulations AA (Unfair Acts or Practices), Z (Truth in Lending) and DD (Truth in Savings).  The unfair acts or practices proposal is a joint proposal of the FRB, OTS and NCUA.

Regulation AA

Regulation AA would be amended to prohibit certain acts or practices by banks in connection with credit card accounts and overdraft services for deposit accounts.

Credit Cards

Time to Make Payments. Banks would be prohibited from treating a payment as late unless the consumer has been provided a reasonable amount of time to make that payment. There would be a safe harbor for banks that send periodic statements at least 21 days prior to the payment due date.

Allocation of Payments. When different APRs apply to different balances on a credit card account (for example, purchases and cash advances), banks would have to allocate payments exceeding the minimum payment using one of three methods or a method equally beneficial to consumers. They could not allocate the entire amount to the balance with the lowest rate. A bank could, for example, split the amount equally between two balances. In addition, to enable consumers to receive the full benefit of discounted promotional rates (for example, on balance transfers), during the promotional period payments in excess of the minimum would have to be allocated first to balances on which the rate is not discounted.

Applying Rate Increases to Existing Balances. Banks would be prohibited from increasing the interest rate on outstanding balances unless the increase is due to: (1) the operation of an index; (2) the expiration or loss of a promotional rate (provided the rate is not increased to a penalty rate); or (3) the minimum payment not being received within 30 days of the due date.

Two-Cycle Billing. Banks would be prohibited from imposing finance charges based on balances on days in billing cycles preceding the most recent billing cycle.

Financing of Security Deposits and Fees. Banks would be prohibited from financing security deposits and fees for credit availability (such as account-opening fees or membership fees) if charges assessed during the first 12 months would exceed 50% of the initial credit limit. The proposal would also require financed security deposits and fees exceeding 25% of the initial credit limit to be spread over the first year.

Credit Card Holds. Banks would be prohibited from imposing a fee when the credit limit is exceeded solely because a hold was placed on available credit.

Firm Offers of Credit. The proposal would require banks making firm offers of credit advertising multiple APRs or credit limits to disclose the factors that determine whether a consumer will qualify for the lowest APR and highest credit limit advertised (for example, the consumer’s credit history, income, and debts). A safe harbor disclosure is provided.

Overdraft Services

Right to Opt Out. Banks would be prohibited from imposing a fee for paying an overdraft unless the bank has provided the consumer with an opportunity to opt out of the payment of overdrafts and the consumer has not done so. The opt-out right would apply to all transaction types. Banks also would be required to provide consumers a partial opt-out for overdrafts resulting from ATM and point-of-sale transactions.

Debit Holds. Banks would be prohibited from imposing a fee when the account is overdrawn solely because a hold was placed on funds in the consumer’s deposit account.

Regulation Z

The Regulation Z proposal would provide that mailed credit card payments received by 5 p.m. on the due date must be considered timely. In addition, if a creditor does not receive or accept mailed payments on the due date (for example, when the due date falls on a Sunday or holiday), a payment received by mail on the next business day would be considered timely.

Regulation DD

The Regulation DD proposal contains overdraft disclosure requirements, including:

Disclosure of Aggregate Overdraft Fees. Banks would be required to disclose on periodic statements the aggregate dollar amounts charged for overdraft fees and for returned item fees (for the month and the year-to-date).  Currently, only banks that promote or advertise the payment of overdrafts must disclose aggregate amounts.

Disclosure of Balance Information. Banks that provide account balance information through an automated system would be required to disclose the amount of the consumer’s funds available for immediate use or withdrawal, without including additional funds the bank may provide to cover overdrafts.

The comment period for the Regulation AA proposal ends 75 days after publication in the Federal Register; the Regulation Z and DD proposals have 60-day comment periods. Click here for the Regulation AA proposal, here for the Regulation Z proposal and here for the Regulation DD proposal.