Alert December 23, 2008

FRB, OTS and NCUA Approve Final Credit Card Rules and Proposed EFT Overdraft Rules

The FRB adopted final amendments (the “Final Rules”) to Regulation AA (Unfair or Deceptive Acts or Practices), Regulation Z (Truth in Lending) and Regulation DD (Truth in Savings) that impose new requirements on issuers of credit cards and charge cards.  The FRB also approved proposed amendments (the “Proposed Rules”) to Regulation E (Electronic Fund Transfers) relating to overdraft fees.  The OTS and the NCUA approved substantially similar rules.  A summary of the major final and proposed rule amendments follows.

New Credit Card Requirements.  For accounts whose balances are subject to different annual percentage rates (“APRs”), the Final Rules require banks to allocate payments exceeding the minimum payment to the balance with the highest rate first or pro rata among all of the balances.  A 45-day advance notice requirement will apply to changes in terms, including an increase in the APR charged due to the consumer’s delinquency or default or as a penalty. The Final Rules impose new format and content requirements for information on credit and charge card applications, solicitations, account-opening disclosures and periodic statements and eliminate the requirement to disclose an “effective APR.”  Under the Final Rules, creditors also must set reasonable cut-off hours governing when receipt of cardholder payments will be considered timely (5:00 p.m. on the payment due date is deemed a reasonable time). 

New Credit Card Prohibitions.  The Final Rules impose restrictions on changes in the interest rates disclosed at account opening during the first year an account is open.  The Final Rules also prohibit banks from treating a payment as late for any reason unless the consumer has a reasonable time to make a payment; a safe harbor applies to periodic statements sent at least 21 days prior to the payment due date.  Two-cycle billing is also prohibited under the Final Rules.  Regarding so-called “subprime” credit cards, the Final Rules (1) prohibit banks from financing security deposits and fees for credit availability if charges assessed during the first twelve months would exceed 50% of the initial credit limit, (2) limit the security deposits and fees charged at account opening to 25% of the initial credit limit, and (3) require any additional amounts (up to 50%) to be spread evenly over at least the next five billing cycles.

Final Overdraft Rules.  Under the Final Rules, all institutions are required to disclose on periodic statements the aggregate dollar amounts charged for overdraft fees and for returned item fees for the statement period and year-to-date, regardless of whether the institution promotes or advertises the payment of overdrafts.

Proposed Amendments to Regulation E.  Comments are solicited in the Proposed Rules on two approaches regarding the payment of overdrafts, each of which is limited to the payment of overdrafts for ATM withdrawals and one-time debit card transactions: (1) institutions could charge a fee for overdraft payments only if the consumer were given the opportunity to opt out of the payment of overdrafts; or (2) institutions could charge a fee for overdraft payments only if the consumer opted in to the institution’s overdraft service.  The Proposed Rules also would prohibit institutions from imposing an overdraft fee when the account is overdrawn because of a hold placed on funds in the consumer’s account that exceeds the actual transaction amount, for example, when the consumer makes a pay-at-the-pump fuel purchase or a meal purchase at a restaurant.

Withdrawn Proposals.  The banking regulators withdrew rule proposals that would have (a) required certain disclosures from banks that made firm offers of credit and advertised a range of APRs or credit and (b)  prohibited banks from imposing a fee on an account when its credit limit was exceeded solely because the institution placed a hold on available credit. 

A copy of the FRB staff memorandum regarding the Final Rules and the Proposed Rules is available at http://www.federalreserve.gov/boarddocs/meetings/2008/20081218/staffmemo.pdf.  The effective date of the Final Rules is July 1, 2010.  The effective date of the Proposed Rules would be January 1, 2010.  There will be a 60-day comment period for the Proposed Rules after publication in the Federal Register.