Consumer Financial Services Alert - December 30, 2008 December 30, 2008
In This Issue

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

The FRB adopted final amendments to Regulation AA, Regulation Z and Regulation DD that impose new requirements on issuers of credit cards and charge cards. The FRB also approved proposed amendments to Regulation E 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 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 12 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, banks 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 bank promotes or advertises the payment of overdrafts.

Proposed Amendments to Regulation E. The proposed rules solicit comments 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) banks 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) banks could charge a fee for overdraft payments only if the consumer opted in to the bank’s overdraft service. The proposed rules also would prohibit banks 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 federal banking agencies withdrew rule proposals that would have (1) required certain disclosures from banks that made firm offers of credit and advertised a range of APRs or credit and (2) prohibited banks from imposing a fee on an account when its credit limit was exceeded solely because the bank placed a hold on available credit.

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. Click here for the FRB staff memorandum regarding the final and proposed rules, here for the Regulation AA Federal Register notice, here Regulation Z Federal Register notice, here for the Regulation DD Federal Register notice, here for the Regulation E Federal Register notice and here for the FRB press release that contains links to other information such as model forms.

FTC Settles Discrimination Complaint Against Mortgage Lender

The FTC reached a settlement with Gateway Funding Diversified Mortgage Services, L.P., and its general partner, Gateway Funding Inc., concerning an FTC complaint alleging violations of the Equal Credit Opportunity Act. Gateway allegedly gave mortgage loan officers nearly complete discretion to charge “overages,” but failed to monitor whether African-American and Hispanic borrowers were paying higher overages than non-Hispanic white borrowers. According to the complaint, this lack of oversight “resulted in African-American and Hispanic applicants being charged higher overages because of their race or ethnicity,” and the “disparities in overage are substantial, statistically significant and cannot be explained by factors related to underwriting risk or credit characteristics of the applicants.” The settlement imposes a $2.9 million judgment, all but $200,000 of which is suspended due to the defendants' inability to pay. Click here for the FTC's press release and links to related information such as the complaint and order.

FDIC Settles with Credit Card Company

The FDIC entered into a settlement with CompuCredit Corporation, which was charged with deceptive marketing of subprime credit cards. Under the terms of the settlement, CompuCredit is required to provide restitution of approximately $114 million to consumers in the form of credits for certain fees. The FDIC’s order also includes a civil money penalty of $2.4 million. In addition, the order requires that credit card solicitations including representations about credit limits or available credit disclose clearly and prominently, and on the same page, fees and other restrictions affecting initial available credit. Moreover, the order contains a prohibition against misrepresentations in the marketing of open-end credit products. Click here for the order.

FTC Issues FACT Act Report to Congress

The FTC issued an interim report to Congress under Section 319 of the Fair and Accurate Credit Transactions Act of 2003, which requires the FTC to study the accuracy and completeness of information in consumers’ credit reports and to consider methods for improving the accuracy and completeness of such information. Click here for the report.

FTC Issues Report on Social Security Numbers and ID Theft

The FTC issued a report on social security numbers and identity theft which contains the following five recommendations to help prevent Social Security numbers from being used for identity theft: (1) improve consumer authentication, (2) restrict the public display and transmission of Social Security numbers, (3) establish national standards for data protection and breach notification; (4) conduct outreach to businesses and consumers, and (5) promote coordination and information sharing on use of Social Security numbers. Click here for the report.

Federal Banking Agencies Publish Identity Theft Brochure

The federal banking agencies published an identity theft brochure designed to assist consumers in preventing and resolving identity theft. The brochure focuses primarily on Internet “phishing” by describing how phishing works, offering ways to protect against identity theft, and detailing steps to follow for victims of identity theft. Click here for the brochure.

Regulation Z Comment Period on Mortgage Loan Disclosures Extended

The FRB announced that it is extending the comment period on its proposal to revise the disclosure requirements for mortgage loans under Regulation Z from January 23, 2009 to February 9, 2009. The proposal was discussed in the December 16, 2008 Alert. Click here for the related Federal Register notice.

IRS Speeds Lien Relief for Homeowners Trying to Refinance, Sell

The IRS announced an expedited process that will make it easier for financially distressed homeowners to avoid having a federal tax lien block refinancing of mortgage loans or the sale of a home. Under the new process, taxpayers or their representatives (such as their lenders) may request that the IRS make a tax lien subordinate to the lien to be created by the lender refinancing or restructuring a loan. Also, taxpayers or their representatives may request that the IRS discharge its claim if the home is being sold for less than the amount of the mortgage lien, if certain conditions are met. The IRS states that the process to request a discharge or a subordination of a tax lien will take approximately 30 days after the submission of the completed application, but that it will work to expedite requests. Click here for more information.

FFIEC Publishes CRA/HMDA Reporter Newsletter

The FFIEC published the annual Community Reinvestment Act/Home Mortgage Disclosure Act newsletter, which provides information on various topics to assist in the collection and reporting of CRA and HMDA data and informs readers of new developments and changes for the upcoming processing year as well as answers to commonly-asked questions. Click here for the newsletter.