Alert October 06, 2009

FRB Releases Proposed Credit Card Rules

The FRB released proposed final rules amending the credit card provisions of Regulation Z. The proposal would add several new provisions to Regulation Z to implement those sections of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 that go into effect on February 22, 2010. The FRB also proposes to amend several provisions regarding unfair credit card practices, which were adopted in January 2009 as part of Regulation AA, and to incorporate them into Regulation Z. A summary of some of the major provisions of the proposal follows.

Limits on APRs and Fees. The proposal generally would prohibit the application of increased annual percentage rates and certain fees to existing balances, with several exceptions: (1) when a temporary rate lasting at least six months expires; (2) when the rate is variable; (3) when the minimum payment has not been received within 60 days after the due date; and (4) when the consumer successfully completes or fails to comply with the terms of a workout arrangement. The proposal also would permit the application of an increased APR when the rate has been reduced pursuant to the Servicemembers Civil Relief Act, and the SCRA ceases to apply. Creditors generally also would be prohibited from increasing an APR during the first year after an account is opened. In addition, certain account opening and other fees charged during the first year, other than fees for late payments, returned payments, and exceeding the credit limit, would be limited to 25% of the initial credit limit. After the first year, creditors would be permitted to increase the APR applicable to new transactions upon 45 days’ advance notice.

Over-the-Limit Fees. The proposal would require that consumers opt in to the imposition of a fee or charge for making extensions of credit that exceed the account’s credit limit (an “over-the-limit fee”) and would impose certain disclosure requirements regarding the fee prior to the consumer’s opt-in. This requirement would apply to new and existing account holders alike. Creditors also would be prohibited from (1) imposing more than one over-the-limit fee per billing cycle, (2) imposing an over-the-limit fee for the same transaction in more than three billing cycles, (3) assessing an over-the-limit fee that is caused by the creditor’s failure to promptly replenish the consumer’s available credit, (4) conditioning the amount of available credit on the consumer’s consent to the payment of over-the-limit transactions, and (5) imposing any over-the-limit fee if the credit limit is exceeded solely because of the creditor’s assessment of fees or charges (including accrued interest charges) on the consumer’s account. Periodic statements that reflect an over-the-limit fee would be required to contain a notice of the consumer’s right to revoke consent to such fee.

Minimum Payment Disclosures. Credit card issuers would be required to include the following information on periodic statements: (1) a “warning” statement regarding making only minimum payments; (2) the number of months that it would take to repay the outstanding balance if the consumer pays only the required minimum monthly payments and if no further advances are made; (3) the total cost to the consumer, including interest and principal payments, of paying the balance in full, if the consumer pays only the required minimum monthly payments and if no further advances are made; (4) the monthly payment amount that would be required for the consumer to pay off the outstanding balance in 36 months, if no further advances are made, and the total cost to the consumer of paying that balance in full if the consumer pays the balance over 36 months; and (5) a toll-free telephone number at which the consumer may receive information about accessing credit counseling and debt management services. The proposal provide specific requirements to comply with this provision, as well as guidance regarding assumptions to be made when making the required calculations.

Underage Consumers and College Students. The proposal would prohibit a creditor from issuing a credit card to a consumer under the age of 21 unless the consumer has submitted a written application with either (1) the signature of a co-signer who is at least 21 years old who can make the required payments, or (2) information indicating that the underage consumer has the ability to make the required payments. The proposal also would limit a creditor’s ability to offer a college student any tangible item to induce the student to apply for or open an open-end consumer credit plan on or near the campus of an institution of higher education or at an event sponsored by or related to an institution of higher education.

Additional Provisions. The proposal also would:

  • Require creditors to apply the amount of a payment that exceeds the minimum payment to balances with the highest APRs first;
  • Prohibit double-cycle billing;
  • Require a creditor to consider a consumer’s ability to make required minimum payments before opening a new credit card account for the consumer or increasing the consumer’s credit limit; and
  • With certain exceptions, require creditors to provide credit card agreements to the FRB and to post on their Web sites or otherwise make available their credit card agreements with their current cardholders.

The closing date for comments will be 30 days after publication in the Federal Register. The FRB intends to make the effective date of the final rulemaking February 22, 2010. Click here for a copy of the proposal.