On Dec. 18, 2008, the Office of Thrift Supervision, the Federal Reserve Board (the “Board”) and the National Credit Union Association (the “Agencies”), pursuant to their authority under the Federal Trade Commission Act, adopted new credit card rules (the “Rules”) aimed at protecting consumers from unfair credit card acts or practices. The Rules, which will take effect in July 2010, will apply to all savings associations, banks and federal credit unions that issue credit cards (collectively, “Institutions”). The Rules will require Institutions to conform their practices in a way that provides greater transparency for consumers entering into credit card agreements. The Rules are intended to lessen the confusion and surprise that many consumers claim to experience as a result of credit card practices that they deem “unfair.”  

Notably, the Rules, which were issued in substantially similar form by all three Agencies, address the following issues:  

  • Require Institutions to allocate amounts paid by consumers in excess of the minimum payment either by applying the entire amount first to the balance with the highest APR or by splitting the amount pro rata among the balances. The Rules prohibit Institutions from allocating a consumer’s payment first to the balance with the lowest APR, which effectively maximizes the interest charges applied to a consumer.
  • Require Institutions to disclose at the time a credit card account is opened all rates that will apply to each category of transactions to the account.
  • Prohibit Institutions from increasing the APR on an outstanding balance that is less than 30 days past due. Institutions may increase rates for new transactions, after the first year of an account opening, if the consumer is given a 45-day advance notice of the increase. A rate may also be increased upon expiration of the rate disclosed at account opening provided the increased rate was also disclosed at the time of account opening.
  • Prohibit Institutions from engaging in double-cycle billing (imposing a finance charge based on balances for days in billing cycles that precede the most recent billing cycle).
  • Prohibit Institutions from treating a payment as late unless consumers have been provided a reasonable amount of time to make payment, such as complying with the safe harbor for mailing or delivering periodic statements to consumers at least 21 days in advance of the payment due date.
  • Prohibit Institutions from charging fees for the issuance of credit that exceeds 50% of available credit during the first year of the account. This provision of the Rules relates to high-fee sub-prime credit cards.  

Regulation Z

In addition to adopting the Rules, the Board adopted additional rules amending Regulation Z (Truth in Lending) which require changes to the format, timing and content requirements for credit card applications, solicitations and disclosures to consumers. In particular, the new rules clarify that any transaction charge imposed on a cardholder by a card issuer is a finance charge that must be disclosed in accordance with Regulation Z. For example, foreign transaction fees are finance charges, regardless of whether a charge is imposed on debit cardholders for such transactions. The Board has also eliminated the requirement to disclose an “effective annual percentage rate.” Interest charges and transaction fee totals must now be grouped separately, with a monthly total for each on periodic statement disclosures.  

The Board has also revised Regulation Z to ensure that creditors do not set cut-off times for mailed payments earlier than 5 p.m. Amended Regulation Z also prohibits creditors from treating a payment as late, if the due date is a day that the creditor does not accept payment by mail (or the U.S. postal service is closed) and the payment is received by mail the next business day. The amendments also require that consumers be given 45 days advance notice before an account term can be changed or before the creditor increases a rate due to the consumer’s default or as a penalty.  

Regulation DD

The Board also adopted amendments to Regulation DD (Truth in Savings) to address disclosure practices related to depository institutions’ overdraft services. The new rule requires institutions to disclose on periodic statements the aggregate amount charged for overdraft fees and for returned item fees. The amendments also require institutions to provide account balance information, through an automated system, that does not include additional funds that are available to cover overdrafts.  

The Agencies did not take action on the proposed rules regarding holds placed on available credit or on overdraft services on deposit accounts. However, the Board has proposed amendments to Regulation E that would prohibit institutions from imposing an overdraft fee on a debit account when the account is overdrawn because of a hold placed on funds in the account that exceeds the transaction amount. The Board’s proposed amendments to Regulation E also provide for two alternative approaches to consumer consent of overdraft fees, one being an opt-out approach and the other requiring affirmative consent by opting-in to the institution’s overdraft service.  

While the Rules and amendments to Regulation Z do not take effect until July 1, 2010, and the amendments to Regulation DD are not effective until Jan. 1, 2010, the Agencies advise that Institutions conform their practices to the new rules as soon as practical.