On July 15 2009 the Board of Governors of the Federal Reserve System released implementing regulations for two key provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009.(1) The provisions, which become effective on August 20 2009, require creditors to deliver periodic statements at least 21 days prior to a due date and to provide notice of changes relating to credit card accounts at least 45 days in advance of the effective date.(2)
The board's regulations to implement the 45-day rule contain a number of onerous provisions that will be of significant concern to issuers. The regulations implement a new federal opt-out right which applies even to penalty rates disclosed to the cardholder in advance and included in the cardholder agreement. The issuer is required to accept opt-outs through a toll-free telephone number. Further, when an issuer provides notice of a penalty rate increase, it must wait until the trigger for the penalty has occurred. This means that issuers raising a rate because of a 60-day delinquency will need to wait until the account is 60-days delinquent, and then provide 45 days' advance notice of the new rate. In order to avoid triggering a 'change in terms' disclosure, the rules require written disclosure of the length of promotional and deferred interest plans, and the numerical annual percentage rates that will apply thereafter, before the start of such plans.
Because of the short time period between the enactment of the act and the August 20 effective date, the board released these regulations as an interim final rule and they will become effective on August 20. However, there is also a 60-day comment period after publication in the Federal Register, and the board may modify the regulations based on any comments received.
The board's rule requires creditors to "adopt reasonable procedures designed to ensure" the mailing of periodic statements to consumers at least 21 days before the payment due date and the date on which any grace period expires. If a creditor violates this requirement, it may not treat a payment as late for any purpose or collect any charge imposed because of the creditor's failure to comply. The regulation, unlike the text of the statute, helpfully applies the reasonable procedures standard to both the due date and grace period requirements.
The 21-day rule applies to all open-end credit plans subject to Regulation Z. This is different from most other provisions in the act, which apply only to credit cards.
For purposes of calculating 21 days before the payment due date, the commentary clarifies that 'courtesy' grace periods, as well as state-mandated grace periods, are not included. The commentary also provides that 'treating a payment as late' includes:
- imposing a late fee;
- raising an annual percentage rate as a penalty; or
- reporting the consumer as late to a credit bureau based on the consumer's failure to make a payment within a specified time.
Under the board's implementation guidance, the 21-day rule will apply only to statements sent on or after August 20. It will not apply to statements sent on August 19 or earlier, even if the due dates listed on those statements fall after the effective date.
The board's regulations implementing the 45-day rule significantly expand the notice obligations from those contained in the current version of Regulation Z.
What events will trigger a notice?
Under the regulations, notice is required whenever:
- the creditor changes any of the terms of the account that will be required to be included in the account opening table under revised Regulation Z, including any annual percentage rate, most account fees, the length of any grace period and the balance calculation method (but reductions in rates and fees are excluded);
- the creditor increases the minimum payment; or
- an annual percentage rate is increased due to the cardholder's delinquency or default or as a penalty for one or more events specified in the account agreement - even if the change is already disclosed in the cardholder agreement.
Notice is not required for changes in account terms other than those listed above - for example, if the creditor changes the fee for requesting a duplicate statement, it need not comply with the 45-day rule.
When must notice be given?
A notice must be mailed or delivered at least 45 days before the change or increase becomes effective.
What must the notice disclose?
The notice must include:
- for changes in contractual terms, a statement that changes are being made to the account and a description of the changes being made;
- for penalty rate increases, a statement that a penalty rate has been triggered and a description of the circumstances under which the penalty rate will cease to apply;
- the date on which the changes or penalty rate will be effective; and
- a statement regarding the cardholder's right to opt out.
Does the notice obligation apply to reductions in the credit limit?
The notice obligation does not apply to reductions in the credit limit. However, written or oral notice of a reduction in the credit limit is required to be given at least 45 days before an overlimit fee or penalty rate is imposed as a result of the newly reduced limit. If the account goes over the limit after that 45-day period, a new notice is required in order to apply a penalty rate.
When does the consumer have a federal opt-out right?
Under the regulation, the consumer has the right to reject any of the changes for which notice is required under the 45-day rule except (i) an increase in the minimum payment, or (ii) any change if the cardholder is 60-days delinquent. The creditor must provide a toll-free number for the consumer to exercise the right. The creditor may (but is not required to) close the account if the consumer exercises the opt-out right. The consumer must be allowed to exercise the opt-out right up until the day before the effective date of the change.
The opt-out right applies not only to actual changes in the contractual terms, but also to any penalty rate increases. Moreover, the federal right is in addition to any state opt-out rules.
May the creditor accelerate the account if the consumer opts out?
If the cardholder opts out, the creditor may close the account to future purchases, but the creditor may not otherwise treat the account as in default or accelerate the balances. Instead, the creditor must allow the cardholder to repay the balance on terms not less favourable than those specified in the regulation.
The creditor may not apply the changed term to the account of a cardholder who has opted out, except that the creditor may apply the change to transactions that occur more than 14 days after the notice is mailed as long as the change relates solely to such transactions (eg, a periodic rate or transaction fee applicable only to those transactions).
Are there exceptions for promotional or other rates?
Under the regulation, no notice is required for rate increases upon:
- expiration of a promotional rate;
- expiration of a deferred interest plan;
- completion of a workout plan; or
- a change pursuant to a variable rate formula.
However, for promotional and deferred interest plans, the creditor must have disclosed - before the inception of the plan - the time period after which the higher rate would apply and the rate (expressed numerically) that would apply thereafter. This will impose a significant burden, particularly at point of sale.
What is the effective date?
The 45-day rule and the board's regulations are effective on August 20 2009. The board has interpreted this to mean that the 45-day rule applies to any notice sent on or after August 20. It does not apply to notices sent before August 20, even if the changes or rate increases become effective on or after August 20.
However, there are two important caveats to this.
For penalty rates, if the event that triggers the penalty rate occurs before August 20, but the rate cannot be implemented until August 20 or later, the creditor must either (i) send the cardholder a notice prior to August 20 disclosing the pending rate increase and its effective date, or (ii) fully comply with the new regulation.
For promotional rates that became effective before August 20 but will expire on or after August 20, the creditor may increase the rate to the 'go to' rate in the following circumstances:
- if the creditor disclosed the length of the period of the promotional rate and the higher rate that applies thereafter (expressed either numerically or narratively, such as "the standard annual percentage rate for purchases") in writing in connection with the promotion;
- if the creditor provides a new written disclosure to cardholders prior to August 20 stating the length of the promotional period and the rate or type of rate that will apply thereafter;
- if the creditor can demonstrate that it provided, prior to August 20, an oral disclosure of the length of the promotional period and the rate that would apply thereafter; or
- if the creditor complies with the new regulation.
Issuers will need to evaluate these new regulations quickly to ensure that they can comply with the 21-day rule and the 45-day rule by the August 20 compliance deadline. In addition, issuers should consider submitting comments to the board concerning the interim final rule to address any problematic provisions.
Finally, issuers should be prepared for the board to release additional rules implementing the other provisions of the act in the near future, which will include revisions to the Regulation Z provisions published by the board in January 2009. The board has indicated that it also anticipates withdrawing Regulation AA, its rulemaking pursuant to the Federal Trade Commission Act, because those provisions will be incorporated into Regulation Z pursuant to the act.
For further information on this topic please contact James A Huizinga, Michael F McEneney, John K Van De Weert or Karl F Kaufmann at Sidley Austin LLP by telephone (+1 202 736 8000), fax (+1 202 736 8711) or email (email@example.com, firstname.lastname@example.org, email@example.com or firstname.lastname@example.org).
(2) The release is available at www.federalreserve.gov/newsevents/press/bcreg/bcreg20090715a.htm.
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