The Federal Reserve Board (“FRB”), the Office of Thrift Supervision (“OTS”) and the National Credit Union Administration (“NCUA”) have adopted a final rule that prohibits certain credit card practices deemed unfair or deceptive. The final rule follows a Notice of Proposed Rulemaking issued in May 2008 by the three agencies and employs authority under the Federal Trade Commission Act to outlaw unfair or deceptive consumer practices. The rule will apply to new and existing consumer credit accounts, effective July 1, 2010.
Elements of the final rule are as follows:
- Reasonable time to pay — Under the final rule, an institution is prohibited from treating a credit card payment as late for any purpose unless the consumer has been provided a reasonable amount of time to make the payment. The final rule creates a “safe harbor” for institutions that adopt reasonable procedures designed to ensure that periodic statements are mailed or delivered to consumers at least 21 days before the payment due date.
- Payment allocation — In the event an account has multiple balances with different Annual Percentage Rates (“APRs”), the final rule requires an institution to distribute amounts paid in excess of the minimum payment by either: (1) allocating the excess payment to the account balance with the highest APRs in descending order, or (2) proportionately to all account balances.
- Interest rate changes —The final rule requires institutions to disclose the APRs that will apply to each category of transactions on the account at account opening and prohibits institutions from increasing APRs unless expressly permitted. Institutions are permitted to increase a rate in the following instances:
- When a specified period has expired, provided that the increasing rate was also disclosed at account opening.
- On a variable rate account, when the increase is due to the operation of an index that is not under the institution’s control;
- Once an account has been open for one year, when a 45-day advance notice of rate increase is provided, as is required by Regulation Z;
- When the consumer is more than 30 days delinquent in paying the credit card bill;
- When the consumer fails to comply with the terms of a workout arrangement between the institution and the consumer, provided that the APR applicable to a category of transactions following any such increase does not exceed the rate that applied to that category of transactions prior to commencement of the workout arrangement.
- Double-cycle billing — An institution is prohibited from using a two-cycle billing practice (reaching back to earlier billing cycles when calculating the amount of interest charged in the current cycle). The rule prohibits an institution from imposing finance charges based on balances for days in billing cycles that precede the most recent billing cycle as a result of the loss of a grace period.
- High-fee subprime cards — The final rule prohibits an institution from charging financing security deposits or fees (such as account opening or membership fees) that would consume the majority of the available credit during the first year after an account is opened. Security deposits and fees charged at account opening could not exceed 25% of the initial credit limit and any additional amounts (up to a 50% cap) must be spread evenly over the next five billing cycles.
- Disclosure – The FRB also amended Regulation Z (Truth in Lending) to enhance and clarify disclosures related to credit and charge card applications and solicitation, account costs, periodic statements and changes in interest rates and other terms