The Federal Reserve Board (“FRB”) recently issued a final rule which amends Regulation Z, its Truth in Lending regulation, to among other things, incorporate changes made by the Credit Card Accountability Responsibility and Disclosure Act of 2009 (“CARD Act”). The rule establishes a number of new substantive and disclosure requirements regarding open-end consumer credit plans, including credit card accounts.
Highlights of the final rule include:
- As is required by the CARD Act, the final rule prohibits credit card issuers from applying annual percentage rate (“APR”) increases and certain fees to existing credit card balances except where (i) a temporary rate lasting at least six months expires, (ii) a variable rate is increased due to the operation of an index, (iii) the minimum payment has not been received with sixty (60) days of the due date or (iv) a consumer either successfully completes or fails to comply with the terms of a workout arrangement that involved a temporarily lowered rate.
- The final rule implements the CARD Act’s prohibition on increasing an APR during the first year after a credit card account is opened and the requirement that forty-five (45) days advance notice be given for any permissible APR increases applicable to new transactions.
- As is required by the CARD Act, the final rule prohibits a creditor from issuing a credit card to a person less than twenty-one (21) years of age except where (i) certain requirements are met regarding the person’s ability to repay debt on the account or (ii) there is a co-signer over the age of twenty-one (21) that has the means to repay the debt and assumes joint liability.
- The final rule implements the CARD Act’s restrictions on the ability of issuers to offer to students tangible inducements, such as gift cards, tee shirts or magazine subscriptions, for applying for or opening open-end consumer credit plans, including credit card accounts. The final rule also implements the CARD Act’s requirements that institutions of higher education publicly disclose agreements with issuers regarding the marketing of credit cards.
- The final rule imposes the CARD Act’s prohibition on opening a new credit card account or increasing the credit limit for an existing account unless the issuer considers the consumer’s ability to make the payments required under the account.
- The final rule, consistent with the CARD Act, requires issuers to obtain a consumer’s express consent or opt-in, after specified disclosures before charging an over-the-limit fee for a credit extension exceeding the consumer’s credit limit. Regardless of the consumer’s consent, issuers are prohibited from imposing more than one over-the-limit fee per billing cycle. Also prohibited is the imposition of an over-the-limit fee on the account for the same over-the-limit transaction in more than three billing cycles.
- The final rule prohibits certain practices as unfair or deceptive. Those include (i) assessing over-the-limit fees resulting from the issuer’s failure to promptly replenish the consumer’s available credit, (ii) conditioning the amount of available credit on the consumer’s consent to the payment of over-the-limit transactions and (iii) the imposition of over-the-limit fees where the credit limit is exceeded solely due to the issuer’s assessment of fees or charges on the consumer’s account.
- The final rule implements the CARD Act’s direction that issuers allocate payments that exceed the minimum required first to the balance with the highest rate.
- The final rule contains, and provides certain exceptions to, the CARD Act’s requirements that credit card issuers post credit card agreements on their website and submit the agreements to the FRB for posting on its website.
- Consistent with the CARD Act, the final rule prohibits issuers from charging specified fees totaling in excess of 25% of the initial credit limit to a credit card account during the first year.
- The final rule implements the CARD Act’s prohibition on “double-cycle billing” which is the practice of imposing finance charges on balances for days in previous billing cycles as a result of the loss of a grace period.
- The final rule provides that, except for payments involving an expedited service by a service representative of the issuer, issuers may not charge any fee to a consumer for making a payment.
- The final rule contains new disclosure requirements that are imposed by the CARD Act. Those include disclosures concerning (i) the amount of time and total cost (principal and interest) involved in paying the balance in full if solely the minimum payment is made and (ii) the monthly payment amount and total cost (interest and principal) necessary to pay the balance off in thirty-six (36) months.
The final rule is effective on February 22, 2010, which is the date required by the CARD Act. Several provisions of the CARD Act, primarily addressing change-in-terms notice requirements and the amount of time consumers have to make payment, were effective August 20, 2009 and were the subject of a prior FRB interim final rule.
Two provisions of the CARD Act, addressing the reasonableness and proportionality of penalty fees and charges and reevaluation by creditors of rate increases, are effective August 22, 2010 and will be the subject of a separate FRB rulemaking.
Affected lenders are encouraged to read the FRB’s final rule carefully.