On January 12, 2010, the Federal Reserve Board approved a final rule (the “Final Rule”)1 amending Regulation Z2 (which implements the Truth in Lending Act (TILA)3) and the related staff commentary (“Official Staff Interpretations”), in order to implement certain provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the “Credit CARD Act” or the “Act”)4 that take effect on February 22, 2010. President Obama signed the Credit CARD Act into law on May 22, 2009, following a call by various members of Congress and consumer advocates for legislative action to further reform credit card industry practices beyond the Federal Reserve Board’s January 2009 rulemaking, which declared certain credit card practices to be inherently unfair and deceptive.5 The Final Rule has incorporated many of the provisions of the January 2009 regulations, and therefore the Federal Reserve Board has withdrawn the January 2009 final regulations.6
In accordance with the Credit CARD Act’s implementation timeline, the requirements of the Credit CARD Act that pertain to credit cards or other open-end credit for which the Board has rulemaking authority become effective in three stages. Last Tuesday’s Final Rule is the second stage in the implementation of the Credit CARD Act and establishes a number of new substantive and disclosure requirements to establish fair and transparent practices pertaining to open-end consumer credit plans, including credit card accounts. The first stage of rules became effective August 20, 2009, and pertained primarily to requiring credit card issuers to provide advance notice of interest rate increases and significant changes in terms, and provisions regarding the amount of time consumers have to make payments.7 The remaining provisions of the Credit CARD Act, which take effect on August 22, 2010, and will be the subject of Federal Reserve Board rulemaking at a later date, include a requirement that late payment and penalty fees must be “reasonable and proportional” to the violation resulting in the fee, a requirement for credit card issuers to re-evaluate, at least once every six months, certain factors considered when a consumer’s Annual Percentage Rate (APR) has been increased, and several new requirements8 applicable to issuers of gift certificates and prepaid/gift cards.
Set forth below in Part II is a brief summary of certain key provisions of the Credit CARD Act and the related Federal Reserve Board implementing regulations, both effective February 22, 2010. Part II.A reflects most of the key provisions of the Final Rule, as codified in a new Subpart G to Regulation Z, and Part II.B reflects several additional key provisions of the Final Rule incorporated into other parts of Regulation Z.
II.A. New Regulation Z Subpart G
1. Consideration of a Consumer’s Ability to Repay – New Regulation Z Section 226.51(a)
Section 109 of the Act adds new TILA Section 150 to prohibit credit card issuers from opening card accounts or increasing credit limits for consumers without considering the ability of the consumer to make the required minimum payments under the account.
The Final Rule adds new Section 226.51(a) to Regulation Z, which implements Section 109 of the Act (TILA Section 150) and further provides the following:
- It would be unreasonable for a credit card issuer not to review any information about a consumer’s income, assets or current obligations, or to issue a credit card to a consumer who does not have any income or assets;
- Credit card issuers must establish and maintain reasonable written policies and procedures to consider a consumer’s ability to make the required payments under the terms of the account based on a consumer’s income or assets and current obligations. Reasonable policies and procedures include a consideration of at least one of the following regarding the consumer: (i) the ratio of debt obligations to income; (ii) the ratio of debt obligations to assets; or (iii) the income the consumer will have after paying debt obligations; and
- When evaluating a consumer’s ability to pay, a credit card issuer must use a reasonable method for estimating the minimum periodic payments the consumer would be required to pay under the terms of the account. The issuer’s method of payment estimation falls within a “safe harbor” if the issuer (i) assumes that the consumer uses, from the first day of the billing cycle, the full credit line that the issuer is considering offering to the consumer; and (ii) uses an assumed minimum payment based on a formula that includes any proposed or current interest charges, and any mandatory fees applicable to the account.
Official Staff Interpretation – The Federal Reserve Board staff clarified that a card issuer complies with the foregoing requirements if it considers information provided by the consumer, or information otherwise obtained by the card issuer from any other financial relationship the card issuer or its affiliates has with the consumer, subject to any applicable information-sharing rules. In addition, a card issuer may base its determination of a consumer’s ability to pay on any current or reasonably expected assets or income of the consumer, including, but not limited to, salary, wages, bonus pay, tips, commissions, interest, dividends, retirement benefits, public assistance, alimony, child support or separate maintenance payments, savings accounts or other investments.
2. Protections of Young Consumers – New Regulation Z Section 226.51(b)
Section 301 of the Act adds new TILA Sections 127(c)(8) to prohibit the issuance of a credit card to, or establishment of an open end consumer credit plan for, a consumer under the age of 21 unless the consumer has submitted a written application that:
- is signed by a cosigner over the age of 21 having means to repay debts incurred by the consumer under the account and indicating joint liability for debts incurred by the consumer until the consumer has attained the age of 21; or
- includes consumer financial information indicating that the consumer has the independent means of repaying extensions of credit in connection with the card account.
Section 303 of the Act adds new TILA Sections 127(p) to require any cosigner on an account where the primary cardholder is under the age of 21 to further consent in writing to a credit line increase and further assume joint liability for such an increase.
The Final Rule adds new Section 226.51(b) to Regulation Z, which implements Sections 301 and 303 of the Act (TILA Sections 127(c)(8) and 127(p)) and further provides that the cosigner, guarantor or joint applicant may either be secondarily liable for any debt incurred by the consumer under the age of 21 or jointly liable with the consumer for any debt on the account.
Official Staff Interpretation – The Federal Reserve Board staff clarified that:
- The age of a consumer is determined as of the date of submission of the application for a credit card or the date the credit line increase is requested; and
- The liability and collection of financial information requirements do not apply to a consumer under the age of 21 who is being added to another person’s account as an authorized user.
3. Limitations on Fees – New Regulation Z Section 226.52
Section 105 of the Act adds new TILA Sections 127(n) to limit the fees (other than late fees, over-the-limit fees or insufficient funds fees) paid by a consumer during the first year after a credit card account is opened to 25 percent of the total credit available under the credit card account, as determined when such account is opened.
The Final Rule adds new Section 226.52 to Regulation Z, which implements Section 105 of the Act (TILA Sections 127(n)) and adds that, in addition to those fees not applicable to the 25 percent limit as set forth in the Act, the 25 percent limit does not apply to any fees that the consumer is not required to pay with respect to the account (as clarified in “Types of Fees” below).
Official Staff Interpretation – The Federal Reserve Board staff clarified:
- Types of Fees – The 25 percent limit on fees applies to fees paid for the issuance or availability of credit, including fees based on account activity or inactivity, cash advance fees, balance transfer fees, foreign transaction fees and fees for violating the terms of the account. However, the 25 percent limit does not apply to fees the consumer is not required to pay with respect to the account, such as fees for making an expedited payment, for optional services (such as travel insurance), for reissuing a lost or stolen credit card, or for statement reproduction.
- Fees that exceed 25 percent – A card issuer that charges a fee during the first year that exceeds 25 percent of the available credit limit is still in compliance with the 25 percent limitation if the card issuer waives or removes the fee and any associated interest charges or credits the account for an amount equal to the fee and any associated interest charges within a reasonable time, but no later than the end of the billing cycle following the billing cycle during which the excess fee was charged.
- Changes in Credit Limit – If a card issuer increases the credit limit during the first year after the account is opened, a card issuer is not permitted to require the consumer to pay additional fees that would otherwise be prohibited without the credit limit increase (such as a fee for increasing the credit limit). If a card issuer decreases the credit limit during the first year after the account is opened, the card issuer must waive or remove any fees charged to the account that exceed 25 percent of the reduced credit limit, or credit the account for an amount equal to any fees the consumer was required to pay with respect to the account that exceed 25 percent of the reduced credit limit within a reasonable amount of time, but no later than the end of the billing cycle following the billing cycle during which the fee was charged.
4. Allocation of Payments – New Regulation Z Section 226.53
Section 104 of the Act amends TILA Section 164 to require credit card issuers to apply payment amounts in excess of the minimum payment first to the card balance bearing the highest interest rate and then to additional balances in successive order of declining interest rate. However, where a balance is subject to a deferred interest arrangement, the entire amount of a payment in excess of the minimum payment must be applied to the deferred interest balance during the last two billing cycles immediately prior to expiration of the interest deferral period.
The Final Rule adds new Section 226.53 to Regulation Z, which implements Section 104 of the Act (amendments to TILA Sections 164); however, Section 226.53 further provides that a credit card issuer may, at its option, allocate any amount paid by the consumer in excess of the required minimum periodic payment among the consumer’s credit card account balances in the manner requested by the consumer.
Official Staff Interpretation – The Federal Reserve Board staff clarified the following:
- A card issuer may allocate payment amounts in excess of the required minimum periodic payment based on the annual percentage rates and balances (i) on the day the preceding billing cycle ends, (ii) on the day the payment is credited to the account or (iii) on any day in between (i) and (ii), provided the day used by the card issuer is generally consistent from billing cycle to billing cycle (but may be changed from time to time).
- A consumer has made a request to allocate amounts in excess of the required minimum periodic payment if the consumer has (i) contacted the card issuer orally, electronically or in writing and specifically requests such particular allocation; or (ii) completes a form or payment coupon provided by the card issuer requesting a particular allocation.
5. Limitations on the Imposition of Finance Charges – New Regulation Z Section 226.54
Section 102 of the Act adds new TILA Section 127(j) to prohibit a creditor from imposing a finance charge with respect to (i) any balances for days in billing cycles that precede the most recent billing cycle (a practice that is sometimes referred to as “two-cycle” or “double-cycle” billing), or (ii) any balances or portions thereof in the current billing cycle that were repaid within a grace period. The foregoing prohibitions do not apply to any adjustment to a finance charge as a result of the resolution of a dispute or the return of a payment for insufficient funds.
The Final Rule adds new Section 226.54 to Regulation Z, which implements Section 102 of the Act (TILA Sections 127(j)).
6. Limitations on Increasing Annual Percentage Rates, Fees and Charges – New Regulation Z Section 226.55
A. Section 101 of the Act adds new TILA Section 171(a) & (b) to prohibit APR, fee and finance charge increases on outstanding balances except under the following circumstances:
- Temporary/Promotional Rate – Expiration of a promotional rate, the terms and duration of which (and the rate applicable upon the expiration of which) were disclosed to the cardholder at the onset of the promotional period;
- Variable Rate – Adjustments in a publicly available third-party index (not under the control of the creditor) to which a variable APR is tied (e.g., changes in LIBOR);
- Hardship/Workout Plan – Expiration of, or termination in the event of the cardholder’s failure to comply with, a hardship/workout plan entered into between the cardholder and the credit card issuer, provided that the APR, fee or finance charge applicable after such event may not exceed the APR, fee or finance charge that applied prior to entry into the hardship/workout plan, and such arrangement was previously disclosed to the cardholder; or
- Delinquency – The cardholder is more than 60 days delinquent in making a required minimum payment on the account, provided, however, the creditor must return the increased APR, fee or finance charge to the pre-default value if the cardholder brings the account current and remains current for the six-month period after such increase was imposed.
The Final Rule adds new Sections 226.55(a) & (b) to Regulation Z, which implements the foregoing provisions of Section 101 of the Act (TILA Section 171(a) & (b)) and further provides that the foregoing listed exceptions are not mutually exclusive, such that a card issuer may increase an annual percentage rate or a fee or charge pursuant to an exception even if that increase would not be permitted under a different exception.
B. Section 101 of the Act also revises TILA Section 171(c) to prohibit a card issuer from requiring a cardholder who has provided a termination notice to the issuer on account of an increased APR, fee or finance charge to repay any outstanding balance by a method or on a timetable that is less beneficial to the cardholder than either:
- a five-year amortization period, beginning on the effective date of the APR, fee or charge increase; or
- a required minimum payment that includes a percentage of the outstanding balance that is not more than twice the percentage required before the effective date of the APR, fee or charge increase.
The Final Rule adds new Section 226.55(c), which implements the foregoing section of Section 101 (TILA Section 171(c)).
C. Section 101 of the Act also creates a new TILA Section 172, which prohibits credit card issuers from increasing the APR, fees or finance charges on a credit card account during the first year after the account is opened.
The Final Rule adds new Section 226.55(b)(3)(iii), which implements the remaining part of Section 101 (TILA Section 172).
The Final Rule also adds new Section 226.55(d) to clarify that Section 226.55 continues to apply to a balance on a credit card account (i) after the account is closed or acquired by another creditor, or (ii) where the balance is transferred from a credit card account issued by a creditor to another credit account issued by the same creditor or its affiliate or subsidiary.
7. Requirements for Over-the-Limit Transactions – New Regulation Z Section 226.56
Section 102 of the Act adds new TILA Section 127(k) to prohibit credit card issuers from charging over-thelimit fees for honoring charges in excess of the credit line unless the consumer has been notified of the fee in advance and has expressly elected to receive overdraft protection services that will result in imposition of the fee. Additionally, the creditor shall provide notice to the consumer of the right to revoke the election, which the consumer may revoke orally, electronically or in writing. Finally, an over-the-limit fee may be imposed only once during a billing cycle in which the consumer’s credit limit is actually exceeded, and only once in each of the two subsequent billing cycles, unless the consumer has obtained additional extensions of credit in excess of the credit card account limit.
The Final Rule adds new Section 226.56 to Regulation Z, which implements Section 102 (TILA Section 127(k)) and additionally provides the following with respect to:
- Notice Requirements - A credit card issuer shall provide a consumer with an oral, written or electronic notice (“Notice”), prior to the assessment of any over-the-limit fee or charge and segregated from all other information, describing the right to affirmatively consent, or opt-in, to receive fee-based overdraft protection services. The Notice shall include (i) the dollar amount of any fees or charges to be assessed for an over-the-limit transaction; (ii) any increased APRs that may be imposed as a result of an overthe- limit transaction; (iii) the method by which a consumer may affirmatively consent (writing, orally or electronically); and (iv) the consumer’s right to revoke consent, at any time and by the same method as used by the consumer to provide consent. Further, the declaration of the consumer’s right to revoke consent to fee-based overdraft protection services must be provided on the front page of each periodic statement that reflects the assessment of an over-the-limit fee or charge.
- Opt-In Requirements – A card issuer shall provide a consumer with (i) a reasonable opportunity for the consumer to affirmatively consent or opt-in to the card issuer’s payment of over-the-limit transactions; and (ii) confirmation of such consent in writing or electronically (if the consumer agrees).
- Duration of Opt-In – A consumer’s affirmative consent is effective until revoked by the consumer, or until the card issuer decides for any reason to cease paying over-the-limit transactions for the consumer.
- Payment for Consumer’s Failure to Opt-In – In the absence of a consumer’s affirmative consent, a credit card issuer may still pay any over-the-limit transactions provided the card issuer does not impose any fee or charge on the account for paying such over-the-limit transaction.
- Additional Restrictions - A credit card issuer may not condition the amount of a consumer’s credit limit on obtaining consumer consent to fee-based overdraft services. Additionally, a card issuer may not impose an over-the-limit fee or charge (i) for the credit card issuer’s failure to promptly replenish a consumer’s available credit line following such consumer’s payment; or (ii) if a consumer exceeds a credit limit solely because of certain fees or interest charged by the credit card issuer pursuant to an open end (not homesecured) credit plan during the billing cycle.
Official Staff Interpretation – The Federal Reserve Board staff clarified the following:
- Notice and Opt-In Requirements – The foregoing notice requirements and requirement to obtain affirmative consent do not apply to a credit card issuer that has a policy and practice of declining to pay any over-the-limit transactions.
- Reasonable Opportunity to Consent – A credit card issuer provides a consumer with a reasonable opportunity to provide affirmative consent when it provides such methods for consent (i) on the application, (ii) by mail, (iii) by telephone or (iv) by electronic means.
- Confirmation of Consent – A credit card issuer may not assess any over-the-limit fee or charge unless and until the card issuer has sent the written confirmation.
- Authorized Users – A credit card issuer may not treat a consumer’s request to consent to, or revoke a prior consent for, the card issuer’s payment of over-the-limit transactions from an authorized user that is not jointly liable on such credit card account.
8. Extensions of Credit to College Students – New Regulation Z Section 226.57
Section 304 of the Act adds new TILA Section 140(f), which requires institutions of higher education to publicly disclose contracts or other agreements with credit card issuers or creditors, and further prohibits credit card issuers from offering any “tangible” items to induce a full-time or part-time college student at an institution of higher education to apply for a credit card if the offer is made on or “near” the campus of an institution of higher education, or at an institution-sponsored or “related” event.
The Final Rule adds new Section 226.57(a) – (c) to Regulation Z, which implements Section 304 of the Act (TILA Section 140(f)).
Official Staff Interpretations – The Federal Reserve Board staff clarified the following:
- Public Disclosure – An institution of higher education may publicly disclose contracts or other agreements with credit card issuers by posting such contracts or agreements on its Web sites, or making such contracts or agreements available upon request, provided the procedures for requesting such contracts or agreements are reasonable, free of cost and provided within a reasonable time frame.
- Prohibited Inducements – Includes any solicitation or application mailed to a college student at an address on or near the campus of an institution of higher education.
- “Tangible” – Includes any physical item such as a gift card, magazine subscription or t-shirt, but does not include non-physical inducements such as discounts, reward points or promotional credit terms. A credit card issuer must have reasonable procedures for determining whether an applicant is a college student before giving the applicant a tangible item.
- “Near the campus of an institution of higher education” – Means a location within 1,000 feet of the border of the campus.
- Event “related to an institution of higher education” – Means the marketing of such an event using the name, emblem, mascot or logo of an institution of higher education, or other words, pictures or symbols, in a way that implies that the institution of higher education endorses or otherwise sponsors the event.
Section 305 of the Act adds new TILA Section 140(r) requiring credit card issuers to submit an annual report to the Federal Reserve Board containing the terms and conditions of all business, marketing, promotional agreements and college affinity card agreements (“Agreements”) with an institution of higher education, or an alumni organization or foundation affiliated or related to such institution (“Entities”), with respect to any credit card issued to a college student at such institution. The annual report must also disclose any memorandum of understanding between such creditor and any Entities regarding any obligations or distribution of benefits between such parties, the amount of any payments and how such payments are determined, from the creditor to any such Entities, the number of credit card accounts opened during the period covered by the annual report and the total number of credit card accounts covered by the Agreements that were outstanding at the end of such period.
The Final Rule adds new Section 226.57(a) and (d) to Regulation Z, which implements Section 305 of the Act (TILA Section 140(r)), and further requires credit card issuers to:
- • Disclose identifying information about the card issuer and the agreements submitted, including the issuer’s name, address and identifying number;
- • Provide a copy of any college credit card agreement in effect at any time during the period covered by the annual report; and
- • Submit such an annual report by the first business day on or after March 31 of the following calendar year, provided card issuers must submit an initial annual report for calendar year 2009 by February 22, 2010.
9. Internet Posting of Credit Card Agreements – New Regulation Z Section 226.58
Section 204 adds new TILA Section 122(d) requiring each credit card issuer to establish and maintain an Internet site where the issuer posts a copy of each cardholder agreement between the issuer and a cardholder. In addition, each credit card issuer must provide the Federal Reserve Board with an electronic copy of each cardholder agreement posted to the credit card issuer’s Internet site that the Federal Reserve Board will publish in a publicly available Internet repository of cardholder agreements.
The Final Rule adds new Section 226.58 to Regulation Z, which implements Section 204 (TILA Section 122(d)); however, it provides the following modifications to the Act provisions:
A. Submission of Agreements – Section 226.58(c) adds the following additional requirements as to the type, timing and content of such submissions, as well as exceptions to the submission requirements:
- Type of Submission – A credit card issuer must submit to the Federal Reserve Board (i) credit card agreements the card issuer has offered to the public as of the last business day of the preceding calendar quarter (and not previously submitted); (ii) any credit card agreement previously submitted that was amended during the preceding calendar quarter; (iii) notification of any credit card agreement previously submitted that the issuer is withdrawing; and (iv) identifying information about the card issuer and the agreements submitted, including the card issuer’s name, address and identifying number (such as an RSSD ID or tax ID).
- Timing of Submission of Credit Card Agreement to Federal Reserve Board – On a quarterly basis no later than the first business day on or after January 31, April 30, July 31 and October 31 of each year, provided, however, the first submission must be made by February 22, 2010 (for those credit card agreements offered to the public as of December 31, 2009), and the second submission must be made by August 2, 2010 (for those credit card agreements offered to the public as of June 30, 2010, and not otherwise previously submitted, along with any credit card agreement previously submitted that was amended after December 31, 2009, and on or before June 30, 2010).
- Form and Content – Each credit card agreement submitted (i) must contain the provisions of the agreement and pricing information9 (set forth in a single addendum to the agreement) in effect as of the last business day of the preceding calendar quarter, and (ii) must not contain any personally identifiable information relating to any cardholder such as name, address, telephone number or account number.
- Exceptions – A card issuer is not required to submit credit card agreements to the Federal Reserve Board under the following exceptions (“Submission Exceptions”):
- The card issuer had fewer than 10,000 open credit card accounts as of the last business day of the calendar quarter;
- As of the last business day of the calendar quarter, the credit card agreement is offered under one or more private label credit card plans,10 each of which has fewer than 10,000 open accounts and is not offered to the public other than for accounts under the plan; and
- As of the last business day of the calendar quarter, the credit card agreement is offered as part of a product test offered to a limited group of consumers for a limited period of time, is used for fewer than 10,000 accounts and is not offered to the public other than in connection with such product test.
If a credit card issuer, or agreement, as applicable, that previously qualified under any of the Submission Exceptions, ceases to qualify, the card issuer must begin making quarterly submissions to the Federal Reserve Board no later than the first quarterly submission deadline after the date on which the issuer ceased to qualify. If a credit card issuer, or agreement, as applicable, that did not previously qualify under any of the Submission Exception so qualifies for a Submission Exception, the credit card issuer must continue to make quarterly submissions until the issuer notifies the Federal Reserve Board that it is withdrawing all agreements previously submitted.
B. Internet Posting of Agreements – Section 226.58(d) modifies the Section 204 (TILA Section 122(d)) requirements by:
- Requiring credit card issuers to post and maintain only those credit card agreements that the card issuer is required to provide to the Federal Reserve Board, rather than simply all credit card agreements in effect with any cardholder. Any such posted agreements must be placed in a location that is prominent and readily accessible by the public without submission of personally identifiable information, and such agreements must be updated at least as frequently as the quarterly schedule required for submission of such agreements to the Federal Reserve Board.
- Where a credit card issuer is not required to submit a specific card agreement to the Federal Reserve Board as a result of a Submission Exception, such card agreement must still be provided to the cardholder either by posting and maintaining such agreement on the card issuer’s Internet site or by providing a copy to the cardholder upon request. If the credit card issuer makes an agreement available upon request, the issuer must provide the cardholder with the ability to request a copy of the agreement both (i) by using the issuer’s Internet site, and (ii) by calling a readily available telephone number as displayed on the issuer’s Internet site.
II.B – Additional Key Provisions
1. Payoff Timing Disclosure
Section 201 of the Act amends TILA Section 127(b)(11) to require credit card account periodic statements to include the following balance payoff disclosures:
- a warning, in substantially the form set forth in the Act, that making only the minimum payment will increase the amount of interest paid and the amount of time required to repay the balance; and
- a balance repayment table that includes:
- the number of months required to pay off the balance if the cardholder pays only the minimum monthly payment and incurs no additional charges to the card account;
- the total cost, including principal and interest, of paying the balance in full if the cardholder pays only the minimum monthly payment and incurs no additional charges to the card account;
- the monthly payment required to pay off the entire balance in 36 months (assuming no further advances) and the total cost to the cardholder (including principal and interest) of paying the balance off over 36 months; and
- a toll-free telephone number at which the cardholder may obtain information about credit counseling and debit management services.
The Final Rule adds new Section 226.7(b)(12) to Regulation Z, which implements Section 102 (TILA Section 127(k)) and additionally provides new guidance in Appendices M1 and M2 (addressing the calculation of the generic repayment estimates and the actual repayment disclosures), and in Appendix M3 (providing sample calculations for the generic repayment estimates and the actual repayment disclosures discussed in Appendices M1 and M2).
2. Late Payment Deadline and Penalty Disclosure
Section 202 of the Act amends TILA Section 127(b)(12) to provide that if a late fee or charge may apply in the event of a cardholder’s failure to make a payment on or prior to the due date for such payment, the periodic statement with respect to such account must include, in a conspicuous location, the date on which the payment is due or, if different, the date on which a late payment fee will be charged and the amount of the associated fee. Further, if one or more late payments may result in an increase in the APR applicable to the card account, the periodic statement with respect to that account must state that fact in a conspicuous location and in close proximity to the payment due date, and must disclose the penalty interest rate in the event of one or more late payments.
The Final Rule adds new Section 226.7(b)(11) and (13) to Regulation Z, which implements Section 202 (TILA Section 127(b)(12)); however, the disclosure of any late payment fee and any increased APRs is not required where periodic statements are provided (i) solely for charge card accounts, and (ii) for a charged-off account where payment of the entire account balance is due immediately.
3. Due Date; Late Payments
Section 106 of the Act adds new TILA Section 127(o) requiring a cardholder’s payment due date to be the same day each month. In addition, if the payment due date is a day on which the issuer does not receive or accept payments (e.g., a weekend or holiday) by mail, a payment received on the next business day must be treated as timely.
The Final Rule adds new Section 226.7(b)(11) & (13) and 226.10(d) to Regulation Z, which implements Section 106 (TILA Section 127(o)), and the foregoing regulations further provide that:
- A cardholder’s payment due date shall be disclosed on the front of the first page of the periodic statement; however, the requirement that the due date be the same day each month is not required where periodic statements are provided (i) solely for charge card accounts, and (ii) for a charged-off account where payment of the entire account balance is due immediately.
- If a creditor accepts or receives payments made on the due date by a method other than mail, such as electronic or telephone payments, the creditor is not required to treat a payment made electronically or by telephone on the next business day following the due date as timely, even if the creditor does not accept mailed payments on the due date.
Official Staff Interpretations – The Federal Reserve Board staff clarified that a creditor may adjust a cardholder’s payment due date from time to time, provided that the new due date will be the same numerical date each month on an ongoing basis.
As previously mentioned, the second stage provisions of the Act and the Final Rule take effect on February 22, 2010. The House of Representatives passed legislation11 this past November to speed up the effective date of the credit card reforms scheduled for February and August; however, the bill has stalled in the Senate, and therefore, the second stage credit card reforms will likely maintain their February 22 effective date.
As the impact of the new credit card reform laws, regulations and related restrictions becomes clearer, cardholders and credit card issuers should expect a changing credit card landscape. Cardholders will certainly benefit from increased account disclosure requirements and the restriction or prohibition of other historical credit card practices that cardholders were unaware of or may have found confusing. Credit card issuers, however, have incurred and will likely continue to incur significant costs to modify existing billing and information systems to comply with the new card reform requirements. In addition to these costs, new restrictions on a credit card issuer’s ability to re-price outstanding balances on credit card accounts based on cardholder risk and to assess fees for certain types of cardholder behavior will likely result in reduced revenue. In light of the expected costs and reduced revenue, there is a greater expectation that credit card issuers will require higher interest rates and or assess new or additional fees in connection with credit card accounts, particularly returning to the practice of charging routine annual fees. In addition, credit card issuers are likely to engage in greater up-front risk profiling of card account applicants and to reduce credit availability to riskier cardholders.