On July 15, 2009, the Board of Governors of the Federal Reserve System (the “Board”) issued an interim final rule (the “Interim Rule”) to implement the provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the “Credit CARD Act”) that become effective on Aug. 20, 2009. The Interim Rule, which amends the Board’s Regulation Z, primarily pertains to: (1) advance notices of rate increases and changes in terms and (2) the time consumers are given to make their payments. Comments on the Interim Rule must be submitted within 60 days after its publication in the Federal Register.
Background and Implementation of the Credit CARD Act
On Dec. 18, 2008, the Board adopted two final rules affecting credit card issuers that are to become effective on July 1, 2010. These rules were published in the Federal Register on Jan. 29, 2009. The first rule makes comprehensive changes to Regulation Z (the “Jan. 2009 Reg Z Rule”), and the second rule, issued jointly with the federal banking agencies under the Federal Trade Commission Act (the “FTC Act”), is intended to protect consumers from unfair practices with respect to consumer credit card accounts (the “Jan. 2009 FTC Act Rule”).
On May 22, 2009, the Credit CARD Act was signed into law. The provisions of the Credit CARD Act become effective in three stages. Provisions regarding advance notices of rate increases and changes in terms and concerning the time consumers are given to make payments are effective on Aug. 20, 2009. The majority of the remaining provisions are effective on Feb. 22, 2010, and the provisions addressing the reasonableness and proportionality of penalty fees and re-evaluation by creditors of rate increases become effective on Aug. 22, 2010. Several provisions of the Credit CARD Act are similar to provisions in the Board’s Jan. 2009 rules, while other portions of the Credit CARD Act address practices or mandate disclosures that were not addressed in the Board’s Jan. 2009 rules.
The Board has stated that it intends to retain those portions of its Jan. 2009 Regulation Z Rule that are unaffected by the Credit CARD Act and that it is not withdrawing any provisions of the Jan. 2009 Regulation Z Rule or its Jan. 2009 FTC Act Rule at this time. In addition, the Board has stated that it anticipates amending or withdrawing those portions of the Jan. 2009 rules that are inconsistent with the requirements of the Credit CARD Act when it finalizes rules for implementing the provisions of the Credit CARD Act that are effective Feb. 22, 2010. In particular, the Board expects that all of the requirements in its Jan. 2009 FTC Act Rule will be withdrawn from the FTC Act’s implementing regulation, Regulation AA, and moved to Regulation Z.
Mailing or Delivery Requirements for Periodic Statements
The General Rule
The Interim Rule requires that creditors adopt reasonable procedures designed to ensure that periodic statements are mailed or delivered at least 21 days before the payment due date and the expiration of the grace period. Failure to comply with this requirement prohibits a creditor from treating a payment as late for any purpose and from collecting any finance or other charge imposed as a result of such failure. When complying with the Interim Rule, a creditor is not required to determine the specific date on which periodic statements are mailed or delivered to each individual consumer. Instead, a creditor may comply with the Interim Rule by adopting reasonable procedures designed to ensure that periodic statements are mailed or delivered to consumers no later than a certain number of days after the closing date of the billing cycle and adding that number of days to the 21-day period when determining the payment due date and the date on which any grace period expires.
The relevant date for purposes of determining when a creditor must comply with this provision of the Interim Rule is the date on which the periodic statement is mailed or delivered, not the due date or grace period expiration date reflected on the statement. Therefore, if a periodic statement is mailed or delivered on Aug. 20, 2009, the creditor must have reasonable procedures designed to ensure that the payment due date and the grace period expiration date are not earlier than Sept. 10, 2009. However, the Interim Rule does not apply to a periodic statement mailed or delivered on Aug. 19, 2009.
Advance Notice Requirements for Significant Change In Terms
The General Rule
In general, the Interim Rule requires creditors to provide written notice of a “significant change” to an account term or an increase in the required minimum periodic payment at least 45 days prior to the effective date of the change, unless an exception applies. The Board has determined that this notice requirement will apply to changes in the following terms: (1) annual percentage rates (“APR”) (includes rates applicable to purchases, cash advances and balance transfers, as well as any discounted initial rate, premium initial rate or penalty rate); (2) fees for issuance or availability; (3) fixed finance charge or minimum interest charge; (4) transaction charges; (5) grace period; (6) balance computation method; and (7) fees consumer should be aware of prior to use of the account (includes cash-advance fee, late-payment fee, over-the-limit fee, balance-transfer fee, returned-payment fee, and a fee for insurance, debt cancellation, debt suspension coverage).
The 45-day advance notice requirement does not apply to changes involving charges for documentary evidence, reductions of finance charges, suspension of future credit privileges (subject to an exception involving credit limit reductions) or termination of an account or plan, or when the change results from an agreement involving a court proceeding. In addition, the Interim Rule provides an exception for increases in APRs upon the expiration of a specified time period, provided that prior to the commencement of that period, the creditor disclosed to the consumer in writing the length of the period and the APR that applies after the period ends and the APR that applies after the period ends does not exceed the rate previously disclosed. This exception also applies to deferred interest or similar programs. The Interim Rule also provides exceptions for increases in variable APRs (subject to certain conditions) and increases in APRs due to the completion of a workout or temporary hardship arrangement (subject to certain conditions).
To comply with the 45-day advance notice requirement, a creditor must provide a description of the changes, and state that changes are being made to the account and the date the changes will become effective. Except when the change is an increase in the required minimum payment, the notice must also include a statement that the consumer has the right to reject the change in terms prior to the effective date of the change unless the consumer fails to make a required minimum periodic payment within 60 days after the due date for that payment. The notice is also required to disclose instructions for rejecting the change or changes, and a toll-free telephone number that the consumer may use to notify the creditor of the rejection. If applicable, creditors are required to disclose that if the consumer rejects the change, the consumer’s ability to use the account for further advances will be terminated or suspended.
Credit Limit Reduction
Generally, a decrease in a consumer’s credit limit is not a significant change triggering the 45-day advance notice requirement. However, a creditor must provide 45-day advance notice in writing or orally that a credit limit is being reduced prior to the imposition of any over-the-limit fee or penalty rate imposed solely as the result of the balance exceeding the newly decreased credit limit.
Generally, the relevant date for determining whether a change-in-terms notice must comply with the Interim Rule is the date on which the notice is provided, not the effective date of the change.
Advance Notice Requirements for Penalty Rate Increases
The General Rule
The Interim Rule requires creditors to provide written notice at least 45 days prior to the effective date of a rate increase due to a delinquency or default or as a penalty. However, the notice must be provided after the occurrence of the event or events that triggered the specific impending rate increase and may not be sent as a general notice reminding the consumer of the conditions that may give rise to penalty pricing.
The Interim Rules provides an exception for rate increases due to a consumer’s failure to comply with the terms of a workout or temporary hardship arrangement between the creditor and consumer, and clarifies the relationship between the notice requirement for credit limit reductions (discussed above) and the notice requirement for imposing a penalty rate on extensions of credit that exceed the newly decreased credit limit.
The notice must state that the delinquency, default or penalty rate has been triggered; the date on which the increased rate will apply; and the circumstances under which the increased rate will cease to apply to the consumer’s account or, if applicable, that the increased rate will remain in effect for a potentially indefinite time. The notice must also inform the consumer of his or her right to reject the application of the penalty rate prior to the effective date of the change, unless the consumer makes a payment that is more than 60 days late. Like the notice for significant changes to an account, the notice must also include instructions for rejecting the rate increase (including a toll-free number) and, if applicable, that the rejection of the rate increase will result in termination or suspension of the account.
Generally, the relevant date for purposes of a penalty rate increase is the date on which the increase becomes effective. However, the Board acknowledges that there may be circumstances in which a consumer’s behavior prior to Aug. 20, 2009, triggers a penalty rate, but a creditor may be unable to implement that rate increase prior to Aug. 20, 2009. In those circumstances, the Board has stated that it would not be appropriate to require 45-days advance notice because it would in effect require compliance with the Interim Rule prior to the Aug. 20 effective date. Therefore, for such penalty rate increases that are triggered, but cannot be implemented prior to Aug. 20, 2009, a creditor must either provide the consumer, prior to August 20, 2009, with a written notice disclosing the impending rate increase and its effective date or must comply with the Interim Rule.
Consumer Rejection of Significant Change in Terms or Rate Increase
As stated above, the Interim Rule requires that notices of a significant change in terms or a penalty rate increase must include a statement of the consumer’s right to reject the change in terms or penalty rate increase. If the consumer rejects the change or other increase before the effective date, the creditor may not apply the change or other rate increase to the account, may not impose a fee or charge or treat the account as in default solely as a result of the rejection, and may not require repayment of the balance on the account using a method that is less beneficial to the consumer than one of the three listed methods. The three listed methods are: (1) the method of repayment for the account on the date on which the creditor was notified of the rejection; (2) an amortization period of not less than five years, beginning no earlier than the date on which the creditor was notified of the rejection; or (3) a required minimum periodic payment that includes a percentage of the balance that is equal to no more than twice the percentage required on the date on which the creditor was notified of the rejection.
As noted above, the consumer’s right to reject a change in terms and a penalty rate increase does not exist when the creditor has not received the consumer’s required minimum periodic payment within 60 days after the due date for that payment. This exception applies even if the delinquency began prior to the Aug. 20, 2009, effective date.
In addition, if the account is used for a transaction more than 14 days after the provision of notice for significant change in terms or penalty rate increases, the creditor is allowed to apply the changed term or increased rate to that transaction even if the consumer rejects the change or increase before the effective date (the “14-Day Exception”). The Board clarified, however, that the 14-Day Exception does not permit a creditor to reach back to days before the effective date of the change in terms or rate increase when calculating interest charges. In addition, the 14-Day Exception is limited to changed terms and increased rates that can be applied to transactions. It does not permit a creditor to apply a changed term to the entire account simply because the account was used for a transaction more than 14-days after provision of the 45-day advance notice.