Posted by Steve Van Beek
Welcome to the beginning of a series of in-depth blog postings looking at the Credit CARD Act and its impact on your open-end lending products. First, a couple of housekeeping issues:
Here is a link to a PDF of the Credit CARD Act. NAFCU's overview is available for NAFCU-members. Both are listed under "Research Tools."
NAFCU will be hosting a webcast covering the Credit CARD Act on July 15, 2009. For those of you who watched the detailed UDAP webcast, we will have Oliver Ireland back from Morrison & Foerster along with his colleague Obrea Poindexter. The Compliance Guy will moderate the webcast. Additionally, Mr. Ireland and Ms. Poindexter will be at NAFCU's Compliance Seminar this October in Charleston, SC discussing the Credit CARD Act.
If you would like to receive the Compliance Blog each day, click on this link, enter your e-mail and the verification code. The last step is to respond to the verification e-mail - so be sure to check your SPAM filter if you don't receive it right away.
All the blog postings related to the Credit CARD Act will be located under the category "CreditCardReform." The categories are listed on the right-hand side of the blog. Here are links to 3 prior posts on the Credit CARD Act: the two provisions effective August 20, 2009; how the Credit CARD Act impacts Regulation Z and the Truth in Lending Act; and NAFCU's overview.
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That was the easy stuff. Now we get into the details. Editor's Note: Now is the time to grab a cup of coffee...
As promised, we are going to be walking section-by-section through the Credit CARD Act. Some sections will be added together, some sections might take more than one blog posting to cover. If new issues related to a certain section crop up, we will try to address the issues as we go along. No better place to start than Section 101.
Before we get too far - I want to remind you that the following discussion of the Credit CARD Act is provided for informational purposes only and should not be treated as legal advice. This blog's disclaimer reads as follows:
NAFCU-members can contact our compliance team at any time, our contact information is here under "contact sheet".
Section 101. Protection of Credit Cardholders.
This section covers a variety of issues, some of which were already going to be addressed in upcoming changes to Regulation Z (Reg Z) or under the new Unfair or Deceptive Acts or Practices (UDAP) regulation. The four main issues covered by Section 101 are:
Advance Notice of Changes
Currently, under Reg Z, credit unions need to provide advance notice of a change-in-terms 15 days prior to the effective date of the change. 12 C.F.R. 226.9(c). The Credit CARD Act requires this notice to be sent 45-days in advance of any increase in the APR or "other significant term" - including any fee or finance charge. Similar language was including in the Reg Z amendments that were to be effective July 1, 2010 (this link is to the language of the Federal Reserve's recent amendments to Reg Z - the Fed may need to revise these amendments). The Credit CARD Act pushes up the effective date for the 45-day advance notice to August 20, 2009.
Section 101 also requires credit unions to include a "Notice of Right to Cancel" statement with each advance notice of changes. The "Right to Cancel" means the member would be able to reject the change-in-terms, cancel the account, and pay off their account under the terms and conditions of the credit card prior to the notice. The credit union may not retaliate against a member who cancels his/her account. The law prohibits credit unions from treating the cancellation as default and prohibits the credit union from demanding the member repay the obligation, in full, at account closing. Additionally, the credit union may not charge a fee or penalty if the member exercises the "right to cancel."
The member's repayment of any outstanding balance on the canceled credit card account is also addressed in Section 101. The credit union needs to offer the member a repayment method under Section 171(c)(2) of the Truth in Lending Act (TILA) or a method that is more beneficial to the member. Section 101 of the Credit CARD Act also adds Section 171(c)(2) to TILA (discussed in tomorrow's blog posting). This repayment requirement was also addressed in the UDAP regulations, 12 C.F.R. 706.24(c) - (see especially pages 128 and 140-141), which are still slated to become effective July 1, 2010.
As promised, we are going to be walking section-by-section through the Credit CARD Act. Some sections will be added together, some sections might take more than one blog posting to cover. If new issues related to a certain section crop up, we will try to address the issues as we go along. No better place to start than Section 101.
Before we get too far - I want to remind you that the following discussion of the Credit CARD Act is provided for informational purposes only and should not be treated as legal advice. This blog's disclaimer reads as follows:
"This website is intended to provide general compliance information in
regard to the subject(s) covered. It is provided with the intent and
understanding that the publisher is
not engaged in the act of rendering legal, accounting or any other
professional advice. The information provided in this website is not
intended nor should be used as a substitute for legal advice or other
expert opinions and services in specific situations."
NAFCU-members can contact our compliance team at any time, our contact information is here under "contact sheet".
Section 101. Protection of Credit Cardholders.
This section covers a variety of issues, some of which were already going to be addressed in upcoming changes to Regulation Z (Reg Z) or under the new Unfair or Deceptive Acts or Practices (UDAP) regulation. The four main issues covered by Section 101 are:
- Advance Notice of Changes - including the Right to Cancel;
- Restrictions on Raising APRs on Outstanding Balances;
- Mandatory Review of Credit Card Accounts with Increased APRs; and
- Limitations on APR Increases for the First Year and for Promotional Period APRs.
Advance Notice of Changes
Currently, under Reg Z, credit unions need to provide advance notice of a change-in-terms 15 days prior to the effective date of the change. 12 C.F.R. 226.9(c). The Credit CARD Act requires this notice to be sent 45-days in advance of any increase in the APR or "other significant term" - including any fee or finance charge. Similar language was including in the Reg Z amendments that were to be effective July 1, 2010 (this link is to the language of the Federal Reserve's recent amendments to Reg Z - the Fed may need to revise these amendments). The Credit CARD Act pushes up the effective date for the 45-day advance notice to August 20, 2009.
Section 101 also requires credit unions to include a "Notice of Right to Cancel" statement with each advance notice of changes. The "Right to Cancel" means the member would be able to reject the change-in-terms, cancel the account, and pay off their account under the terms and conditions of the credit card prior to the notice. The credit union may not retaliate against a member who cancels his/her account. The law prohibits credit unions from treating the cancellation as default and prohibits the credit union from demanding the member repay the obligation, in full, at account closing. Additionally, the credit union may not charge a fee or penalty if the member exercises the "right to cancel."
The member's repayment of any outstanding balance on the canceled credit card account is also addressed in Section 101. The credit union needs to offer the member a repayment method under Section 171(c)(2) of the Truth in Lending Act (TILA) or a method that is more beneficial to the member. Section 101 of the Credit CARD Act also adds Section 171(c)(2) to TILA (discussed in tomorrow's blog posting). This repayment requirement was also addressed in the UDAP regulations, 12 C.F.R. 706.24(c) - (see especially pages 128 and 140-141), which are still slated to become effective July 1, 2010.
Mandatory Review of Credit Card Accounts with Increased APRs
While many of the provisions in the Credit CARD Act had been addressed in some form or fashion under Reg Z amendments or UDAP regulations, some provisions - like the mandatory review - are completely new. You may want to make sure you are sitting down for this one (and clearing your desk of breakable objects may not hurt either).
Section 101 adds Section 148 to TILA which requires credit unions to review credit card accounts which received increases in their APRs based on the member's credit risk, market conditions, or other risk factors. Credit unions will be required to review these accounts to determine if the factors which lead to the increased APR are still present and warrant the continuation of the increased APR. This review will need to occur at least every 6 months. If the review indicates the factors prompting the increased APR are no longer present or are less prevalent, the credit union would need to the lower the credit card account's APR. If the factors are greater, the credit union could increase the APR by giving 45 days advance notice.
Section 148 requires the Federal Reserve to issue regulations by February 22, 2010 to implement the review requirements. These future regulations will be effective August 22, 2010. Because this issue was not addressed in previous Reg Z amendments or the UDAP regulations, it is unclear what the detailed regulations from the Federal Reserve will look like. And, since the effective date for this provision is further into 2010 - credit unions may want to focus on complying with the other provisions of the Credit CARD Act while keeping an eye out for proposed regulations from the Federal Reserve to implement Section 148 of TILA.
I think that is enough for the first day - we will continue Section 101 in tomorrow's blog posting.
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On Wednesday, June 24 at 1 p.m. EDT, NCUA will host a free webinar to discuss the actions the NCUA Board took at its June 18th meeting. NCUA will discuss the establishment of the Stabilization Fund and its impact on credit unions. The 2-hour webinar is free, but you must register before 12:45 p.m. EDT on June 24.
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