The Regulation Z Open End Proposal Drops; Additional 21-Day Guidance

Posted by Anthony Demangone

Yesterday, the Federal Reserve released a proposal to amend the open end rules to Regulation Z.  Specifically, the Fed's proposal is designed to implement the sections of the Credit CARD Act that will take affect February 22, 2010. 

First things first.

1. The RESPA section-by-section analysis is going to be put on hold.  Perhaps for a good while.  

2. We're going to discuss this proposal quite a bit.  There may be others (inside or outside your credit union) who would benefit from the discussions we lead on this blog.  Feel free to forward this email to them.  They can sign up to receive daily blog emails via this link. They'll have to enter their email address and later click on a confirmation email.  There's no cost, and this blog is open to all credit unions - not just NAFCU members.  And they can unsubscribe at any time.

Now, on to the proposal.  It is 841-pages in length.  That page number, however, includes the preamble, model forms, official staff commentary, etc.  What I want to do today is to "shrink" the proposal into a series of usable tools.

1. Here's a link to the proposal.  Stop right now and save the document to your computer.  Personally, I'd have it on my desktop.  You'll be referring to this proposal quite a bit, so this will save you some time.
2. Within the 841-page document, there is a 7-page summary of the major changes.  I'd read that next.   View the overview here.
3. Some sections apply just to credit cards.  Some to all open-end credit.  The Fed created a 2-page chart to clarify which sections apply to what.  View the chart here.
4. Perhaps you just want to look at the regulatory text without the charts, commentary, preamble, etc.  The actual regulatory language is roughly 127 pages.  Not short, but far better than 841-pages  Read just the regulatory language here.
5. If you must print out this document, consider printing it on both sides (duplex).  Even better, when printing it, consider printing two pages on each side.  In other words, each piece of paper will have 4 pages of the proposal.  That way, you can print out all 841-pages of the proposal on roughly 210 sheets of paper.

Here are some general thoughts and observations:

• There's new guidance on the 21-day issue.  The Fed issued a proposed change to the commentary to indicate that the prohibition against treating a payment as late for any reason only applies during the 21 days after a statement is mailed.  Here's the language, which can be found on page 592.

2. Treating a payment as late for any purpose and collecting any finance or other charges. Treating a payment as late for any purpose includes increasing the annual percentage rate as a penalty, reporting the consumer as delinquent to a credit reporting agency, or assessing a late fee or any other fee based on the consumer’s failure to make a payment within a specified amount of time or by a specified date. The prohibition in § 226.5(b)(2)(ii) on treating a payment as late for any purpose or collecting finance or other charges applies only during the 21-day period following mailing or delivery of the periodic statement. When an account is not eligible for a grace period, imposing a finance charge due to a periodic interest rate does not constitute treating a payment as late or collecting finance or other charges as a result of a failure to comply with § 226.5(b)(2)(ii).

And the Fed discussed it on pp. 30-31 in the preamble as well.

The Board is proposing to amend comment 5(b)(2)(ii)-2 in several respects in order to clarify the consequences of a failure to comply with the requirement in § 226.5(b)(2)(ii) that creditors adopt reasonable procedures designed to ensure that periodic statements for open-end credit plans are mailed or delivered at least 21 days before the payment due date and the date on which any grace period expires. First, the title of the comment would be amended to cover both treating a payment as late for any purpose and collecting any finance or other charge. Second, because § 226.5(b)(2)(ii) only prohibits the creditor from treating a payment as late for any purpose or collecting any finance or other charge as a result of a failure to comply with the general 21-day requirement, the comment would be amended to clarify that the prohibition in § 226.5(b)(2)(ii) on treating a payment as late for any purpose or collecting finance or other charges applies only during the 21-day period following mailing or delivery of the periodic statement. Thus, if a creditor does not receive a payment within 21 days of mailing or delivery of the periodic statement, the prohibition does not apply and the creditor may, for example, impose a late payment fee.

Here are a few thoughts on this issue.  First, this is a proposed amendment to the staff commentary.  It isn't final yet.  Second, it isn't clear exactly what this means.  There's still a requirement to have reasonable procedures that ensure that statements are mailed or delivered at least 21 days before the due date.  Is the only consequence of not meeting the 21-day requirement (assuming the proposed commentary becomes final) that credit unions must wait 21 days to charge a late fee, etc.?  Or could a credit union that fails to meet the 21-day requirement also be exposed to an administrative action for a violation of Regulation Z?  We are seeking to clarify this issue.

• The comment period is only 30 days from when this is published in the Federal  Register.  Ugh.
• The Fed indicates that it intends to make the effective date for this rule February 22, 2010.  That makes sense, as that is the requirement under the Credit CARD Act.  But the Fed is considering whether it wants to also make the provisions of its open-end final rule that were to take effect July 1, 2010 effective on February 22, 2010 as well, as many of those provisions are closely related to the CARD Act.  If the Fed does that, those effective dates will be moved up more than 4 months. 
• The minimum payment warning language will only apply to credit card accounts under an open-end plan.  See p. 367 et seq. Whew.
• Since the Fed has issued 4 proposed or final rules that affect open end lending in 2009, they decided to republish all sections of Regulation Z from the 4 proposals or final rules that affect open-end (non-home secured) credit. They are also including the UDAP provisions, with proposed amendments to make them jibe with the Credit CARD Act.

Comments

[Rob Rutkowski]

Thanks for getting your arms around this so quickly! We mentioned you quite a bit on CIiCU this month and the great work you're doing here. I am relieved to hear that the minimum payment warning language will only apply to credit card accounts. Moving the July date to February is unfortunate though.

[Anthony Demangone]

Here's another comment from another great CU attorney, Brian Witt.

We have to be real careful on advising CU clients at this point on this rule clarification and I think your caveat of “proposed” is critical.

The FRB’s proposed clarification of the “consequences” of failing to adopt procedures to mail statements 21 days prior to the payment due date will NOT ensure mailing statements 21 days in advance of the due date rather it tends to invite creditors to ignore the 21 day delivery rule and not adopt procedures to provide for the 21 statement delivery.

The FRB’s clarification will permit creditors to simply modify their operational practices to provide that - no payments made after a payment due date but received within the 21 day period after statement mailing will be treated late for any purpose. However, payments received after the due date and after the 21 day period of when the statement was mailed can be treated as late for any purpose. Based upon the FRB’s example, if the borrower pays on the 22nd day after the statement is provided, even if statements are not mailed 21 days prior to the payment due date, the payment can be treated as late for any purpose. The prohibition simply does not apply. This clarification will only require a programming change and is far easier to implement than the 21 day mailing rule.

While this may appear to be the relief the credit union industry sought, further FRB clarification would be necessary to make it real.

Notwithstanding the FRB’s clarification, the FRB neglects to point out the additional consequences of failing to provide statements 21 days in advance under Reg Z 226.5(b)(2)(ii): Reg Z civil liability for compliance violations will now be: $500 minimum and $5000 maximum under Sec. 107 of the CARD Act.

[Kim DeDapper]

Holy brain drain, Batman! Thank you SO much for the portion-controlled version, Anthony. I dub thee Compliance KING!