Reg Z Help; Credit CARD Act - Truth in Lending Act

Posted by Steve Van Beek

Okay, I admit - I'm using "help" generously, but I believe the following is very useful.  For quite some time, I'm been lamenting the fact that the new open-end Regulation Z rules, effective July 2010, need to be organized in some fashion to assist in reading and understanding the new requirements.  I have a love/hate relationship with the Federal Register.  I love it because I can find background on why the changes are being made in the preamble to the final rules.  I hate it because the background information can be presented in a very, very confusing way.  Not to mention the three column approach - I'm not a fan of those columns.  

I stumbled across a page on the FDIC's website that contains a list of Regulations and Laws.  I've seen plenty of lists similar to this, but one section caught my eye: "Truth in Lending (FRB Regulation Z) Effective Date July 1, 2010."  I said a quick prayer and clicked on the link to find a truly glorious sight: the language of the open-end portions of Regulation Z as they will look on July 1, 2010.  

The reason I find this so useful is that it removes some of the hunting required when a regulation is amended.  As I detail below, amendments to regulations or laws can cause confusion by making small changes without providing the bigger picture.  Seeing the new open-end Reg Z rules together in one place provides the big picture.

Note: The Reg Z changes above do not address the subsequent changes required by the Credit CARD Act, the Federal Reserve will need to further amend its regulations to implement the Credit CARD Act changes.  

***

The Credit CARD Act primarily amends the Truth in Lending Act (it also amends portions of the  Electronic Funds Transfer Act and other laws).  As I mentioned above, amendments to laws can be extremely confusing.  For example, here is a portion of Section 104 of the Credit CARD Act:

"Sec. 104. APPLICATION OF PAYMENTS.
Section 164 of the Truth in Lending Act (15 U.S.C. 1666c)
is amended--
(1) by striking the section heading and all that follows through "Payments" and inserting the following:
"§ 164. Prompt and fair crediting of payments
"(a) IN GENERAL.--Payments";
(2) by inserting ", by 5:00 p.m. on the date on which such payment is due," after "in readily identifiable form";
(3) by striking "manner, location, and time" and inserting "manner, and location"; and
................................................................."

Looking at the section, by itself, it is very difficult to determine what has changed in the law and what is required of credit unions going forward.  Examination of the current language of the Truth in Lending Act helps to decipher what the new law will look like.  The link above also comes from the FDIC's list of regulations/laws.  To navigate within the Truth in Lending Act, click on "[Next Page]" or "[Previous Page]" to find the section the Credit CARD Act amends.

Thus, by using these resources we can see that the Credit CARD Act amends Section 164 of the Truth in Lending Act from this (the current version):

"§ 164. Prompt crediting of payments.
Payments received from an obligor under an open end consumer credit plan by the creditor shall be posted promptly to the obligor's account as specified in regulations of the Board. Such regulations shall prevent a finance charge from being imposed on any obligor if the creditor has received the obligor's payment in readily identifiable form in the amount, manner, location, and time indicated by the creditor to avoid the imposition thereof."

To the new language of the Truth in Lending Act (effective February 22, 2010):

"§ 164. Prompt and fair crediting of payments.
(a) IN GENERAL -- Payments received from an obligor under an open end consumer credit plan by the creditor shall be posted promptly to the obligor's account as specified in regulations of the Board. Such regulations shall prevent a finance charge from being imposed on any obligor if the creditor has received the obligor's payment in readily identifiable form, by 5:00 p.m. on the date which such payment is due in the amount, manner, and location indicated by the creditor to avoid the imposition thereof." (emphasis added).

Referring to the current language of the Truth in Lending Act can clarify what the changes of the Credit CARD Act accomplish.  In the example, it is now easier to see that the new laws will require payments made by 5:00 p.m. to be credited on the day they are received.  Examining the existing language of TILA also makes it clear that the Federal Reserve must make changes to Regulation Z to implement and clarify this requirement.

The Federal Reserve had already made changes to this section of Regulation Z, 12 C.F.R. 226.10, in its recent amendments to open-end lending.  However, the Credit CARD Act will require further amendments in order for the Federal Reserve to align Regulation Z with the Truth in Lending Act.

We were operating under the following laws and regulations for the crediting of payments:

Truth in Lending Act - Section 164.

Regulation Z, 12 C.F.R 226.10. 

Then, the Federal Reserve amended Regulation Z to make 12 C.F.R. 226.10 look like this (effective July 1, 2010).  

But, the Credit CARD Act threw a wrench into the whole thing.  Not only is the Federal Reserve going to have to amend Regulation Z again - but the effective date might need to be moved up to February 22, 2010.

Why is this important?  The regulations gave flexibility to credit unions when setting cut-off times for accepting payments.  Looking at the amended § 226.10, the credit union could set reasonable cut-off times for payments.  If your credit union closes at 3:00 p.m., a 3:00 p.m. cut-off time might be considered reasonable.  NAFCU commented on this issue when the Federal Reserve amended Regulation Z (see page 2).  However, the Credit CARD Act mandates a 5:00 p.m. cut-off time and the Federal Reserve will need to amend Regulation Z accordingly. 

Note: The 5:00 p.m. cut-off time does not require a credit union to post the payment to the member's account on that particular date, but, rather, would require the credit union to credit the member's account as of the date of payment (by using a backdating posting method).  

I randomly picked this one section of the Credit CARD Act as an example.  Perhaps, an onion analogy is most appropriate.  Each layer that gets pulled away reveals more layers beneath - and makes us cry that much more.  This is just one of issues that will be changing in the upcoming months as the Credit CARD Act provisions begin to be implemented - by both the Federal Reserve and credit unions.   And, I only examined section (a) of § 164 of TILA - new section (b) regulates the application of payments in a manner more restrictive than the UDAP regulations (credit unions must apply payments in excess of the minimum payments to the highest APR balance on the account - but that is another blog posting altogether).

Compliance with these rules is best described, in my opinion, as trying to hit a moving target.  Hopefully, the resources provided above will help clarify what is required of credit unions going forward.    

Comments

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