Grace Periods

Posted by Anthony Demangone

The recent changes to Regulation Z's open end rules have changed the way card issuers must handle their grace period.  We're all familiar with the new prohibition against double-cycle billing.  But there's more.

Effective February 22, 2010, when a member pays some, but not all of a prior credit card balance before the expiration of the grace period, the Credit CARD Act, and Reg Z, will prohibit the card issuer from imposing finance charges on the portion of the balance that  has been repaid.   The requirement is found at 226.54, and it was part of the proposal.  I've highlighted some text in red below.

§ 226.54 Limitations on the imposition of finance charges.

(a) Limitations on imposing finance charges as a result of the loss of a grace period.  (1) General rule. Except as provided in paragraph (b) of this section, a card issuer must not impose finance charges as a result of the loss of a grace period on a credit card account under an open-end (not home-secured) consumer credit plan if those finance charges are based on:

(i) Balances for days in billing cycles that precede the most recent billing cycle; or

(ii) Any portion of a balance subject to a grace period that was repaid prior to the expiration of the grace period.

In other words, if the member had purchases of $500, and paid you $300 before the expiration of the grace period, you can only reach back and charge interest on the $200 that was not paid.  It is our understanding that many card programs were not set up this way.  The staff commentary, beginning on page 1054, gives a number of examples and shows how this will work using hypothetical transactions.

I would check to see how you handle grace periods to ensure that your practices will match with the upcoming changes.

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NAFCU members, the February 2010 NAFCU Regulatory Compliance Monitor is now available.

Comments

[Julie Fabula]

What if your Visa interest is calculated based on average daily balance?

[Steve Van Beek]

Julie, the restrictions apply regardless of which balance computation method the credit union uses. The Credit CARD Act, as implemented by Reg Z, has prohibited the practices listed in the posting. You'll need to work with your processor to be sure they are not charging interest on any partial payments when a grace period is in effect on a member's account. The best resource is to work through the staff commentary explanation and examples. http://nafcucomplianceblog.typepad.com/RegZFinalSections/OSCto226.54.pdf