Reg Z's August 22 Rules: A First Look

Posted by Anthony Demangone

I've had a few minutes to glance through the Federal Reserve's recent final rule that implements the last two provisions of the Credit CARD Act.  Here's some help in breaking it down. 

• The final rule is 252 pages long   Yech!  But here's the thing, you shouldn't worry about reading all of it at first.  Just read the 21 pages that form the actual changes to the regulation itself.  Here are those 21 pages.  Read that first.  If something is confusing, then go the staff commentary.  If it is still confusing, then go the preamble and discussion portion of the rule.  If the issue is still unclear, you may be off the grid.  
• So, when does the rule take effect?  August 22.  Well, sort of.  The Fed does provide later compliance dates for certain things, such as corrected disclosures.  Read all about it in these 12 pages.   For example:

Special mandatory compliance date for amendments to penalty fee disclosures.
The mandatory compliance date for the amendments to the penalty fee disclosures in §§ 226.5a, 226.6, 226.7, and 226.56 and in Model Forms G-10(B), G- 10(C), G-10(E), G-17(B), G-17(C), G-18(B), G-18(D), G-18(F), G-18(G), G-21, G- 25(A), and G-25(B) is December 1, 2010. Although card issuers may not charge late payment fees, returned payment fees, or over-the-limit fees that are inconsistent with § 226.52(b) after August 22, 2010, the Board understands that it may not be possible for some card issuers to revise the disclosures for such fees prior to August 22. Accordingly, the Board has established a mandatory compliance date of December 1, 2010 for the amendments to the penalty fee disclosure requirements.

• Regarding penalty fees, the Fed had proposed that credit unions might be able to take advantage of a number of credit card penalty fee arrangements. There was the cost method, the prohibitive effect method, a percentage method, and the safe harbor.  In the final rule, the Fed limits credit unions to either a "cost" method or the "safe harbor" fee of $25.  (There is another method based on 3% of the the delinquent balance, but that is limited to charge cards.) The cost method will require an institution to show that its penalty fee represents a reasonable proportion of the costs incurred by the card issuer for that type of violation. Any card issuer using the "cost" method will have to reevaluate its determination of what those costs are, and the reasonable fee, every 12 months.  That sounds like a lot of work, so I envision a super-majority of credit unions will simply use the safe harbor fee.
• The safe harbor is $25, but for violations of the same type that occur within the next six billing cycles, credit unions will be able to charge up to $35 for such violations. 
• Keep in mind that even with the safe harbor, there are general penalty fee prohibitions that run concurrently.  So, for example, penalty fees may not be more than the underlying transaction.  So, if a member misses a minimum credit card payment of $15, that is the late fee limit for that transaction.   
• Regarding the review of credit CARD APR increases, the main question was this: how long will we have to continue to review a decision to increase a credit card's APR.  In the immortal words of Buzz Lightyear: To Infinity...And Beyond!  (Or until you lower the APR to what it was before, or lower.) Here's the actual language found in 226.59(f)

(f) Termination of obligation to review factors.  The obligation to review factors described in paragraph (a) and (d) of this section ceases to apply:

(1) If the issuer reduces the annual percentage rate applicable to a credit card account under an open-end (not home-secured) consumer credit plan to the rate applicable immediately prior to the increase, or, if the rate applicable immediately prior to the increase was a variable rate, to a variable rate determined by the same formula (index and margin) that was used to calculate the rate applicable immediately prior to the increase; or

(2) If the issuer reduces the annual percentage rate to a rate that is lower than the rate described in paragraph (f)(1) of this section.  

Well, I guess that's enough for today.  Ugh.  

Comments

[Jody]

You guys are great! Thank you for doing this for us.

[Kristina Brown]

Thanks for adding this tidbit.

[Any card issuer using the "cost" method will have to reevaluate its determination of what those costs are, and the reasonable fee, every 12 months. That sounds like a lot of work, so I envision a super-majority of credit unions will simply use the safe harbor fee.]

Even though I completely agree with what was stated above. We are deciding to take the road less travelled by using the "cost" method. Do you have cost analysis templates or formulas that can assist?

[Anthony Demangone]

Hi Kristina,

I am not aware of any cost analysis templates. For now, all that is available is the Reg Z rule itself.