NAFCU Compliance Blog

Balance Transfers; NCUA SAFE Act LOL; Blah, Blah, Blah

Posted by Anthony Demangone

Here's another Reg Z wrinkle that many folks may not have seen.  I'm speaking of 12 C.F.R. Part 226.55(d). As we know, section 226.55 provide a general prohibition on increasing credit card rates unless the increase can fit within one of our exceptions found in that section.  But look at .55(d):

(d) Continuing application. This section continues to apply to a balance on a credit card account under an open-end (not home-secured) consumer credit plan after:

(1) The account is closed or acquired by another creditor; or

(2) The balance is transferred from a credit card account under an open-end (not home-secured) consumer credit plan issued by a creditor to another credit account issued by the same creditor or its affiliate or subsidiary (unless the account to which the balance is transferred is subject to § 226.5b).

In other words, if you close a credit card account, or it is acquired by another creditor in a merger or acquisition, or if the balance is transferred from one account to another account by the same creditor - the protections of 226.55 come along for the ride.  The Fed was concerned that card issuers would attempt to increase the APR on existing balances by wooing consumers to convert an existing card to a new one that had a short-term promotional rate of say, 2.99 APR, but with a much higher rate that would kick in after the promotion ended.  With the 226.55(d), the existing balance remains protected.  As always, please read the reg and staff commentary for additional details.

Before you hyperventilate, the restriction will not govern balance transfers from other card issuer accounts that the member transfers to your credit union.  If a member transfers a balance from say, Bank of America, to your credit union, you can charge whatever your rate is on whatever they transfer.  But if you acquire a credit card account from another credit union via a merger or acquisition, then those balances are protected via 226.55.

***

NCUA issues Legal Opinion Letter 09-1018 to clarify that, in its opinion, that federal law preempts a North Carolina state law that attempts to require federal credit unions to file a notice of exemption from state licensing requirements.  The letter has SAFE Act implications.  Here's a snippet:

"While the SAFE Act contemplates separate state and federal regimes for mortgage loan originators, it provided for a national registration system and required NCUA, the other federal banking agencies, and the Farm Credit Administration to develop and maintain a system for registering mortgage loan originators employed by institutions regulated by these agencies. The federal agencies have published a proposed rule, 74 Fed. Reg. 27,386 (June 9, 2009), to establish the Nationwide Mortgage Licensing System (NMLS) for individuals engaged in the business of residential mortgage loan origination and a final rule is expected soon. Individuals, if employed at a federally regulated institution, must register on the NMLS. Individuals who are not employed at a federally regulated institution must be licensed under state law and register on the NMLS.

NCUA’s regulatory provision on preemption of state law states it does not apply to aspects of credit transactions primarily regulated by other federal law. 12 CFR §701.21 (b)(3). The SAFE Act expressly addresses the registration requirements for mortgage loan originators regulated by federal agencies. FCUs and their employees who originate mortgages will be required to register under this federal registration regime. In addition to the provisions of the FCU Act supporting preemption of the exemption notice requirement in North Carolina law, the SAFE Act addresses the sole basis identified in the state law for requiring exempt institutions to "claim and confirm" their exemption. The SAFE Act requires a national registry open to consumers and, thus, fully addresses the basis identified in the state law, namely, to facilitate the referral of consumers who contact the state commissioner. N.C. Gen. Stat. §53-244.050 (g). Therefore, we conclude federal law preempts the state provision requiring FCUs to file a notice of exemption from the state licensing requirements under the North Carolina SAFE Act. "

So, if a state SAFE Act system tries to have you file an exemption, NCUA has taken the stance that such a requirement is preempted.

***

I'm going to yabba-dabba at a number of NAFCU events in the near future, if you are interested.

• The NAFCU member call-in, on February 10.  This member-only overview is very good, and very free. 
• A Reg Z and Reg E webcast, on February 17.   Members and nonmembers, and even non credit unions (such as law firms) can sign up for this event.

• NAFCU's Regulatory Compliance School, on March 22-26.   I'm the MC.  (Yes, I have lots of bad jokes planned.) And I'll talk on the Right to Financial Privacy Act, Privacy and Security of Member Info, and BSA.  This event is open to all, as long as your check clears. The early bird registration discount ends this Friday.

• NAFCU's Volunteer's Conference, on May 20-22.  I'll be speaking on general regulations for board members and supervisory committee members, and BSA for credit union officials.  And I'll likely be eating my weight in wonderful Tex-Mex food, as the educational event takes place in San Antonio along the River Walk.  Again, members and non-members are welcome.

NCUA Board Meeting; Overview Updated

Posted by Anthony Demangone

The NCUA Board Meeting agenda is set for this Thursday.  Here's what is on the open agenda:

1. Withdrawal of Final Rule – Part 706 of NCUA’s Rules and Regulations, Unfair or Deceptive Acts or Practices.

2. Insurance Fund Report.

So goes UDAP.  NCUA is following the Fed in withdrawing the UDAP rule.  I would think that their rationale would be similar to the Fed's, which you can read here. Simply put, many of the protections found within the recent UDAP rule have been overtaken by the CARD Act.  Now that those protections are housed within Regulation Z, the need for UDAP seems, well, unfair and deceptive.  It is amazing to remember how frazzled we were when that UDAP rule was released in December of 2009.  Little did we know...

***

NAFCU Members, the Reg Z overview document has been updated with the following sections:

1. Periodic statements sent 21 days before the due date; and
2. Increasing APRs due to a consumers default or delinquency, including the 60-day delinquency requirements.

Minimum Payment Disclosures; Reg Z & Reg E Webcast

Posted by Steve Van Beek

The minimum payment disclosures are certainly one of the most confusing new disclosures that credit unions have had to work through.  Here is a brief synopsis of how we got here:

• Bankruptcy Act of 2005 requires minimum payment warnings
• Federal Reserve proposes and finalizes minimum payment warnings effective July 1, 2010 - these notices gave the option of a "generic example" or the actual disclosure 
• Credit CARD Act amends the Truth in Lending Act (superseding the Bankruptcy Act requirements) and requires actual disclosures and disclosures about how to pay off the balance in 36 months 
• Federal Reserve proposes and finalizes new minimum payment warnings effective February 22, 2010 according to the requirements in the Credit CARD Act.  

Thus, the possibility of the "generic examples" has been removed and credit unions will need to follow the most recent Federal Reserve amendments (the July 1, 2010 minimum payment warnings are removed).

New Requirements

The new requirements are going to require 1 of 3 minimum payment disclosures on a member's account - depending upon that member's particular situation.  Thus, credit unions will need to work with their processors to be sure their systems can identify and reproduce which minimum payment warning needs to be produced.

This requirement applies to credit card periodic statements mailed or delivered on or after February 22, 2010 (see page 5).

Which disclosures to include will depend on the amount of the minimum payment and how quickly that payment will pay off the outstanding balance on the account (after the assumptions provided in Appendix M1).

The Federal Reserve produced model forms of these 3 variations of the minimum payment warnings.  Below are links to the 3 model forms followed by the situations they will need to be used.

G-18(C)(1) - When Amortization Occurs and the 36-month Disclosures are Required

• If a member, paying only the minimum payment, will not pay off the account in 3 years.

G-18(C)(2) - When Amortization Occurs and the 36-month Disclosures are Not Required

• If a member, paying only the minimum payment, will pay off the account in 3 years or less.

G-18(C)(3) - When Negative or No Amortization Occurs

• If a member, paying only the minimum payment, will never pay off the balance on the account.

The way the Fed wrote the regulation, credit unions need to disclose the calculations according to 12 CFR 226.7(b)(12)(i)(F) - (start on page 2).  The default is the 36-month disclosures (226.7(b)(12)(i)(F)(1) - but those disclosures do not apply in situations where the balance will be paid off in less than 36-months by simply making the minimum payments (instead, use 226.7(b)(12)(i)(F)(2)(i-iii) - page 3).  Additionally, the 36-month disclosures are not required (and wouldn't make sense) if the account has negative amortization (i.e. making the minimum payments only would never pay off the balance).  For the negative amortization situations, use 226.7(b)(12)(i)(F)(2) - starting with (ii) at the bottom of page 3 (the Fed messed up their numbering in this section and will need to correct it).

Remember, the staff commentary is here and the preamble to this section is here.   

Rounding Issue

The commentary contains an explanation on how credit unions are supposed to round to determine if the balance will be paid off in 3 years or less:

"Minimum payment repayment estimate disclosed on the periodic statement is three years or less. Section 226.7(b)(12)(i)(F)(2)(i) provides that a credit card issuer is not required to provide the disclosures related to repayment in 36 months if the minimum payment repayment estimate disclosed under § 226.7(b)(12)(i)(B) after rounding is 3 years or less. For example, if the minimum payment repayment estimate is 2 years 6 months to 3 years 5 months, issuers would be required under § 226.7(b)(12)(i)(B) to disclose that it would take 3 years to pay off the balance in full if making only the minimum payment. In these cases, an issuer would not be required to disclose the 36- month disclosures on the periodic statement because the minimum payment repayment estimate disclosed to the consumer on the periodic statement (after rounding) is 3 years or less."

So, in the situation described in the staff commentary - you would be using G-18(C)(2).

Be sure to work with your data processor to be sure they can differentiate between accounts to ensure the proper rounding calculations occur and the proper minimum payment disclosures are being included.

***

On February 17, Anthony, Sarah, and I will be conducting a NAFCU webcast discussing the February 22, 2010 changes to Regulation Z as well as the July 1, 2010 changes to Regulation E dealing with overdraft protection programs.  We will tackle many of the common concerns and problems that have arose as these compliance dates approach.  You can sign up here (or if you've always wanted to put a face with a name - here is your chance). 

  

Reg Z Grab Bag; NAFCU Member Conference Call

Posted by Anthony Demangone

Here are a few issues that have come up regarding the new Regulation Z final rule. 

• We know that there is a general prohibition on increasing rates and certain fees during the first year after a credit card is opened.  The final rule clarifies that the prohibition will only apply to new accounts opened on or after February 22, 2010.  See p. 519 of the final rule. 
• The date for determining whether a change-in-terms notification  must comply with the new requirements of Regulation Z is generally the date on which the notice is sent.  So, if a change-in-terms is mailed on February 21, 2010, you'd follow the July 2009 interim final rule's requirements.  If you sent it on February 22, 2010, you'd follow the new rules. See p. 497 of the final rule.  The Fed gives this example: 

For example, if the change being disclosed is a rate increase due to the consumer’s failure to make a required minimum payment within 60 days of the due date, a notice provided prior to February 22, 2010 is not required to disclose the consumer’s right to cure the rate increase by making the first six minimum payments on time following the effective date of the rate increase.  

But don't forget the major exception to this general rule I dealt with in this blog post.  

• The 45-day notice requirement for changes in terms applies to all open-end (non-home secured) loans on February 22, 2010, not just to credit cards.  Take a look at footnote 1 on page 8 of the final rule. 
• The Federal Reserve has created this website to alert consumers to the new protections.  Clearly, this is what the Fed views as the most important changes.  This website is certainly worth a glance or two.
• Many of you have signed up for the blog in the past few days.  If you are looking for Reg Z resources, don't forget these two posts: 

1. This blog post pulls out and organizes the major sections of the final rule that will take effect February 22, 2010.  
2. This blog post rips out the overview and other useful sections from the final rule.  

***

Attention NAFCU members: Please mark your calendar for "Challenges & Opportunities," a NAFCU member-only conference call on Wednesday, Feb. 10, from 4-5 p.m. EST. NAFCU President Fred Becker and the association's senior staff (including me) will report on the latest developments in Washington affecting credit unions, including the proposed Consumer Finance Protection Agency, overdraft protection and interchange fees, financial services reform and recent trends in compliance and regulation. In addition, we will discuss the outlook for the economy.

The Member Call-In is free, but you must register to participate. Call our Member Service Center at (800) 344-5580 or register online here. 

***

Have a great weekend, everyone.

Rate Increase Timing and Existing Balances

Posted by Anthony Demangone

Today, I want to highlight another aspect of the final rule that is a wee bit unexpected.

On February 22, 2010, credit card "existing balances" are protected.  If a creditor increases an APR for the card, the change will not affect the card's existing balance.  The increased rate can only be applied to new transactions.   You'll find this new consumer protection at 12 C.F.R. Part 226.55(b)(3).

But what if a card issuer sends a change in terms notice to increase a credit card's APR on January 29, 2010, weeks before section 55(b)(3) takes effect?  Will the increased APR apply to the existing balance? No. You're too late. 

Remember, the change in terms now takes 45 days to become effective.  Even if you sent the notice today, the change would not take effect until after February 22, 2010.   The existing balance protection springs to life on February 22, 2010 - regardless of when the notice is sent.  This is different from how the Fed generally deals with change in terms notices.  Normally, it is the date the notice is sent - not the effective date - that trumps. But not in this case. Ironically, because the Fed issued this rule so late, we never had a chance to issue a change in terms notice 45 days before the effective date of February 22, 2010, if we waited to see the final rule before sending it.  Coincidence?  Hmmm.  Here's the Fed's rationale.

Furthermore, if the relevant date for compliance with § 226.55(b)(3) was the date on which a § 226.9(c) or (g) notice was provided, card issuers would be permitted to apply increased rates, fees, or charges to existing balances until April 7, 2010 so long as the notice was sent before the Credit Card Act’s February 22, 2010 effective date. The Board does not believe that this was Congress’ intent. Regulation Z final rule, p. 518.

The Fed gives theses two examples to show how the protection works.

Example 1. On January 7, 2010, a card issuer provides a notice of an increase in the purchase rate pursuant to § 226.9(c). Consistent with § 226.9(c), the increased rate is effective on February 21, 2010. Therefore, § 226.55(b)(3) does not apply. Accordingly, on February 21, 2010, the card issuer may apply the increased rate to both new purchases and the existing purchase balance (provided the consumer has not rejected application of the increased rate to the existing balance pursuant to § 226.9(h)).

Example 2. On January 8, 2010, a card issuer provides a notice of an increase in the purchase rate pursuant to § 226.9(c). Consistent with § 226.9(c), the increased rate is effective on February 22, 2010. Therefore, § 226.55(b)(3) applies. Accordingly, on February 22, 2010, the card issuer cannot apply the increased rate to purchases that occurred on or before January 22, 2010 (which is the fourteenth day after provision of the notice) but may apply the increased rate to purchases that occurred after that date.

Floors; Overview Document

Posted by Anthony Demangone

Today, I wanted to discuss one aspect of the recently-issued Regulation Z final rule that does not match up with the proposal.

Floors.  Apparently, the Fed does not like the use of interest rate "floors" anymore for credit cards.  This comes from page 317 of the final rule.

Consumer groups and a member of Congress raised concerns about two industry practices that, in their view, exercise control over the variable rate in a manner that is inconsistent with revised TILA Section 171(b)(2). First, they noted that many card issuers set minimum rates or “floors” below which a variable rate cannot fall even if a decrease would be consistent with a change in the applicable index. For example, assume that a card issuer offers a variable rate of 17%, which is calculated by adding a margin of 12 percentage points to an index with a current value of 5%. However, the terms of the account provide that the variable rate will not decrease below 17%. As a result, the variable rate can only increase, and the consumer will not benefit if the value of the index falls below 5%. The Board agrees that this practice is inconsistent with § 226.55(b)(2). Accordingly, the Board has revised comment 55(b)(2)-2 to clarify that a card issuer exercises control over the operation of the index if the variable rate based on that index is subject to a fixed minimum rate or similar requirement that does not permit the variable rate to decrease consistent with reductions in the index. (Emphasis added.)

What does this mean?  Are floors illegal?  Not really.  Remember, section 226.55 now states that you cannot change an interest rate on a credit card unless the change fits into one of the possible scenarios listed in the section.  One of those is the variable rate exception.  With a floor, that exception is now gone.  So, if you have a floor now, you really have a very complicated non-variable rate.  But the floor can remain. Only now, you'll need to issue a 45-day change in terms to move the rate up.  And that triggers a right to reject.  Here's a thought:  If your floor arrangement has "wiggle room, there may be no rush to remove the floor from existing accounts.  (But you may want to fix this for new accounts.)  Here's why:

Let's use a hypothetical situation.  Let's say you have a credit card that is prime (3 percent)  + a margin (5 percent), with a floor of 11 percent.  So, without a floor, the rate would be 8 percent.  But because of the floor, the member's APR is 11 percent.  Do you have to send out new disclosures right away to remove the floor and increase the margin?  Not necessarily.  In this hypothetical, prime could go up 300 basis points before the member's APR exceeds 11 percent.  That gives you "wiggle room" - some additional time.  With that in mind, you could sit back until you think the Fed will raise rates that would push the APR past 11 percent.  

But the bottom line is this: I think the guidance is misguided.  Here's why:

• Floors are a solid way of managing interest rate risk, which the Fed wants us to do - as evidenced by their decision to join in on the FFIEC interest rate risk guidance document.   
• The guidance will accomplish nothing.  Organizations will simply amend their agreements to get rid of floors.  But they'll also increase the margin so that the interest rate risk is properly managed.  But in doing so, they'll have to issue "change in terms" notices to all affected borrowers.  As I see it, the only beneficiary here is the U.S.P.S.  In addition, it will give all of us a black eye.  Consumers will think that their credit union or bank is evil (for increasing the margin) or incompetent (if they recently issued changes in terms that included a floor).   
• My colleague Steve pointed out that some consumers may actually be harmed by this.  Let's say a credit union has a variable rate with a margin, with a floor of 9.99 percent.  With rates so low, the margin + prime is at, say, 7 percent.  In this hypothetical, prime could increase 299 basis points before the member sees an increase on their credit card's APR.  But take away their floor, and most sensible organizations facing corporate assessments, high delinquencies, etc., will take steps to keep the interest rate the same.  So they'll remove the floor but increase the margin to make the rate...9.9 percent.  Only now, if the prime goes up at all, the member will see an increase in their rate immediately.  And those increases continue each time the Fed adjusts interest rates. 

Finally, this change is the equivalent of a regulatory meteorite.  It came out of nowhere, and we did not have a chance to comment on the idea.  I spoke with a credit union that just sent out 40,000 change in terms notices that include a floor.  Postage alone will be roughly $20,000 to correct the issue.  And that doesn't take into account member confusion.  The credit union professional told me this: if they had known that this was even a possibility, they would have thought twice about going down this road.  Now they are strongly considering issuing new notices that remove the floor, and....(you guessed it) increase the margin.

This reminds me of a scene from The Wedding Singer.  In the movie, Adam Sandler's character makes a series of poor decisions.  Invariably, someone gives him the perfect piece of advice...after he has made the bad decision and cannot turn back. Below is Adam's response to that advice.

Adam Sandler sums up my feelings perfectly about this guidance from the Fed. (Wav file.)

That is my response to the Fed.  Only, there's no way a credit union that implemented a floor could have known what was coming.  Again, they've been hit with a regulatory meteor.  There was no warning on this.  No time for us to comment.  It is frustrating, to say the least.

We'll make the Fed aware of our thoughts.  But I cannot say for sure what the chances are that this will be reversed.

***

Hey NAFCU Member: we're working on a overview document concerning the major Feb. 22 deadlines found within the Regulation Z final rule.  This is a work in progress.  We're getting a ton of phone calls, as you can imagine. So we'll update this as soon as we can.  For now, the document provides an overview, as well as detailed analysis of the following:

• Consideration of Ability to Repay & Issuing Cards to Consumers Under 21; and  
• Internet Posting of Credit Card Agreements 

 Members can access the document here.

FinCEN Ruling on CIP; Tom Petty

Posted by Anthony Demangone

Those unfamiliar with the Bank Secrecy Act's Customer Identification Program (CIP) requirements may not understand the issue with post office boxes and the CIP.  The two generally do not get along.  CIP requires that you gather a residential or business street address. 

This NCUA CIP FAQ shows the tension between post office boxes and CIP requirements. 

What address should be obtained for customers who live in rural areas who do not have a residential or business address or the residential or business address of next of kin or another contact individual? For example, is a rural route number acceptable?

Yes, the number on the roadside mailbox on a rural route is acceptable as an address. A rural route number, unlike a post office box number, is a description of the approximate area where the customer can be located. In the absence of such a number, and in the absence of a residential or business address for next of kin or another contact individual, a description of the customer’s physical location will suffice. (Emphasis added.)

This makes sense. The whole purpose behind the CIP is to gather information about prospective customers and members.  If a crime is being committed, law enforcement likes to kick down doors.  I have yet to see an episode of NCIS, NCIS: LA, CSI: Crime Scene Investigations, CSI: Miami, CSI: Las Vegas, CSI New York, Law and Order, Law and Order: Special Victims Unit, Numb3rs, Without a Trace,  Medium, or The Mentalist where they kick down a post office box.  Law enforcement wants to know where the criminals live, not where they pick up their mail.

But here's an issue.  What if a person is part of an address confidentiality program (ACP).  ACPs are found in 31 states, and they are used to protect victims of domestic violence, sexual assault and stalking.  Under ACPs, the PO Box can be used as their legal business address. 

So, what gives?

FinCEN made public a ruling yesterday that makes an exception.

Accordingly, in an effort to support [name of state ACP] requirements, as well as similar requirements that may arise in other states that have established an ACP, under 31 U.S.C. § 5318(a)(5) and 31 C.F.R. § 103.55(a), FinCEN authorizes the following exception to the requirement that a [financial institution] obtain a customer’s residential or business street address: a customer who participates in a state-created ACP shall be treated as not having a residential or business street address and a secretary of state, or other state entity serving as a designated agent of the customer consistent with the terms of the ACP, will act as another contact individual for the purpose of complying with FinCEN’s rules. Therefore, a [financial institution] should collect the street address of the ACP sponsoring agency for purposes of meeting its CIP address requirement.  (Emphasis added.)

***

Tom Petty? Waiting is the hardest part.  

We understand that NCUA will approve the final SAFE Act rule later this month.  Remember - this does not necessarily trigger the 6-month deadline to get everyone registered.  That kicks in when the federal registry is actually open for business. If you want a sneak peek, take a look at the  FDIC's final rule on the SAFE Act.  I bet ours will be very, very, very similar - if not identical.  

Regulation Z Final Rule - Sections Effective February 22, 2010

Posted by Steve Van Beek

Due to the size and scope of the recent final rule from the Federal Reserve, we have attempted to organize the new requirements into [somewhat] manageable sections.  Keep in mind that the sections below do not attempt to cover every requirement of the Regulation Z amendments but, rather, aim to organize the final rule so that credit union professionals can review and analyze the requirements in a more efficient manner.

As Anthony mentioned yesterday, some of the amendments have mandatory compliance dates of February 22, 2010 and others have mandatory compliance dates of July 1, 2010.  In order to prevent confusion, this posting only lists sections with mandatory compliance dates of February 22, 2010.

Let me offer a few tips before we go on:

• If you have colleagues who might benefit from this blog post, feel free to forward this on to them or utilize the "Email this" button at the bottom of this blog posting. 
• Remember, anyone can sign up to receive the compliance blog as a daily e-mail or in a RSS reader.  If you sign up for the daily e-mails, look for a confirmation e-mail that is a requirement before you start receiving the blog daily into your Inbox. 
• Consider saving this blog post in your Inbox for easy access to the links.
• Alternatively, click on the title of the blog post [which will take you to the actual compliance blog site] and then "right-click" the screen and select "Create Shortcut." This will put a link to this blog post on your desktop which could be a time saver in the future [browsers other than Internet Explorer may need to go to the toolbar rather than "right-click."]. 

What does this blog post do?

It cuts apart the 1155-page final rule and splits it into separate PDF documents.  Each section listed below has links to 3 PDF documents (some have 4 including model forms) which pinpoint where the particular requirement is discussed in the Federal Reserve's monster document.  Thus, if you want to work on understanding the new opt-in for over-the-limit fees you can click on the links under that subsection to review the relevant material without being distracted by other requirements.

What is in each PDF document? 

Regulatory Text - these PDFs contain that actual regulatory text of Regulation Z.

Official Staff Commentary - these PDFs contain the Federal Reserve's staff commentary which is the Fed's guidance in plain-English.  The commentary is a very useful tool to analyze for clarity regarding the requirements.

Preamble - these PDFs contain the Fed's section-by-section analysis of the new requirements.  The preamble discusses the proposed rule, comment letters received, and the rationale behind the Fed's decision to regulate (or not regulate) in a certain way.  The preamble can be an extremely important resource to understand the background behind the requirements. 

Note: The references to the Credit CARD Act simply identify the legal authority for the requirement.

Regulation Z - Requirements Effective February 22, 2010

Periodic Statements Sent 21-days Before Due Date

Regulation Z: 12 CFR 226.5(b)(2) Credit CARD Act: Section 106(b)

Regulatory Text Official Staff Commentary Preamble

Late Payment Disclosures on Periodic Statements

Regulation Z: 12 CFR 226.7(b)(11) Credit CARD Act: Section 202

Regulatory Text Official Staff Commentary Preamble

Repayment Disclosures on Periodic Statements – Minimum Payment Warning

Regulation Z: 12 CFR 226.7(b)(12) Credit CARD Act: Section 201

Regulatory Text Official Staff Commentary Preamble  Model Forms

Format of Late Payment and Repayment Disclosures on Periodic Statements

Regulation Z: 12 CFR 226.7(b)(13) Credit CARD Act: Section 201

Regulatory Text Official Staff Commentary Preamble  Model Forms

Subsequent Disclosures (i.e. Change-in-Terms Notices)

Regulation Z: 12 CFR 226.9(c)(2) Credit CARD Act: Section 101(a)

Regulatory Text Official Staff Commentary Preamble  Model Forms

Disclosures Upon Renewal of Credit Card (incl. Annual Fees)

Regulation Z: 12 CFR 226.9(e) Credit CARD Act: Section 203

Regulatory Text Official Staff Commentary Preamble

Increases in APR Due to 60-Day Delinquency

Regulation Z: 12 CFR 226.9(g) Credit CARD Act: Section 101(b)

Regulatory Text Official Staff Commentary Preamble

Right to Reject Changes-in-Terms

Regulation Z: 12 CFR 226.9(h) Credit CARD Act: Section 101(a)

Regulatory Text Official Staff Commentary Preamble

Crediting of Payments

Regulation Z: 12 CFR 226.10 Credit CARD Act: Sections 104; 106(a) & 102(a)

Regulatory Text Official Staff Commentary Preamble

[Includes subsections on payments at branches, payments on days the CU is not open for business, fees related to method of payment, and changes of address by card issuers.]  See Bookmarks in PDFs.

Timely Settlement of Estates

Regulation Z: 12 CFR 226.11(c) Credit CARD Act: Section 504

Regulatory Text Official Staff Commentary Preamble

Consideration of Ability to Repay & Issuing Cards to Consumers Under 21

Regulation Z: 12 CFR 226.51 Credit CARD Act: Sections 109; 301 & 303

Regulatory Text Official Staff Commentary Preamble 

Subprime Fees on Credit Cards

Regulation Z: 12 CFR 226.52 Credit CARD Act: Section 105

Regulatory Text Official Staff Commentary Preamble

Payment Allocation - Amount Above Min Payment to Highest APR Balance

Regulation Z: 12 CFR 226.53 Credit CARD Act: Section 104

Regulatory Text Official Staff Commentary Preamble

Double-Cycle Billing Prohibition

Regulation Z: 12 CFR 226.54 Credit CARD Act: Section 102

Regulatory Text Official Staff Commentary Preamble

Restrictions on Increasing APRs on Existing Balances

Regulation Z: 12 CFR 226.55 Credit CARD Act: Section 101(b)

Regulatory Text Official Staff Commentary Preamble

Opt-In Requirement Before Assessing Over-the-Limit Fees

Regulation Z:  12 CFR 226.56 Credit CARD Act: Section 102

Regulatory Text Official Staff Commentary Preamble

Marketing to College Students & College CC Agreements

Regulation Z: 12 CFR 226.57 Credit CARD Act: Section 304

Regulatory Text Official Staff Commentary Preamble

Internet Posting of Credit Card Agreements

Regulation Z: 12 CFR 226.58 Credit CARD Act: Section 204

Regulatory Text Official Staff Commentary Preamble  Technical Specifications

And, as they used to say at the end of G.I. Joe cartoons: "Now you know, and knowing is half the battle."  If only that were true.

1,155-page Final Regulation Z Open End Rule Drops

Posted by a frazzled Anthony Demangone

Yesterday, the Federal Reserve released the long-awaited final regulations that amend its open-end lending rules.  Here's what happened. 

• First, the Fed issued a final rule to withdraw Regulation AA (UDAP.)  The UDAP rule was overtaken by the Credit CARD Act, so the Fed withdrew it as "unnecessary."  The Fed explained that the UDAP requirements have been revised for consistency with the Credit CARD Act and have been incorporated in the new rule, linked above.  I expect that NCUA will withdraw its UDAP rule as well.
• Second,  the Fed issued another final rule to withdraw the Regulation Z final rule that they issued back on January 29, 2009.   This was the rule that had the original July 1, 2010 effective date.  The Fed has indicated that those requirements have been revised to be consistent with the Credit CARD Act, and those requirements have been incorporated within the massive Reg Z final rule.   How are they handling the two different compliance dates?

The new final rule is effective on February 22, 2010. However, to the extent consistent with the Credit Card Act, the Board has retained the July 1, 2010 mandatory compliance date for many of the provisions incorporated from the January 2009 Regulation Z Rule. The Board has provided additional discussion of the withdrawal of the January 2009 Regulation Z Rule and the mandatory compliance dates in the Supplementary Information for the new final rule.(Emphasis added.)

And the Fed also issued the massive, 1,155 page final rule to amend its open-end rules.  As noted above, it massages and incorporates the UDAP and original Reg Z open end rules. Here's a link to that 1,155 page document. 

Here's some useful links that we've created:

1. Save a copy of this final rule to your computer so that you don't have to hunt down the Fed's website every time you want to review it. 
2. Read the 12-page summary of major revisions.   
3. Do you just want to look at the regulations?  Here's a link to the regulatory language.  Granted, it is still 144 pages long.  But I added section bookmarks to help you navigate it.   
4. What rules apply to just credit cards?  Which rules apply to all open-end lending?  Look at this chart.
5. What are the mandatory compliance dates?  The Fed lays this out in excruciating, yet necessary detail, in these 37 pages.   

That should be enough to get you guys rolling.  Don't worry - we're not done on this issue.  Not by a long-shot.

Resource for the Credit Counseling Requirement

Posted by Anthony Demangone

Hey guys - sorry for the second post today.  But boy did I kick the hornet's nest with this morning's blog post. It seems that the credit counseling requirement found within the Reg Z proposal was not on everyone's radar.  And that's OK.  You'd need a NASA-powered radar to keep track of everything flying around within that proposal.

But here's some great news.  The National Foundation for Credit Counseling has created a free solution designed to meet the proposed requirement to provide information to credit card borrowers about at least three credit counseling agencies that are properly approved.  It may be worth your while to check it out.

• Here's an FAQ document that answers questions about their program.
• Here's their main website page on this issue.

If you have specific questions, their contact information is found within the links above.

Credit CARD Act --> Federal Reserve's Regulation Z

Posted by Steve Van Beek

As we prepare for the new requirements brought on by the Credit CARD Act of 2009, I wanted to remind credit unions to be sure to review the Federal Reserve's proposed rules to implement the requirements.  The Federal Reserve's proposal takes the new requirements and expands upon them and details the steps credit unions will need to take to comply. 

NAFCU prepared an "Overview of the Credit CARD Act" and put it on our compliance homepage.  This overview was drafted as a summary document to inform credit unions about the new requirements.  NAFCU will not be able to continue updating the overview as the requirements get implemented by the Federal Reserve.  It could still serve as a useful overview, however, as we move toward complying with the new requirements - be sure to look to the proposed rules for the details.  Here is a blog post that breaks the proposal into 25 topics to analyze.  

In short, the Credit CARD Act adds new requirements for credit unions - but the Federal Reserve's amendments to Regulation Z implement the new requirements and provide details and specifics that credit unions need in order to be in compliance.  Further, when the Federal Reserve finalizes its amendments - be sure to work off the final rules as they may have changed during the regulatory process from the proposed rules.

For an example, the Credit CARD Act did not appear to limit the minimum payment warning to credit card accounts.  However, the Federal Reserve used its authority to interpret the Truth in Lending Act (which the Credit CARD Act amended) to limit the repayment warnings to credit card accounts [at least in the proposal - we are waiting for the final version to confirm].  Anthony did a great job of explaining this in this blog post. 

ODP - A History Lesson; OTS CEO Letter on Credit CARD Act Fix

Posted by Anthony Demangone

This week, I want to focus on the upcoming changes to NCUA's Truth in Savings regulation.  Those changes require additional disclosure requirements for periodic statements and automated systems.  But today, I want to deliver a brief history lesson and the current state of affairs for overdraft protection programs. 

The regulation.  First, there is a regulatory foundation to our ability to offer overdraft protection programs.  You'll find it buried within NCUA's general lending regulation, at 12 C.F.R. 701.21(c)(3).  I haven't researched exactly when that got on the books, but it predates my arrival at NAFCU.

Please, pretty please.  Roughly 5 years ago, consumer groups started grumbling about overdraft protection programs.  In 2005, NCUA and others issued guidance and some regulatory changes.  First, NCUA issued Letter to Credit Unions 05-CU-03, which provides some guidance and best practices.  They also issued 05-CU-21 later in the year to share an AIRES questionnaire with credit unions concerning ODP programs.  Access both here.  That year, NCUA also amended its Truth in Savings regulation.  It added 707.11, which address ODP programs, and it added some guidance in other areas as well.  Those changes only affected credit unions that advertised their ODP programs.  All of these changes really didn't affect how you structured your ODP programs.  They simply affected or suggested how you were to market them.  Bills were drafted that would greatly limit our ability to charge fees for ODP programs, but these bills never made it into law.

Enough, already.  In 2009, things changed.  With Democrats firmly in control of the White House, Senate and House of Representatives, consumer group arguments against ODP programs found receptive ears.  A number of bills were drafted that would curtail the number of ODP fees we could charge or the amount of such fees.  To date, those bills are still percolating.  Regulators also kicked into high gear, amending two regulations to address ODP concerns.  NCUA and others amended their "Truth in Savings" regulations that mandates increased ODP disclosures for all institutions.  And Regulation E was amended to prevent certain overdraft fees without an affirmative "opt in" from affected consumers.  Will the regulatory changes blunt the legislative momentum of the various ODP bills on the Hill?  It is hard to say for sure.

What are the lessons here?  I'm not sure there are any clear ones.  But here's a possibility.  When consumer groups complain about perceived unfair practices, whether they involve credit cards, ODP, or mortgages, there will be those on the Hill that will listen.  If you derive income from any practice that consumer groups consider to be unfair - even if you do it above board and with a fair price - that income is at risk.  When Congress moves to reform, they do not use scalpels.  They use saws and axes.  We often get caught up in Congressional reforms, even as legislators admit that we are not part of the problem. 

Tomorrow, we'll start looking at the NCUA changes in detail.

***

Last week, the OTS released a CEO Letter that appears to be the first guidance issued by a regulator about the Credit CARD Act fix to the 21-day dilemma. Of note:

As originally enacted, § 163(a) of TILA applied not only to credit cards, but to all open end credit, including home equity lines of credit (HELOCs). Because HELOCs are home-secured, savings associations that offer them must also comply with an OTS rule that prohibits assessing a late fee if the borrower’s payment is received within 15 days after it is due.2 To accommodate this rule, many thrifts have drafted their HELOC agreements to require payment by the 15th of the month, but defer charging a late fee until the 30th day. Since contract terms are not easily changed, it has been difficult for associations to adjust their practices to comply with the requirement that consumers be given 21 days to remit payment. The correction discussed above means that this requirement will only apply to credit card accounts.

However, thrifts should note that TILA § 163(b) remains unchanged. Pursuant to § 163(b), when an open end creditor provides a grace period permitting consumers to repay without incurring a finance charge for a period of time after payment is due, the grace period must last at least 21 days. Moreover, the creditor must transmit periodic statements to consumers at least 21 days before their payment is due. Although HELOCs are not typically structured to include a grace period, thrifts should be aware that if they provide one, the requirements of TILA § 163(b) will apply.  (Emphasis added.)

Compliance Dates Reminder

Posted by Sarah Loats

There's quite a few compliance dates next year and the Federal Reserve sure seems to like July 1, 2010, as there are three fairly major rules effective that day. Let's recap, shall we (the links will take you to NAFCU's Final Regulation summaries):

1. Regulation Z open-end lending rules. Prior to the Credit CARD Act, the Federal Reserve issued final rules to the open-end lending rules. This was a major overhaul of the open-end lending rules, amending the rules for applications and solicitations, initial disclosures, periodic statements, and advertising, among other things.  For the changes that haven't been swallowed up by the Credit CARD Act, the effective date is still July 1, 2010.

2. FACT Act.  By July 1, 2010, credit unions must have in place policies and procedures regarding the accuracy and integrity of information provided to consumer reporting agencies.  This rule also addresses direct disputes from consumers.

3. Regulation E overdraft rules. This rule is probably fresh in your head, but again, the effective date is July 1, 2010.

As if that wasn't enough, we have quite a few more compliance dates coming up next year:

• RESPA - January 1.
• Truth in Savings (disclosures of overdraft fees on periodic statements and disclosure of account balances through automated systems) - January 1.
• Private Student Lending - February 14.  .
• Credit CARD Act - February 22.
• Reg GG - June 1.
• More Credit CARD Act (gift cards, reasonableness and proportionality of fees, reevaluation of credit card rate increases) - August 22.
• HELOC and closed-end mortgages amendments to Reg Z and SAFE Act registration requirements- who knows??? 

Maybe it's time to look into that year-long sabattical...

President Signs H.R. 3606 into Law

Posted by Anthony Demangone

Earlier today, President Obama signed H.R. 3606 into law, which provides a technical fix for the 21-day issue by limiting its affects to credit card accounts.  Let me know when you're done clapping.

OK.  Here's what that did.  With a stroke of the pen, the Truth in Lending Act has been amended.  The Fed will need to update regs and guidance to implement this, and we can expect that information when the Fed issues the final rule to implement the portions of the Credit CARD Act due to go into affect on February 22, 2010.  Those rules should come by year's end.  But no matter how long the Fed takes, the law was changed the moment President Obama's signature graced the document.

I cannot say with 100 percent certainty how the Fed will address this issue.  There always is a bit of haziness until you see what the final regs say.  Can credit unions that moved due dates simply move them back without some sort of notice?  I wouldn't think so.  But again, we'll have to wait for the final rule to know what the Fed really thinks about all of this. In any event, this sure is wonderful news. 

And with the news, it signals the end of one of the strangest chapters in my life as a compliance professional.

Regulation Z Proposal: Online Disclosures of Credit Card Account Agreements

Posted by Anthony Demangone

First, please accept my apology for such a post on a Friday. 

As you ready your credit union to comply with the massive changes to Regulation Z's open-end rules, do not put off today's topic too long.  While the online disclosure of credit card account agreements sounds like it could be simple...it simply is not.  In short, you'll need to post your credit card agreement on your website. And you'll have to submit them to the Fed as well.  The Fed will create a website where people can go to view all the credit card agreements that exist in American. 

Yee-haw.  Pop me some popcorn.  I can't wait.

In today's post, I wanted to give you a taste of what is involved.  For painful, excruciating detail, please refer to this document. 

• First, note that the Fed created a "small issuer" exemption.  If your credit union has less than 10,000 credit card accounts open (including dormant accounts), you are not subject to the requirement to submit agreements to the Fed. 
• The new requirements will be housed at 12 C.F.R. Part 226.58.
• Even if your agreements do not include pricing (i.e., APRs), you'll need to provide this information to the Fed, along with applicable fees.
• You only need to upload agreements to the Fed that you currently offer to the public.
• You'll need to register with the Fed, and upload agreements electronically to them 4 times a year.  The Fed indicates that it will provide specific details on how to do this in the near future. 
• While the quarterly submissions are generally due no later than the first business day after January 31, April 30, July 31, and October 31, there is special timing for the first two submissions.  The first submission would be due February 22, 2010, and the next one would be due August 2, 2010.
• Here's the rub.  Or one of them, anyway.  If you change your agreement, including pricing or provisions) you need to update the agreement on the next quarterly submission.  And if an agreement no longer is offered, you'll need to notify the Fed about that as well.
• Much of the specifics are outlined in Appendix N of Regulation Z.

As I said, I apologize for sending this to you on a Friday.

***

We are reworking our regulatory compliance newsletter.  After we began the process, we realized that we had a terrible name.  What happens when you let attorneys name a newsletter?  Well, we called ours...The NAFCU Regulatory Compliance Newsletter.  Pretty creative, huh?

Well, what should we call it?  We're asking you, NAFCU members, to come up with a new name for the new newsletter.  I'll give some sort of award for two entries: 1) one for the name we end up using; and 2) one for the name that makes me laugh the hardest.

Send ideas to [email protected].

***

Have a great weekend, everyone!  (Even you Buckeye fans.)

Reg Z Proposal: Late Payment Disclosures

Posted by Sarah Loats

Today we'll continue through the Regulation Z proposal and focus on late payment disclosures for periodic statements. For those of you familiar with the Federal Reserve's January 2009 rule, effective July 1, 2010, the proposed rule is revising that final rule in order to implement the new Credit CARD Act amendments to TILA. Here is the language from the proposed rule that relates to this provision.

Here are some items of note from the proposal:

- The requirements apply only to credit cards.

-The due date is required on the statement regardless of whether a late fee or penalty rate would be assessed.

-The due date disclosed must be the same date each month. A proposed comment clarifies that this means the same numerical day each month (i.e., the 25th of each month). Another comment provides that the credit union would be able to change the due date from time to time, such as in response to a member request, provided the new due date will be same date each month.

- Proposed staff comments explain that the date to be disclosed is the due date according to the "legal obligation between the parties" and that a courtesy period should not be taken into account.

-If the due date falls on a day the credit union does not accept payments, it must still reflect that day as the due date. An example provided in the proposed rule - the member's due date is on the 4th of each month, and the credit union does not accept payments by mail on July 4th. Under another portion of the proposal, the credit union would have to accept a payment received by mail on July 5th as timely, but it must still disclose the 4th as the due date.

The portion of the proposed rule relating to the formatting of the late payment (and repayment) disclosures can be found here.

An excerpt from the proposal summarizes the format requirements nicely:

Consistent with TILA Section 127(b)(12), as revised by the Credit Card Act, the Board proposes to retain the requirement in § 226.7(b)(13) that credit card issuers disclose the payment due date on the front side of the first page of the periodic statement. In addition, credit card issuers would be required to disclose the amount of any late payment fee and penalty APR that could be triggered by a late payment in close proximity to the due date. Also, the due date, late payment fee, penalty APR, ending balance, minimum payment due, and the repayment disclosures required by proposed § 226.7(b)(12) must be grouped together. See § 226.7(b)(13). The Board believes that these format requirements fulfill Congress’ intent that the due date and late payment disclosures be grouped together and be disclosed in a conspicuous location on the periodic statement.

Regulation Z Proposal: Substitute or Replacement Card Disclosures

Posted by Anthony Demangone

The Regulation Z proposal tackles a number of sticky issues.  The issue of substitute and replacement cards is one of them.  A member may request additional features to a credit card account that will require a change in the disclosures.  So, must you send a change in terms or a set of brand new initial disclosures?  Here's what the Fed is thinking.

    The Board understands that, when an existing cardholder requests new features or benefits, disclosure of the new terms pursuant to § 226.6(b) may be preferable because the cardholder generally will not want to wait 45 days for the new terms to take effect (as would be the case if notice were provided pursuant to § 226.9(c)(2)). Thus, this comment is intended to provide card issuers with some flexibility regarding whether to treat the substitution or replacement as the opening of a new account (subject to § 226.6(b)) or a change in the terms of an existing account (subject to § 226.9(c)(2)).
    However, the Board does not intend to permit card issuers to circumvent the disclosure requirements in § 226.9(c)(2) by treating a change in terms as the opening of a new account. Accordingly, the comment would further state that whether a substitution or replacement results in the opening of a new account or a change in the terms of an existing account for purposes of the disclosure requirements in §§ 226.6(b) and 226.9(c)(2) is determined in light of all the relevant facts and circumstances.  74 Fed. Reg. 54131.

The Fed proposes that creditors look at the following factors:

1. Does the member get a new credit card?
2. A new account number?
3. New features?
4. Does the card work at a greater or lesser number of locations after the change?
5. Was it done on an individual basis?
6. Does the card become a different type of card (does a charge card become credit card, for example)

When most of these facts are present, the substitution or replacement is really the opening of a new account, for which new account disclosures are required.  Note: the Fed is looking for comments on this issue.

If you want to read more about this issue, here's the part of the proposal that deals with this issue.

***

I just realized that is is November.  Where did this year go? 

21-Day Fix on to President's Desk; Reg Z Proposal: Timely Settlement of Estates

Update by Anthony Demangone 7:55 p.m., Thursday evening

I just received an email from our lobbying dynamo, Brad Thaler.   Just minutes ago, the U.S. Senate passed H.R. 3606 by unanimous consent. This bill would make a technical correction to the Credit CARD Act to limit the 21-day requirements to credit cards, instead of all open-end lending.  The legislation now goes to President Obama's desk.  He is expected to sign it within days.

Many thanks to all of you for your help in getting this legislation to this point. We'll update you on any developments.

***

Posted by Steve Van Beek

Today's blog will be a little lighter in content as we will take a look at a less controversial provision of the Fed's Reg Z proposal.  Section 226.11(c) requires Timely Settlement of Estates.  The summary of the provision lays out the main changes:

"E. Timely Settlement of Estates 

The Credit Card Act directs the Board to prescribe regulations requiring creditors to establish procedures ensuring that any administrator of an estate can resolve the outstanding credit card balance of a deceased accountholder in a timely manner. The proposed rule would impose two specific requirements designed to enable administrators to determine the amount of and pay a deceased consumer’s balance in a timely manner. First, upon request by the administrator, the creditor would be required to disclose the amount of the balance in a timely manner. Second, once an administrator has made such a request, the creditor would be required to cease the imposition of fees and charges on the account (including the accrual of interest) so that the amount of the balance does not increase while the administrator is arranging for payment."

Section 226.11(c) is broken down into three subsections.

• (1) General Rule. Creditors need to establish reasonable procedures to ensure administrators or executors of estates can determine the amount of and pay any balance on the credit card account. 

• (2) Fees and Charges. After receiving a request by an administrator or executor, the credit union would not be able to charge interest or late fees to the account.  There is an exception for a joint credit card accounts.       

• (3) Timely Statement of Balance. Upon request from an administrator or executor, the credit union would need to provide a statement balance within a reasonable period of time.  The proposal considers 30 days, from the date of the request, to be reasonable.  

 The staff commentary also provides examples and additional information (see pages 12-13).   

Have a great weekend!  I'll be spending my Saturday moving and hoping the rain holds off (currently 30% chance - but on moving day that might as well be 75%).  

Regulation Z Proposal: 21 Day Comment Clarification; NAFCU Online Training Free Trial

Posted by Anthony Demangone

When I look back on 2009, I might call this the year that lacked 6 words.  Had the Credit CARD Act contained "For a credit card account under..." much of our collective frustration could have been avoided.  And if I had hair, I would not be bald.

In any event, I thought I'd take a moment to recap where we are on the 21-day issue.

1. In May, the Credit CARD Act required us to mail or deliver periodic statements at least 21 days before the due date for all open-end loans in order to be able to treat those payments as late for any reason.

2. On July 15, the interim final rule that implemented the August 20 provisions of the Credit CARD Act.  And the rule did not stray from the Act.  We had to stick to the 21-day timing requirement, although the rule did create a "temporary" solution that would allow us to add a disclosure to our periodic statements if we could not fully comply with the 21-day requirement.

3. On September 29, the Fed issued a proposal to implement the February 22, 2010 provisions of the Credit CARD Act.   In the proposal, the Fed decided to republish the various proposals that it had issued recently that touch upon open-end lending.  A new comment clarifies the 21-day issue.  In short, it clarified the penalty for not complying with the 21-day proposal.  It seems to say that the prohibition against treating a payment late for any reason only lasts for 21 days after the mailing of a periodic statement.  This guidance appears to contradict what the Fed had issued in the interim final rule in July.

4. Just a few weeks ago, Congressman Jack Welch (D-VT) introduced a bill that would create a technical fix to alter the Truth in Lending Act to limit the 21-day provision to credit card accounts.  Last week, it seemed that the U.S. Senate was close to moving it on to President Obama's desk.  But this has not happened yet.

So we wait.

***

Next week, I will host a free go-to-webinar to highlight NAFCU's online training program, designed for volunteers and new employees. Specifically, the webinar will take place next Tuesday, November 3, from 2 to 3 p.m., EST.  You can sign up for the register using the link above.

I'll go over the ins and outs, and those who sign up will receive a free trial to the training program so that you can kick the tires.  There's a good BSA module within the training program, so this may be something that your credit union could use. 

Seminar; ODP; Interest Rate Freeze?

Posted by Anthony Demangone

First of all, hats off to Sarah Loats.  Last week, Steve and I were in Charleston for our annual regulatory compliance seminar.  While we learned, spoke and ate our way through Charleston, Sarah held down the fort and wrote a number of blog posts during a busy week.  Thanks, Sarah.

I thought the seminar went very well, as our speakers and the content were both top-notch.  And there were roughly 180 attendees from around the country soaking it all in.  If you haven't been to a NAFCU compliance conference (we do a certification school in the Spring and a seminar in the Fall), please consider it.  Here's a list of next year's conferences.

***

First, overdraft.  As Sarah pointed out, Senator Dodd and Rep. Maloney introduced legislation in the Senate and House that would greatly limit our ability to collect overdraft protection fees.  When I announced this news at seminar, you could feel the air leave the room.  Some of you have asked what can be done to counter the legislation.  Here's a thought: I wonder if any credit unions keep "thank you" letters from members who have used and enjoyed the credit union's overdraft protection program.  If you have such letters, it might be something to share with your representative and senators.  Of course, you'd want to redact any personal member information or seek their approval before sharing. 

***

I thought the next item was some cruel joke.  It wasn't.  Yesterday, Senator Dodd introduced legislation that would immediately freeze credit card interest rates on existing balances.   I don't have a ton of details on this bill yet.  At press time (when I'm typing this) it hadn't been introduced yet.  It is my understanding that the freeze would only last until the Feb. 22 provisions of the Credit CARD Act take affect. But let me go out on a limb. I don't like it.  Not one little bit. 

Reg Z Proposal: Payment Allocation

Posted by Sarah Loats

In my haste to put up a blog posting for last Friday, I left out the good news. I threw in a last second sentence about the House Financial Services approving a bill to move the deadline for the Credit CARD Act to December 1st, failing to mention that it would exempt from this earlier deadline card issuers with less than 2 million credit card accounts. Here's NAFCU's news story about this. That'll teach me to post something in a hurry. Maybe.

***

You may remember that the UDAP rule contained requirements regarding the allocation of payments in excess of the minimum payment. The Credit CARD Act rule contains a similar, but stronger rule. When different rates apply to different balances on a card, Regulation Z will require that any payment amount in excess of the minimum payment be allocated to the balance with the highest APR.

There are a few items of note:

• This rule does not regulate how the minimum payment must be applied.

• If a credit card account has a balance subject to a deferred interest rate program, that balance should be treated as having a 0% APR during the deferral period for payment allocation purposes.

• There's a wrinkle to this deferred interest rule. The proposed rule requires that the credit union must allocate any payments in excess of the minimum payment first to that deferred interest balance for the two billing cycles immediately preceding expiration of the deferred interest period.

Confused yet? The proposed staff commentary includes some good examples explaining this rule.

Reg Z Proposal: Crediting of Payments, Address Change

Posted by Sarah Loats

The Credit CARD Act provides that if the due date for a credit card payment is on a day that the credit union does not receive or accept payments by mail, it may not treat a payment received by any method the next business day as late for any purpose. For example, if a due date lands on a Sunday one month, the credit union would have to treat a payment received on Monday as timely. The Board's proposed rule implements this requirement in section 226.10(d), which clarifies that if the credit union accepts or recieves payments made on the due date by a method other than mail, such as electronic or telephone payments, the credit union is not required to treat a payment made by that method on the next business day as timely. The Board is also proposing to apply this to all open-end lending, not just credit cards, in order to have one consistent rule.

Also, if the credit union makes a material change to the address for  receiving credit card payments, it cannot charge a late fee, and such change causes a delay in the crediting of a payment for the 60-day period following he change, the credit union cannot charge a late fee. Here is the applicable text. One of the proposed comments provides a safe harbor:

3. Safe harbor. A card issuer may elect not to impose a late fee or finance charge on a consumer’s account for the 60-day period following a change in address for receiving payment or procedures for handling cardholder payments which could reasonably be expected to cause a material delay in crediting of a payment to the consumer’s account.

Oh, and as a little side note, the House Financial Services Committee approved legislation yesterday to establish the CFPA. They also approved the bill to move the effective date of the CARD Act to December 1st.

Happy Friday everyone!

Reg Z Proposal: Credit Cards to Young Consumers

Posted by Sarah Loats

The Credit CARD Act restricts a creditor's ability to provide young consumers with credit cards. The Federal Reserve Board proposes to implement these requirements in proposed section 226.51(b). In order to issue credit cards to such members, the application will have to:

1. include the signature of a cosignor, guarantor, or joint applicant who has attained the age of 21 and has the means to repay the debts incurred; or
2. include financial information indicating that the underage member has the ability to repay the debts incurred.

Remember Anthony's post about the requirement to assess the consumer's ability to make payments in general? This provision incorporates those requirements - either you will have to assess the cosignor's ability to make the payments, or if there isn't a cosignor, the underage consumer's ability to make payments, in accordance with section 226.51(a).

I think the most interesting part of this section of the proposal is the comments regarding Regulation B:

"Proposed comment 51(b)(1)-1 explains that when evaluating an application to open a credit card account or credit line increase for a consumer under the age of 21, creditors must comply with applicable rules in Regulation B (12 CFR Part 202). Given that age is generally a prohibited basis for any creditor to take into account in any system evaluating the creditworthiness of applicants under Regulation B, the Board believes that Regulation B prohibits card issuers from refusing to consider the application of a consumer solely because the applicant has not attained the age of 21 (assuming the consumer has the legal ability to enter into a contract). Furthermore, because TILA Section 127(c)(8) permits card issuers to open a credit card account for a consumer who has not attained the age of 21 if either of the conditions under TILA Section 127(c)(8)(B) are met, the Board believes that a card issuer may choose to evaluate an application of a consumer who is less than 21 years old solely on the basis of the information provided under § 226.51(b)(1)(ii). Therefore, the Board believes, a card issuer is not required to accept an application from a consumer less than 21 years old with the signature of a cosigner, guarantor, or joint applicant pursuant to § 226.51(b)(1)(i), unless refusing such applications would violate Regulation B. For example, if the card issuer permits other applicants of non-business credit card accounts who have attained the age of 21 to provide the signature of a cosigner, guarantor, or joint applicant, the card issuer must provide this option to applicants of non-business credit card accounts who have not attained the age of 21 (assuming the consumer has the legal ability to enter into a contract)."

It's a good reminder to that there isn't just one lending regulation, but rather an entire system of lending regulations, that we need to consider when implementing lending policies and procedures.

Reg Z Proposal: Marketing to Students

Posted by Steve Van Beek

The Credit CARD Act limits card issuers ability to market open-end consumer credit to college students.  The Federal Reserve has proposed to implement this restriction in new Section 226.57 of Regulation Z.  This posting will focus on the marketing to college students while a future blog posting will cover the restrictions and requirements related to creditors who offer "college affinity cards."

Definition of College Student Credit Card & College Student

The proposal defines "college student credit card" as a credit card offered to any college student.  The definition of "college student" would extend to any student attending an institution of higher education regardless of age and is not limited to undergraduate students but would apply to all students including those enrolled in graduate programs or joint degree programs.  

Prohibited Inducements

Credit unions will be prohibited from offering a college student "any tangible item" to induce a student to apply for or open an open-end consumer credit plan if the offer is made:

• On the campus of an institution of higher education;
• Near the campus of an institution of higher education; or 
• At an event sponsored by or related to an institution of higher education.    

Comment 57(c)-1 clarifies that a "tangible item" includes any physical item (such as a gift card, t-shirt, magazine subscription, etc.) but does not cover non-physical items such as discounts, reward points, or promotional credit terms.  Comment 57(c)-2 clarifies that if an item is offered to all students (and not dependent upon applying for an account) that the item is not an inducement.

Comments 57(c)-3 and 57(c)-5 helps explain which marketing activities are "near the campus" and which are "at an event sponsored by or related to an institution."  The proposal uses 1,000 feet to determine whether a location is "near the campus."  Comment 57(c)-5 indicates that an event is related to an institution if "the event uses the name, emblem, mascot, or logo of an institution of higher education in a way that implies that the institution of higher education endorses or otherwise sponsors the event."

What if the credit union mails an offer of a tangible item to a college student (at or near the campus)?  Comment 57(c)-4 indicates this would be prohibited because the offer for a tangible item was sent to a location on campus.  See pages 20-21 for the language of the comments to Section 226.57(c). 

Note: The prohibitions in subsection (c) applies to all open-end consumer credit plans and is not limited to credit card offers. 

If your credit union markets to college students, be sure to analyze how this proposal will impact your marketing plans.  Remember, this is a proposed rule.  While the Federal Reserve's hands are tied in some respects due to the statutory language of the Credit CARD Act, the Fed does have some latitude and flexibility.  

What about branches on or near campus?

The proposal does not provide any guidance for institutions that have branches on a college campus. Are exceptions allowed in these instances?  It does not appear so.  Thus, this section could prohibit the credit union from offering account opening bonuses to college students solely because the branch is located on or near the campus of an institution of higher education.  Interestingly, the college student would be able to go to another branch (that is not located on or near campus) and receive the bonus to open an account.  Remember, this section covers any open-end consumer credit plan.  

Send your comments to the Federal Reserve (or NAFCU if you are NAFCU-member) if you believe branches on or near a college campus are different and deserve an exception (i.e., because the student is coming to the credit union rather than the credit union coming to the student).  Try to focus your comments on why accepting applications and offering a bonus in a credit union branch on campus is different than a card issuer handing out t-shirts at a college football game to induce students to apply for credit card account.  

Reg Z Proposal: Subprime Fee Credit Cards; See You in Charleston

Posted by Steve Van Beek

The Credit CARD Act included a restriction on charging subprime fees on a credit card account during the first year the card is opened.  The Federal Reserve has proposed to implement this restriction in Section 226.52 of Regulation Z.  The Fed provides a description of these subprime cards on page 3 of the above PDF (page 159 of the proposed rule).

The limitations in Section 226.52 apply to fees assessed during the first year a credit card account is opened.  If a card issuer charges any fees to a credit card account during the first year an account is opened:

"(i) The card issuer must not charge to the account during that period [the first year] fees that in

total constitute more than 25 percent of the credit limit in effect when the account is opened; and

(ii) The card issuer must not require the consumer to pay any fees in excess of the total amount permitted by paragraph (a)(1)(i) of this section with respect to the account during that period [the first year]." 

The limitations in Section 226.52 apply throughout the first year the credit card is opened rather than only at account opening.  Pages 11-12 of the cut-out PDF contains a detailed example of Section 226.52's application.  

Comment 52(a)-3 clarifies that the credit limit to be used in the 25% calculation is the credit limit at account opening even if the credit limit is raised during the first year.  This restriction makes sense.  If a card issuer could raise the credit limit and use the new, increased credit limit to calculate the 25% ratio - the consumer would not receive the benefits of the increased credit limit because the card issuer would then be allowed to charge additional fees on the account.

Which fees does Section 226.52 apply to?  Comment 52(a)(2)-1 lists which fees are limited by Section 226.52 (page 13-14).  Covered fees include:

• Fees the consumer is required to pay for issuance or availability of credit (including an activity or inactivity fee);
• Any fee a consumer must pay to receive a particular credit limit; 
• Fees for insurance or debt cancellation coverage if required for the account; and 
• Fees the consumer is required to pay for transactions on the account (such as cash advance fees, balance transfer fees, foreign transaction fees, and fees to use the account for purchases). 

Fees for expedited payments, reproduction of periodic statements, or fees to reissue a lost or stolen card are not covered fees for Section 226.52.  Additionally, late payment, over-the-limit, or returned-payment fees are not subject to this restriction because they are fees related to the member's behavior rather than simply imposed by the credit union as a condition of the credit.  

The credit union will be required to refund or waive any fees that exceed the 25% threshold during the first year.  And, the credit union will not be able to collect these fees in any other manner.  See page 13 - Comment 52(a)(1)(ii)-1 for an example.

If your credit union offers credit card accounts with low credit limits, be sure to analyze whether these new restrictions will impact your cards.  Remember, the restrictions apply to fees assessed throughout the first year an account is opened. 

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Have a great weekend everyone!  If you are heading down to Charleston next week for Compliance Seminar, have a safe trip.  Anthony and I will see you down there.

Reg Z Proposal: Over-the-limit fees

Posted by Anthony Demangone

The financial services industry is really caught in a pickle.  The economy is bad, so our loan portfolios are hurting.  Every lending regulation known to man is being re-worked, so our heads are hurting.  The corporate credit union situation has us writing some unexpected checks to NCUA.  So our financials are hurting.  And to top it off, many forms of non-interest income are under attack.  I'm wouldn't be surprised to find out that we're under attack from aliens.  Its been that kind of year.

I mentioned non-interest income.  We all know about overdraft protection and interchange.  But the Credit CARD Act will chip away at over-the-limit fees.  In short, it will force us to obtain a member's consent before we can assess over-the-limit fees.  Here's the portion of the Regulation Z proposal that deals with this issue.  The restriction will become effective, in one form or another, by February 22, 2010.

Here are the highlights:

• You must have a member's express consent before you can charge an over-the-limit fee. Before obtaining consent, you must disclose the amount of the fee and any possible increase in the APR if the member goes over the limit.  You only need to obtain this consent once.
• The consent must be separate.  You cannot, for example, combine consent to over-the-limit fees with the application's signature line.
• If the member consents, you also have to provide notice of their right to revoke the consent on any periodic statement showing an over-the-limit fee.
• The proposal affects all consumers, so existing account-holders are NOT grandfathered.  In other words, this would apply to your entire credit card portfolio.
• Even if the consumer consents, you still are limited to no more than one over-the-limit fee per cycle.  And if the member goes over the limit, you can only charge a fee for that over-the-limit transaction for three billing cycles, if the member remains over the limit.
• A proposed comment clarifies that if you have a policy and practice not to pay or authorize transactions that you reasonably believe would take the member over his or her limit, you would not be subject to these over-the-limit requirements.

I can tell you that many organizations have announced plans to scrap these fees altogether.  With that in mind, before I would get too deep into research on this issue, I'd first determine whether your credit union wishes to continue charging these fees.  I'd also make it clear to those responsible for budgeting this fact: even if your credit union wishes to continue charging over-the-limit fees, you should see the revenues generated from over-the-limit-fees drop precipitously in 2010.

Reg Z Proposal: Limitations on Fees Related to Method of Payment; H.R. 3606

Posted by Steve Van Beek

The proposed Section 226.10(e) implements Section 127(l) of the Credit CARD Act.  Proposed 226.10(e) would not allow a separate fee to be charge for accepting payment on a credit card account - unless the payment was processed in an expedited manner by a member service representative.  The prohibition covers payments made by telephone (including a voice response unit), online or through the mail.

The Federal Reserve has proposed comments to the section to provide clarification.  Comment 10(e)-1 clarifies that a "separate fee" is one assessed to a member for making a single payment on an account (but does not include late payment fees as they are assessed for other reasons).  Comment 10(e)-2 defines "expedited" as a payment applied to the account on the same day or the next business day if received after the credit union's cut-off time.

Comment 10(e)-3 clarifies that consumer/member service representative does not include a voice response unit (VRU) or other automated process for accepting payments.  Rather, the payment must be expedited by an actual, live representative of the credit union before a fee could be charged.

This section is short (5 pages combined) and the Federal Reserve does a great job of describing and explaining this prohibition.  Remember, in some areas of the proposal the Federal Reserve's hands are tied due to the language of the Credit CARD Act.  Section 226.10(e) is one of these situations where the Fed had little wiggle room because Congress made it clear they did not want fees charged unless a live person expedited the payment.  

***

Yesterday, the House passed, by voice vote, H.R. 3606 which would make a technical correction to the Credit CARD Act that would clarify that the 21-day notice requirement only applies to credit card statements and not all open-end lending.  NAFCU will continue to work with the Senate to push this important piece of legislation.    

  

21-Day Fix?; RESPA FAQ Updated Again...

Posted by Anthony Demangone

We'll take a break from our march through the Fed's Reg Z proposal to discuss a major development on the 21-day issue.

Congressman Peter Welch (D-VT) has introduced a bill that would create a "technical fix" for the 21-day issue by amending the Truth in Lending Act to limit the reach of the controversial "21-day provision" to credit cards.  We hear that the the bill, H.R. 3606, is scheduled to be considered very soon - if not today.  But keep this in mind: should it pass the House, the Senate will have to act on the issue before it could become law.  Our lobbyists, as well as others, have been working this issue non-stop for months.  Stay tuned.

***

HUD has updated its RESPA Q and A guidance document again.  For those in charge of mortgage lending, I'd take a fresh look at this Q and A document. It is now 43-pages long, and there's a good table of contents that organizes the guidance.

Reg Z Proposal: Evaluation of Consumer's Ability to Repay; The Hearing

Posted by Anthony Demangone

Today, we'll discuss the Fed's proposal concerning a new requirement heading out way - evaluating a consumer's ability to repay their credit card debt.  Access the applicable regulatory text here.

In short, the proposal, if finalized, will require credit unions to establish that a consumer has an ability to repay his or her credit card before issuing it.  This differs quite a bit from certain methods I saw during college.  Those would be the mirror method (if you can fog it, you have a credit card) or the pulse method (if you have one, you have a credit card).

Here's a nice overview, from page 13 of the proposal.

However, because a creditor will not know the exact amount of a consumer’s minimum payments at the time it is evaluating the consumer’s ability to make those payments, the proposal would require creditors to use a reasonable method for estimating a consumer’s minimum payments and would provide a safe harbor that creditors could use to satisfy this requirement. For example, with respect to the opening of a new credit card account, the safe harbor would provide that it would be reasonable for a creditor to estimate minimum payments based on a consumer’s utilization of the full credit line using the minimum payment formula employed by the creditor with respect to the credit card product for which the consumer is being considered.

The review must include their income or assets, as well as their current obligations.  And you may also consider other facts as well, such as a review of a member's credit report.  The bottom line is this: you'll need to create reasonable policies and procedures to make sure these goals are accomplished.  And check out page 150 of the proposal: the Fed makes it clear that you do not have to verify information before the account is opened.

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Thank you all for your kind comments and well wishes before my testimony yesterday.  I think the hearing went well.  Then again, I may be biased. If you are interested, NAFCU wrote an article about the hearing here.

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Have a great weekend, everyone.  We'll be off on Monday, so we'll see you all on Tuesday.  For those who want a twins update, get the new heights and weights here.

Can I Have a Witness?

Posted by Anthony Demangone

As you are aware, Chairman Barney Frank (D-MA) and Congresswoman Carolyn Maloney (D-NY) introduced legislation to move up the effective date for pretty much all of the remaining provisions of the Credit CARD Act to December 1, 2009.

Today, I have the honor of testifying before the House Committee on Financial Services.  The Committee is holding a hearing on this legislation, as well as a bill that addresses interchange issues. My job is to give them our side of the story.  You can actually download my written testimony watch the hearing live here.  In short, I will do my best to underscore all the work that you all are doing, and how moving up the Credit CARD Act effective dates would create enormous problems for compliance shops.  I will carry the conversations I've had with many of you with me when I enter the hearing room.

Wish me luck.

Regulation Z Proposal: Double Cycle Billing

Posted by Anthony Demangone

Before we take a look at the proposal, I want to take a few minutes to discuss why I care about these proposed amendments to Regulation Z.  I've heard from a number of folks recently, and I can sum up their thoughts this way.

Enough! First, the Fed issues final rules to amend open end rules.  And there's the UDAP rules. Then the CARD Act throws that all out the window.  Then there's a final rule to implement the August 20 deadlines, and now this 841-page proposal appears to be just following the CARD Act.  Why don't we just wait for the final rather than burning brain cells trying to make sense of this proposal?

I feel your pain.  This regulatory process has been one for the books.  I shudder to think how many hours I wasted looking at the UDAP proposal.  My coworker Steve created a wonderful UDAP chart that is now good for...well, I guess you could line a hamster cage with it.  And now we have this 841-page...proposal.  So, we get to do this dance again when they issue a final rule.  So why do we care?

• The Fed's proposal, and ultimately, its final, have to track the CARD Act, which amends the Truth in Lending Act.  But the Fed does have the right to paint outside the lines if it thinks it is necessary to achieve the goals laid out within the Truth in Lending Act.  And they've already done this.  Case in point: the proposal indicates that payment warning requirements will only apply to credit card accounts.  That is good to know.
• The Credit CARD Act simply amends the Truth in Lending Act, which creates a bare-bone set of requirements.  The regs flesh out these requirements.  I always think of it this way: laws say what, while regs say how.
• Finally, the room for maneuvering is very small with this proposal.  Usually, with a rule like this, you'd get a year to implement changes.  This rule, by hook or by crook, will be finalized, with an effective date of February 22.  We have to start planning now.  If not yesterday.

OK, so let's take a look at what the proposal says about double-cycle billing.  Here's the regulatory text that Steve pulled together.

Let me sum up what the guidance says.

Don't do double-cycle billing.

All kidding aside, I don't know that there's much more to say on this one.  Except these two points:

1. If you want a very good example as to what double-cycle billing is, take a look at pages 173-174 of the proposal, which is also available via the link above.  Finally, someone provided an example of double-cycle billing that the average person can understand.
2. You may want to check with your card processor to see if you currently do double-cycle billing as outlined in this proposal.  If they aren't sure, or if they say yes, then I'd dig down into the language a bit more.  But for the most part, double-cycle billing isn't a credit union phenomenon.  Save your focus on provisions that will greatly change your current practices.

Reg Z Proposal: Increasing APRs on existing balances

Posted by Anthony Demangone

Steve penned a great post that breaks the 841-page Regulation Z open-end proposal into 25 major subjects.

Today, we'll begin our analysis with the section that addresses increasing APRs on existing balances. This link will take you to an 81-page snippet from the final rule that addresses this topic. 

And using this link, you can sign up to have the blog emailed to you each day.

The Feds proposal tracks the Credit CARD Act very closely.  The proposal would prevent creditors from applying an increased APR and certain fees and charges to existing balances, except in four areas:

1. When a temporary rate lasting at least 6 months expires.  For example, teaser or introductory rates.

2. When the rate increase is due to the variable-rate nature of an account.

3. When the creditor has not received a minimum payment within 60 days.  Good luck on this one.  If the member has not made a minimum payment in 60 days, I wonder how much good it does to increase the rate on existing balances.

4. When the consumer completes or fails to comply with the terms of a workout agreement. This one is a bit tricky.  If you need additional details, a nice discussion begins on page 800 of the proposal. 

Also, the rule clarifies that when you've reduced the APR on existing balances to comply with the SCRA, you can increase the rate on existing balances once the SCRA no longer applies.

These proposed rules would be housed at 12 C.F.R. Section 226.55. Here are a few things that caught my eye.

If you are thinking of converting non-variable rate cards to a variable rate card, you may want to consider doing it sooner rather than later.  Take a look at this proposed comment. 

Because the conversion of a non-variable rate to a variable rate could lead to future increases in the rate that applies to an existing balance, proposed comment 55(b)(2)-4 clarifies that a non-variable rate may be converted to a variable rate only when specifically permitted by one of the exceptions in § 226.55(b). For example, under § 226.55(b)(1), a card issuer may convert a non-variable rate to a variable rate at the expiration of a specified period if this change was disclosed prior to commencement of the period. P. 194 of the proposal.

The general prohibition on increasing rates or fees applicable to existing balances is just that. Check out this proposed comment.

However, as discussed above, the prohibition on increases in rates, fees, and finance charges in revised TILA Section 171 applies only to “outstanding balances” as defined in Section 171(d). Accordingly, proposed § 226.55(b)(3) provides that a card issuer may generally increase an annual percentage rate or a fee or charge required to be disclosed under § 226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) with respect to new transactions after complying with the notice requirements in § 226.9(b), (c), or (g).  Page 195.

Oh, and there's one fact that you won't see discussed within this section.  Keep in mind that the the prohibition concerning increasing the APR on existing card balances does not apply yet.  If you give notice now (and until it becomes effective) and the member does not reject the change, you can apply the increased rate to new transactions and the member's existing balance.  But also keep in mind another provision that will require you to revisit any APR increase for credit cards at least 6 months after the increase to see if the justification for the increased still exists.

Reg Z Proposal to Implement the Credit CARD Act - 25 Sections To Analyze

Posted by Steve Van Beek

Last Thursday, I asked the readers if our approach to handling the massive Reg Z proposal to implement the Credit CARD Act provisions was manageable and if we should continue.  The answer was a resounding: Yes, please!  Starting tomorrow, we will begin analyzing these sections, one-by-one. 

Below you will find 25 sections that we have "ripped out" of the Reg Z proposal and placed in separate PDF documents organized by topics.  These individual PDFs contain the preamble (i.e. section-by-section analysis), proposed regulatory text, and the proposed official staff commentary to each particular section.  We have also added a cool strike through feature - which should help clarify which information in each individual PDFs we will be focusing on.  

Remember, anyone can sign-up to receive the compliance blog each day.  If you have colleagues who may be interested, feel free to forward this e-mail and have them click this link to sign-up to receive the blog each day via e-mail.  

Tip: Try to take a risk-based approach to these sections.  For example, if your credit union does not offer credit cards with annual fees, leave that section for later (same with sections like double-cycle billing) - and focus on the sections that will definitely impact your credit union (i.e. repayment disclosures, payment allocation, increasing APRs on existing balances, etc.).  

Main Changes to Reg Z to Implement the Credit CARD Act Provisions

Increasing APRs on Existing Balances

Evaluation of Ability to Repay

Credit Cards to Consumers under 21

Marketing to Students

Limitations on Over-the-Limit Fees

Timely Settlement of Estates

Online Disclosure of Credit Card Agreements

Subprime Fees on Credit Cards

Payment Allocation

Double-Cycle Billing

Substitute or Replacement Card Disclosures

Clarification of 21-day Comment

Late Payment Disclosures

Repayment Disclosures

Format of Late Payment and Repayment Disclosures

Subsequent Disclosures (i.e. Change-in-Terms)

Disclosures Upon Renewal of Credit Card

Increases in APR Due to Delinquency

Right to Reject Changes-in-Terms

Payments - Generally

Payments - Specifics - Cut-off Times

Payments at Financial Institution Branches

Crediting of Payments - Closed-Office Days

Limitations on Fees Related to Method of Payment

Change of Address by Card Issuer

Bonus: Model Forms from Appendix G (large document - useful to get a visual of some of the changes).    

Minimum Payment Warnings; Right to Cancel; NCUA Regulatory Alert

Posted by Anthony Demangone

I'm sure that many of you are still digging through the 841-page Reg Z proposal.  So are we.  Today, I want to clarify two major issues that we've discovered within the proposal.  Both should address questions that many of you have.

Minimum payment warnings.   The Credit CARD Act appeared to require detailed minimum payment warnings for all open-end credit.  The proposed rule issued by the Fed applies the minimum payment warnings only to credit card accounts.  The Fed did not take this issue lightly.  But they did reach this conclusion:

...the Board proposes to use its TILA Section 105(a) and 105(f) authority (as discussed above) to exempt overdraft lines of credit and other general purpose credit lines from the repayment disclosure requirements, because in this context the Board believes the repayment disclosures are not necessary to effectuate the purposes of TILA. Page 53  of the Proposal.

The Fed went to great length in explaining itself on this issue.  They spend 8 pages walking you through the payment warning issue, starting at the Bankruptcy Act and continuing on through the Credit CARD Act and various Regulation Z proposals.  The details might come in handy if you wanted to comment to the Fed in support of this decision. (Hint, hint.)  Access the detailed explanation here.

Right to Reject for Increased APRs.  The Credit CARD Act appeared to give consumers the right to cancel any proposed interest rate hike for credit card accounts.  That right, under the proposal, would be eliminated.  The Fed's rationale makes sense.  In short, due to other protections created by the Credit CARD Act, a consumer that rejects an increased APR really does not gain any substantive rights.  In fact, it may end up hurting consumers, as they may think that rejection blocks the increase while allowing them to use the card with no affect.  Access the Fed's rationale here.

***

In related news, NCUA issued Regulatory Alert 09-RA-10.  Under Regulation Z, when a credit union changes material terms or increases an APR, they must give 45 days notice.  That being said, the credit union can begin charging the higher rate or implement the new significant term 14 days after they mail the change-in-terms disclosure.  But the credit union is not required to notify members about the 14-day wrinkle.  In the alert, NCUA suggests that credit unions disclose this fact by inserting the following language in the notice:

NOTE: Even if you reject this change in terms, the new terms will be applied to any transactions on your account that occur on or after [INSERT DATE].

Please read the alert for additional details.

***

NAFCU is offering a webcast next week that will address the changes to Reg Z brought about by the Credit CARD Act.  Read all about it and download a registration form here.  The speakers, Obrea Poindexter and Oliver Ireland, are top-notch. Personally, I look forward to hearing what they have to say.  NAFCU members and non-members can sign up.

Dissecting the Reg Z Proposal on Credit Cards

Posted by Steve Van Beek

Anthony did a great job yesterday with an introduction to the new proposed rules and how to handle the 841-pages of information.  If you have begun reading through the proposal, you are aware of how difficult it is to focus on one particular issue.  The Federal Reserve discusses a particular topic in the section-by-section analysis, then in the proposed rule itself as well as the proposed official staff commentary.  The difficulty is that these discussions are spread throughout the 841 page proposal.

In order to help myself stay organized and focused on a particular issue - I've created separate documents that includes only the Federal Reserve's discussion on one topic.  For example, I created this 11-page PDF document which highlights the Federal Reserve's changes to 12 C.F.R. 226.9(e).  This document contains only the portions of the proposed rule that talks about the "Disclosures Upon Renewal of Credit Cards."

The document is composed of three separate parts:

1. Pages 1-5 consist of the Fed's section-by-section discussion of their proposed changes to 226.9(e).
2. Pages 6-7 contain the actual regulatory text of the proposed changes to 226.9(e). 
3. Pages 8-11 contain the official staff commentary to proposed 226.9(e). 

I have found this as a useful tool in dissecting the 841-page proposal into smaller, manageable pieces in order to focus on specific changes - in this case on the rules governing "Disclosures Upon Renewal of Credit and Charge Cards."  

For comparison purposes, the current language in 12 C.F.R. 226.9(e) can be found here.  Additionally, here is our past blog posting on the changes to this 226.9(e) which were mandated by Section 203 of the Credit CARD Act.

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My thought is this approach will allow us to focus on specific topics in the proposed rule rather than being overwhelmed by the size and complexity of the rule as a whole.  What are your thoughts?  Is this a manageable way to work through the proposal?  Leave a comment or shoot us an e-mail. 

Here are two more examples:

Limitations on Fees Related to Method of Payment - 226.10 (e)

Changes by Card Issuer - 226.10(f) - (Discusses a Creditor Changing their Mailing Address)

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.

Federal Reserve Issues Proposed Rules on Credit Card Provisions

Posted by Steve Van Beek

Earlier this morning, the Federal Reserve issued its proposed rules to implement the Credit Card Act provisions effective on February 22, 2010.  The proposed rules amend Regulation Z and are contained in a PDF at the bottom of the press release.  The proposed rules are 842 pages long (including background, preamble, the regulations, official staff commentary, and model forms).  I'd save the large PDF to your desktop as a starting point.    

Tomorrow morning we will discuss a game plan for reviewing this proposed rule.  One thing to note is the short notice-and-comment rulemaking phase:  "Comments on the proposal must be submitted within 30 days after publication in the Federal Register, which is expected shortly."

 

CARD Act Deadlines to Move Up?!?; RESPA: Section 3500.7(c) and (d)

Posted by Anthony Demangone

Yesterday, Reps. Barney Frank (D-MA) and Carolyn Maloney (D-NY) introduced legislation that would move up the compliance deadline for the remaining provisions of the Credit CARD Act to December 1, 2009.

Read the Financial Services Committee press release here.
Download the legislation here.
Here's a link to the original Credit CARD Act.

The legislation is deceptively short.  It basically says this: Anything that was effective 9 months after the Credit CARD Act was enacted is now effective December 1, 2009.  And it added additional provisions to move up the effective dates concerning gift cards, reasonable fees and the "look-back provision" concerning increased APRs to December 1, 2009 as well.

OK, you can pick up your jaw now.  Before we hit the panic button, this legislation must pass numerous hurdles before it could become law.  NAFCU's lobbyists are actively communicating with all the necessary parties to let them know the enormous compliance burdens this would cause.  Not to mention the fact that it would pretty much ruin my birthday and Thanksgiving, which fall on the same day this year.

Personally, I see this as Reps. Frank and Maloney voicing their displeasure (loudly) with the financial institution industry.  This comes from the press release.

“Pew Charitable Trust reports that interest rates have spiked by an average of 20% on credit cards representing more than 91% of the $864 billion in outstanding credit card balances. It’s clear that credit card companies are taking advantage of this period between the signing of my bill and the current effective date,” Rep. Maloney said. “The breadth and depth of the rate hikes happening now point to the need for faster consumer protections. Americans need relief now.”

Stay tuned, but don't panic yet.

***

Let's move on to our RESPA overview.  Let's continue with the GFE requirements, shall we?

Section 3500.7(c).

GFE Expiration. A credit union's estimates of the charges and terms on the GFE must be available for at least 10 business days.  But you can extend that time period if you wish.  This requirement does not apply to everything, thank goodness.  It doesn't apply to the interest rate, charges and terms related to the interest rate, and per diem interest.

It could have been worse.  Consumer groups wanted 30 days.

I again underscore the fact that the 10-day period doesn't apply to interest rates.  If you don't believe me, here's HUD's take on this issue from the preamble to the final rule:

Accordingly, the final rule provides that the interest rate stated on the GFE will be available until a date set by the loan originator for the loan. HUD is not requiring the interest rate to be available for any specific length of time.The final rule provides that the loan originator indicate on the GFE the period during which the interest rate is available. After that time period, the interest rate, the interest rate related charges, and loan terms, including some of the loan originator charges, the per diem interest, and the monthly payment estimate for the loan could change until the interest rate is locked.  (Emphasis added.) 73 Fed. Reg. 68,216.

There was only one question and answer on HUD's FAQ document that addressed this:

Q: When does a GFE expire?

A: If a borrower does not express an intent to continue with an application within ten business days after the GFE is provided (or such longer time period specified by the loan originator), the loan originator is no longer bound by the GFE.

Section 3500.7(d).

This section gets to content and form of the GFE.  Rather than go through all f that here, I think you'd be best served to review this post, where I highlight the fact that Appendix C of the final rule will answer most questions concerning how to complete the GFE.

***

Have a great weekend, everyone.  Even you Hawkeye fans.

Updated Overview of Credit CARD Act

Posted by Steve Van Beek

NAFCU has updated its Overview of the Credit CARD Act (NAFCU-member only).  This update goes into further detail for the provisions which will be effective February 22, 2010.  Obviously, we are all waiting to see how the Federal Reserve regulates these provisions in its proposed (and then final) regulations.  

Each updated section includes a topic list, effective date, sumamry, analysis, and related notes to help explain some of the upcoming requirements.  Below is an example of one of the updated sections.  Here is a sample:

"Sec. 203. Renewal Disclosures.

Topics: Renewal Disclosures for Annual Fees

Effective Date: February 22, 2010. Blog Posting Here

Applies to: Credit Cards with Annual Fees

Summary: This section amends Section 127(d) of TILA which details the process by which card issuers charge annual fees on existing accounts. The section removes the prior paragraph (2) which was a special rule that allowed card issuers the ability to provide a renewal disclosure on the periodic statement where the annual fee was imposed – if the card issuer also allowed 30 days for the consumer to reject the annual fee and close the account. This option has been removed from TILA.

Analysis: If your credit union relied on the “special rule” [or “delayed notice” as it is called in Regulation Z – 12 C.F.R. 226.9(e)(1)] for providing the renewal disclosure for a credit card with an annual fee, you will need to change your procedures due to the removal of the “special rule.”

After February 22, 2010, Section 127(d) of TILA will appear as follows:

“(d) DISCLOSURE PRIOR TO RENEWAL.—

(1) IN GENERAL. -- A card issuer that has changed or amended any term of the account since the renewal that has not been previously disclosed or imposes any fee described in subsection (c)(1)(A)(ii)(I) or (c)(4)(A)(i) shall transmit to a consumer at least 30 days prior to the scheduled renewal date of the consumer's credit or charge card account a clear and conspicuous disclosure of—
(A) the date by which, the month by which, or the billing period at the close of which, the account will expire if not renewed;
(B) the information described in subsection (c)(1)(A) or (c)(4)(A) that would apply if the account were renewed, subject to subsection (e); and
(C) the method by which the consumer may terminate continued credit availability under the account.
(2) SHORT-TERM RENEWALS.--The Board may by regulation provide for fewer disclosures than are required by paragraph (1) in the case of an account which is renewable for a period of less than 6 months.”

Therefore, the credit union would have to provide information about the annual fee or other periodic fee at least 30 days before the annual fee [or another of the fees described in subsection (c)(1)(A)(ii)(I) or (c)(4)(A)(i)] is assessed and the card is renewed. The notice must also include information on how the member can cancel the account before the imposition of the annual fee.

Note: Regulation Z, 12 C.F.R. 226.9(e)(3) does allow this 30-day advance notice of the credit card renewal to be disclosed upon the periodic statement. However, if the notices are on the back of the periodic statement – the credit union would need to make a reference to the disclosures on the front of the periodic statement.

Amendments Needed: The Federal Reserve will need to amend Regulation Z – Part 12 C.F.R. § 226.9(e) – to reflect the removal of the “Delayed Notice.” Existing language of Reg Z – 12 C.F.R. § 226.9(e) is here."

***

We will continue our RESPA discussions tomorrow.  

Switching to Variable-Rate Credit Cards?

Posted by Steve Van Beek

Due to some of the Credit CARD Act restrictions, quite a few credit unions are discussing whether to switch from traditional fixed-rate credit cards to variable-rate credit cards.  More have already made the switch.  And, as this Wall Street Journal article notes, big banks have been migrating their accounts as well.    

This discussion comes with plenty of risks to analyze and decisions to make.  I will try to pull them apart and analyze them separately below.  

Use of "Fixed" to Describe a Credit Card

Section 103 of the Credit CARD Act places restrictions on the use of "fixed" to describe a credit card account.  After February 22, 2010, the credit union will only be able to use "fixed" to describe cards that will never increase - or indicate a period of time where the rate will be fixed (i.e. "fixed rate for two years").  

If you do not want to change to variable-rate cards - and you want to retain the ability to increase rates in the future (via 45-day advance notice subject to the right to cancel) - you will want to refer to your credit cards as "non-variable."  Thus, you would have a "non-variable 9.99% APR" or just "9.99% APR" rather than a "Fixed 9.99% APR."  Remember, after February 22, 2010, if you continue to refer to your non-variable rate credit card accounts as "fixed" and advertise them as "fixed" - you will lose the ability to raise the APR on those accounts (unless you clearly disclose the period of time the card will be fixed).  Work with your marketing folks to make sure everyone is on the same page.

Making the Switch - 45-days Advance Notice & Right to Cancel

If the credit union decides to switch from a fixed/non-variable rate to a variable-rate, it must give 45-days advance notice and the right to cancel to the member.  What if the change results in a lower APR?  Is the change-in-terms notice and right to cancel still applicable?  Yes, as the Federal Reserve indicates in the official staff commentary:

"4. Changing from a non-variable rate to a variable rate. If a creditor is changing a rate applicable to a consumer's account from a non-variable rate to a variable rate, the creditor must provide a notice as otherwise required under §226.9(c) even if the non-variable rate is higher than the variable rate at the time of the change." Comment 4 from the Official Staff Commentary to 12 C.F.R. 226.9(c)(2)(v).

This makes sense.  Even though the variable rate may be lower, a major term of the account has been changed.  The account's APR will now fluctuate in accordance with an established index, outside of the FCU's control, which allows the APR on the account to increase if the index increases - without advanced notice.

Impact on Outstanding Balances

The Credit CARD Act also includes restrictions on raising the APR on outstanding balances.  That restriction becomes effective February 22, 2010.  If the credit union were to switch to variable rates prior to February 22, 2010, that change could apply to the member's outstanding balance on the account.  If the credit union made the switch after February 22, 2010 - only new transactions would have the new variable rate and the outstanding balance would remain at the prior, non-variable APR.

Further, variable-rate accounts have an exception to restriction on raising the APR on outstanding balances.  For example, assume your accounts have a variable 9.99% APR consisting of the WSJ prime rate (ex: 4.99%) and a 5% margin.  If the WSJ prime rate, an index outside of the FCU's control, raises to 5.49% - the FCU's credit card APRs could rise to 10.49% without a requirement for the advance notice and the right to cancel.  The increased APR would apply to the outstanding balance as well as future transactions.

In contrast, if the credit union needs to increase a non-variable rate to address the same interest rate risk - the procedure is not as easy.  The credit union would need to send a 45-day advance notice of the increase in APR - along with the right to cancel - to its members.  If a member does not cancel the change, the change could only apply to future transactions and not the member's outstanding balance.  This is because the exception only applies to variable-rate accounts where the APR increase is outside the FCU's control.  In the non-variable context, the credit union has made the decision to increase the APR.

Making the Switch After February 22, 2010

If the credit union decides to make the switch until after February 22, 2010, the outstanding balances on the accounts will remain at the prior, non-variable APR.  The restriction on raising the APRs on outstanding balances goes into effect on February 22, 2010.  What if the credit union switches to a lower variable-rate APR?  It is unclear how the Federal Reserve's forthcoming proposed regulations will address this situation.  We will know by February 22, 2010 how the Fed answers this question.  

Forty-Five Days Advance Notice & Right to Cancel

Remember, if the credit union decides to switch from "fixed" or non-variable rates to variable rate for its existing credit card accounts - the 45-day advance notice and right to cancel under 12 C.F.R. 226.9 apply.  Those requirements became effective August 20, 2009.  

Wild-Card - The 6-month "Look-back Provision"

As discussed in this blog posting, Section 101 of the Credit CARD Act requires that financial institutions must do a "6-month review" of credit card accounts where the APR has been increased since January 1, 2009 to determine if the same conditions apply.  Senator Dodd has sent letters to the regulators pressing them to examine closely on this issue.  Unfortunately, we do not know how the Federal Reserve will interpret this section.  This subsection will be effective August 22, 2010 - but will apply to increases in APRs since January 1, 2009.  If the credit union is raising APRs (regardless of whether it involves a switch to variable rates), be sure to document the reasons for the increased APRs.  This documentation will come in handy for performing the 6-month reviews and for showing examiners your due diligence.

More CARD Act; Can I Have a Witness?

Posted by Anthony Demangone

The OCC issued a very interesting bulletin recently.

The bulletin describes a strange quirk found within the Regulation Z interim final rule, specifically concerning the 45-day change in terms requirements. As we are all aware, we now must give 45-days notice when we increase the APR or change significant terms on a credit card.  And now members have the right to reject those changes.

However, here's what most consumers don't realize: under the rules, the new rates or terms can be applied to any transaction that occurs more than 14 days after the notice is provided – even if the consumer ultimately rejects the changes. The changes to Regulation Z do not require us to tell members about this fact.

Step in the OCC.  Via the bulletin that is linked above, the OCC is directing national banks to include an additional disclosure to notify consumers of this consequence. The OCC hopes that it will minimize confusion.

Here's the relevant language from the bulletin:

To avoid unnecessary consumer confusion, national banks should include the following (or similar) additional information in 45-day advance notices to alert the consumer, if applicable, to the imposition of the new terms on transactions that occur more than 14 days after the notice is provided, regardless of whether the consumer rejects the changes:

NOTE: Even if you reject this change in terms, the new terms will be applied to any transactions on your account that occur on or after [INSERT DATE].

Now, this is an OCC bulletin, so did does not apply to federal credit unions.  Time will tell whether NCUA moves in this direction.  But you may see compliance article drafted about this, and I wanted to bring it to your attention.  Oh, and nothing would prevent you from voluntarily following the OCC guidance.

***

Today, I have the honor of testifying before the House Small Business Committee on the issue of pandemic preparedness.  I will do my best to show how hard the financial services industry, including federal credit unions, has been working on this issue.   With that in mind, here's some good pandemic resources:

• NCUA Letter to Credit Unions 09-CU-13. The letter focuses on hurricanes and the swine flu development.

• NCUA Letter to Credit Unions 08-CU-01. This letter really is the backbone of NCUA's guidance on pandemic issues. 

• NCUA Letter to Credit Unions 06-CU-06.  This was the first piece of pandemic guidance issued from NCUA.
• Part 749, Appendix B.   Don't forget about this new appendix to NCUA's recordkeeping rule.  It touches upon business continuity planning issues.

Decreasing Credit Limits; Mention the Blog

Posted by Steve Van Beek

The Federal Reserve's Interim Final Rules cover more than just the 21-day issue.  For example, they address whether advance notice is required to decrease a member's credit limit on a credit card.  Forty-five days advance notice is not required and the right to cancel does not need to be given if a card issuer determines it necessary to reduce a member's credit limit.  However, the issue is more complex than it first appears.

The official staff commentary to 12 C.F.R. §226.9(c)(2)(v) states:

"9(c)(2)(v) Notice not required.
1. Changes not requiring notice. The following are examples of changes that do not require a change-in-terms notice:
i. A change in the consumer's credit limit except as otherwise required by §226.9(c)(2)(vi)......"

The referenced section, 12 C.F.R. §226.9(c)(2)(vi) reads as follows:

"(vi) Reduction of the credit limit. For credit card accounts under an open-end (not home-secured) consumer credit plan, if a creditor decreases the credit limit on an account, advance notice of the decrease must be provided before an over-the-limit fee or a penalty rate can be imposed solely as a result of the consumer exceeding the newly decreased credit limit. Notice shall be provided in writing or orally at least 45 days prior to imposing the over-the-limit fee or penalty rate and shall state that the credit limit on the account has been or will be decreased."  (emphasis added).

The Federal Reserve explained its rationale in the preamble to the Interim Final Rules.  In essence, the rules are designed so that a card issuer can not reduce a consumer's credit limit - without notice - and then assess over-the-limit fees and penalty rates on the consumer for exceeding the reduced credit limit.

"Section 226.9(c)(2)(vi) requires an issuer to provide a consumer with 45 days' advance notice that a credit limit is being decreased or will be decreased prior to the imposition of any over-the-limit fee or penalty rate imposed solely as the result of the balance exceeding the newly decreased credit limit. The Board is not including a decrease in a consumer's credit limit itself as a significant change in a term that requires 45 days' advance notice, for several reasons. First, the Board recognizes that creditors have a legitimate interest in mitigating the risk of a loss when a consumer's creditworthiness deteriorates, and believes there would be safety and soundness concerns with requiring creditors to wait 45 days to reduce a credit limit. Second, the consumer's credit limit is not a term generally required to be disclosed under Regulation Z or TILA. Finally, the Board believes that Sec.  226.9(c)(2)(vi), as adopted, adequately protects consumers against the two most costly surprises potentially associated with a reduction in the credit limit, namely, fees and rate increases, while giving a consumer adequate time to mitigate the effect of the credit line reduction."  

There is another wrinkle to this situation as well.  Section 226.9(g) requires 45-days advance notice and the right to cancel prior to imposing the penalty APR to a member's account.  However, one of the exceptions is if the credit union has provided notice of the credit limit decrease and indicates to the member that the penalty APR will apply if the member's balance exceeds the reduced credit limit after 45-days expire from the date of the notice.  Here are the details:

"(4) Exceptions —
.............
(ii) Decrease in credit limit. A creditor is not required to provide, prior to increasing the rate for obtaining an extension of credit that exceeds the credit limit, a notice pursuant to paragraph (g)(1) of this section, provided that:
(A) The creditor provides at least 45 days in advance of imposing the penalty rate a notice, in writing, that includes:
( 1 ) A statement that the credit limit on the account has been or will be decreased;
( 2 ) A statement indicating the date on which the penalty rate will apply, if the outstanding balance exceeds the credit limit as of that date;
( 3 ) A statement that the penalty rate will not be imposed on the date specified in paragraph (g)(4)(ii)(A)(2) of this section, if the outstanding balance does not exceed the credit limit as of that date;
( 4 ) The circumstances under which the penalty rate, if applied, will cease to apply to the account, or that the penalty rate, if applied, will remain in effect for a potentially indefinite time period; and
(B) The creditor does not increase the rate applicable to the consumer's account to the penalty rate if the outstanding balance does not exceed the credit limit on the date set forth in the notice and described in paragraph (g)(4)(ii)(A)(2) of this section."

Thus, the credit union is not required to give 45-days advance notice before reducing the credit limit on a member's credit card account.  However, the credit union does need to give notice 45 days prior to imposing an over-the-limit fee or penalty rate because the member is above the reduced credit limit.  And, if the credit union follows the exception in §226.9(g)(4)(ii) - this 45 day notice could replace the normal 45-day notice required under §226.9(g)(1) before imposing the penalty APR on the credit card account.  Importantly, the notice under §226.9(g)(1) requires the right to cancel.  However, the exception in §226.9(g)(4)(ii) does not require the right to cancel.

The official staff commentary to 12 C.F.R. §226.9(g)(4)(ii) provides a detailed example which explains this situation:

"9(g)(4)(ii) Decrease in credit limit.
1. The following illustrates the requirements of §226.9(g)(4)(ii). Assume that a creditor decreased the credit limit applicable to a consumer's account and sent a notice pursuant to §226.9(g)(4)(ii) on January 1, stating among other things that the penalty rate would apply if the consumer's balance exceeded the new credit limit as of February 16. If the consumer's balance exceeded the credit limit on February 16, the creditor could impose the penalty rate on that date. However, a creditor could not apply the penalty rate if the consumer's balance did not exceed the new credit limit on February 16, even if the consumer's balance had exceeded the new credit limit on several dates between January 1 and February 15. If the consumer's balance did not exceed the new credit limit on February 16 but the consumer conducted a transaction on February 17 that caused the balance to exceed the new credit limit, the general rule in §226.9(g)(1)(ii) would apply and the creditor would be required to give an additional 45 days' notice prior to imposition of the penalty rate (but under these circumstances the consumer would have no ability to cure the over-the-limit balance in order to avoid penalty pricing)."

Therefore, if your credit union is considering reducing some credit limits in order to mitigate risk - be sure to realize that even though advance notice is not required for the actual decrease in the credit limit - advance notice is required before charging an over-the-limit fee or imposing the penalty APR for increasing the new credit limit.

***

As I mentioned last week, NAFCU has extended the early-bird pricing for Compliance Seminar for blog readers who use the promo code "THEBLOG" when registering.  The promo code ensures blog readers will save $200 off the regular pricing when registering for the full compliance program before September 4.  Seminar is October 19-22 in Charleston, South Carolina.     

HOEPA - Section 226.16 Con't; CC Act - NCUA Reg Alert

Posted by Sarah Loats

The Federal Reserve provides guidance on the clear and conspicuous standard through new comments in the staff commentary. Which brings up a researching tidbit - always look to see if the rule includes staff commentary. The Federal Reserve hides very useful information in its staff commentary to rules, as we'll see below.

Clear and Conspicuous Standard
In general, all advertisements are subject to a "clear and conspicuous" standard. In the final rule, the Federal Reserve has provided guidance on what is "clear and conspicuous" for certain types of HELOC advertisements.

Promotional Rates and Payments for HELOCs. Additional disclosures that are required due to the advertisement of a promotional rate or payment will be deemed in compliance if they are in the same type size as the trigger terms and appear immediately next to or directly above or below the trigger terms, without any intervening text or graphical displays.

Internet Advertisements for HELOCs. The required disclosures cannot be obscured by such techniques as graphical displays, shading, coloration, or other devices that hinder the consumer's ability to read them. This is true for visual text TV HELOC advertisements as well. Also, for TV advertisements, the consumer should be able to read the disclosures - very fine print would not comply with the standard if consumers cannot read it.

Oral Advertisments for HELOCs. Disclosures should be given at a speed and volume at which consumers can understand them (i.e., not too fast, not too quiet). This applies to all oral advertisements whether over the radio, TV, or internet.

And just a couple of last tidbits for HELOC advertisements. The final rule requires additional disclosures regarding balloon payments if an advertisement states any minimum periodic payment amount. An advertisement that states or implies that the interest expenses under a HELOC plan may be tax deductible must not be misleading, and an advertisement distributed in paper form or via the internet that states the advertised extension of credit may exceed the fair market value of the applicant’s dwelling will trigger additional disclosures.

***

NCUA has issued a Regulatory Alert regarding the Credit CARD Act requirements. For regular readers of the blog, I don't know that there's much in here that would be new to you, but they do provide it in a handy-dandy chart form.

21-Day Issue - A Skip Solution?

Posted by Anthony Demangone

I know it is decision time for some of you on the 21-day issue.  I just wanted to bring to light a creative solution that a few credit unions are considering.  I call it the "skip" solution.

In essence, some credit unions will force a "skip" for their entire open-end portfolio for September.   This would be done via some global change in terms notification that goes to all affected loans.  Based on this change, when the credit union issues their August periodic statements in early September, the due dates will be pushed forward a month to October.  This way, the members get to keep their existing due dates.  The credit union, however, potentially sacrifices an entire month's-worth of payments for their open-end loans.  And all subsequent due dates are pushed back.  So, when September statements are mailed in early October, a November due date will be shown.  And so on.

Technically, this is not really a "skip," as the September payment (and all subsequent payments) are pushed back a month.  Will credit unions lose interest income?  I don't think so.  At least not when you look at it from an "annual" point of view.  In the hypothetical above,  the September payment is pushed to October.  Some members will continue to pay as they have.  So, nothing is different there.  Others will take advantage of this quasi-skip.  If interest continues to accrue, members will pay the accrued interest in October when they make their next scheduled payment.

This solution seems to be permissible under the Credit CARD Act and interim final rule to Regulation Z.  When and how credit unions would notify members about the change would be a business decision, as long as you follow Reg Z's change in terms requirements.  Personally, I lean toward a separate mailing that clearly describes the changes and clearly explains that interest will continue to accrue. 

In any event, I wanted to pass that along.  If you have thoughts or feedback about this possible solution, please leave a comment on the blog.

***

On a related note, here's a news story about our continued efforts to turn the 21-day issue around. (Scroll down a little bit.)  While the Fed has indicated that they do not intend to budge, we'll keep plugging away.

Credit CARD Act and the 21-Day Issue

Posted by Anthony Demangone

After extensive and very recent conversations with numerous folks at many levels of the Federal Reserve, I do not hold out any real hope that the Fed will carve out an exception for non-credit card open-end loans on the 21-day issue.  Without a legislative fix, the Fed feels that it can go no further.  And with Congress either out (the House) or soon leaving (the Senate) for its August recess, the window of opportunity for a legislative fix has slammed shut for some time.  We have a NAFCU Today article on this issue that you can access here.  NAFCU pushed hard to try to get a fix while Congress was in session, but ultimately obtaining a legislative fix in such a short time faced many hurdles.

With that in mind, affected credit unions may want to consider the following paths.

1. Do nothing.  They can keep their current due dates and simply send periodic statements as they do now.  With this choice, credit unions will lose the ability to treat payments as late for many open-end loans.
2. Credit unions can latch on to the temporary "fix" that the Fed provided in its interim final rule.  This fix involves placing a disclosure on or with the periodic statement to indicate that members have 21 days from the date of mailing to get a payment in to the credit union. I wrote about this earlier, as you may recall. (Scroll to the bottom of the post.)  With the fix, a credit union can wait to see if a legislative fix emerges.  Which may or may not happen.  But ultimately, as things currently are, credit unions that take this route will need to make operational changes when the availability of this fix sunsets.
3. Credit unions can make operational changes necessary to bring themselves into compliance with the 21-day requirement so that they may treat payments as late.  With this comes risk that Congress may ultimately fix the 21-day issue sometime in the future.  

I wish there were better news, but I can say that NAFCU has worked this issue as hard as possible.  We've met with Congressional staff, NCUA, the Fed and urged Connecticut credit unions to communicate concerns with Senator Dodd.  And we'll keep working this issue.  But I know that many of you needed information to make operational decisions.

Have a great weekend, everyone.

Risk-Based Lending for Credit Cards

Posted by Anthony Demangone

For the past month, I've heard the following question quite a few times.

Following the Credit CARD Act, is risk-based lending dead for credit cards?

Let me give you a great attorney answer: it depends.

Before you chuckle too hard, that really is the best answer I can give.  Compliance gives few simple conclusions.  And as I like to point out, simple issues generate few questions.  Let me explain.

What do you mean by risk-based lending?  Terms are a funny thing.  If you ask 5 people what risk-based lending means, you'll get 6 different answers.  Does risk-based lending refer to the initial rate, or is it a process that reassesses the risk of the credit card borrower over time and adjusts the rate in relation to risk?  Or is it both?  The Credit CARD Act makes it much more difficult to reprice credit cards after they are issued.  That is true.  But can you use risk to price new credit cards?  You bet.  Knock yourself out. 

But what about after the card is issued?  There's nothing that prevents you from using risk to reprice your card portfolio after you issue the card.  But we're going to live in a different world after the Credit CARD Act is fully implemented.  After new cards are issued, you won't be able to change rates within the first year (with certain exceptions).  After that period, you'll have to give 45 days notice before you increase rates, and the member will have the right to reject the increase.  If you do manage to navigate a rate increase by the member rejection right, you'll have to revisit the rationale at least every six months to ensure that the basis for the increase still exists.  If it doesn't, you'll have to reduce the rate.

The dreaded right to cancel.  This new right does get your attention, doesn't it?  But I can't wait to see how it ultimately plays out.  How many folks will cancel their card following a notice of a rate increase?  Some will, for sure.  And for those folks, you're really no worse off than you were.  They'll have to repay your card (under a new set of rules) based on the initial rate.  But some will accept the new rate, because many folks will want to use the card.   (Keep in mind that the new, higher rate will not apply to existing, outstanding balances.)  In addition, I believe consumers will soon learn that the easy days of 0% balance transfer offers and easy to obtain teaser rates are behind us.  Consumers will learn that if you cancel a change in terms on a decent credit card, they'd better have something better in hand.  The devil you know, as they say. 

Conclusion.  These extra hurdles certainly make risk-based pricing adjustments more difficult for credit cards.  For some credit unions, the changes are enough to make risk-based adjustments out of the question.   I'm sure some credit union out there, though, will find a way to make it work.  So, is risk-based lending dead for credit cards?  It depends on how you look at it.  And now you know why.

Credit CARD Act: 15/45 Days; Payday Lending

Posted by Anthony Demangone

Last week, Sarah did a great job of highlighting when and how the Credit CARD Act 45-day change in terms notification kicks in this month.  Here's a link to her post.   She pointed out that it will only apply to credit cards on August 20 of this month.  In other words...

The 45-day notice does not apply to other, non-credit card lines of credit - and not even to HELOCs that are accessed via a credit card device.  Here's the language of the interim final rule, with emphasis added.  The 45-day requirement will kick in later for other open-end (non credit card loans) and the Fed has a proposal out right now that would address HELOCs.

Credit Card Accounts
The interim final rule preserves, in § 226.9(c)(1) and associated staff commentary, the existing change-in-terms notice requirements for home-equity plans and other openend plans that are not credit card accounts. These rules are substantively identical to the current rules under § 226.9(c), except for several technical and renumbering changes. 
    The Board notes that open-end (not home-secured) lines of credit that are not credit card accounts will be subject to the revised change-in-terms notice requirements contained in the January 2009 Regulation Z Rule when that rule becomes effective. In particular, changes made in January 2009 to § 226.9(c) and (g) have not been withdrawn. However, the January 2009 Regulation Z Rule is not yet effective, and unsecured lines of credit that are not credit card accounts are not subject to the advance notice requirements in the Credit Card Act. Therefore the existing rules have been preserved for such lines of credit for the period between the effective date of this interim final rule and the date the January 2009 Regulation Z Rule becomes effective. Thus, creditors offering open-end (not home-secured) lines of credit that are not credit card accounts may continue to comply with the existing change-in-terms notice requirements, which have been adopted in this interim final rule as renumbered § 226.9(c)(1).
    The Board notes that it also is currently reviewing those portions of Regulation Z that pertain to home-equity lines of credit, and the applicable notice requirements for such products may be amended in the course of that rulemaking.

***

NCUA just issued Letter to Credit Unions 09-FCU-05.  Access it here.  Note that this is a letter to federal credit unions.  And why is that?  The usury ceiling looms large in this letter.  NCUA, in a well-written and straight-forward manner, reminds FCUs that if they have a payday lending program, they must abide by the usury ceiling of 18 percent.  They have one example of a no-no that really caught my eye:

An FCU offers loans with a stated 0% APR and charges an application fee of 20% based on the loan amount. The FCU has essentially the same processing costs for all payday loans regardless of amount. The 20% fee does not accurately reflect the costs of processing applications so the fee should be considered a finance charge under Reg Z and be included in calculating the APR. This would raise the APR above the 18% ceiling. (Emphasis added.)

I take two things away from that section.

1. First, an application fee based on a percentage of loan proceeds is a no-no.

2. But the guidance implies that an application fee should accurately reflect the costs of processing an application.  Is your application fee based on an accurate reflection of the costs of processing your loans?  If it is, how have you documented that fact?  Inquring minds (examiners) may want to know.

Clarification on the Same Day Requirement

Posted by Anthony Demangone

On Friday, I wrote about the Credit CARD Act requirement that due dates be on the same day of the month.

As many of you pointed out to me, that requirement only applies to credit cards.  I should have been more specific with the post, and I apologize for any confusion!  And if you are reading this on Saturday...booooo!  I've updated the post, which you can access via the link above. 

If You Are Changing Due Dates...; Usury Ceiling

Posted by Anthony Demangone

We've heard from quite a few credit unions that plan to "migrate" due dates to later dates in order to comply with the Rubik's Cube regulation the 21-day "issue."  Here are just some thought for credit unions that are walking down that path.

• Remember that a different provision of the Credit CARD Act requires due dates for credit cards to be on the same day each month.  Steve wrote about that issue back on July 2.  This requirement kicks in on February 22, 2010.  While there's some confusion as to what the "same day each month" means, we expect the Fed to clarify its meaning when it issues a proposed rule to implement that Credit CARD Act provision.  So, while the same day issue only applies to credit cards, we understand that many credit unions are pushing all open dates back.  It may make sense to choose a single day to ease compliance burdens or simplify things.

• What did you do yesterday for your open end loans?  While I'm sure many of you already have thought about this, I wanted to mention it anyway.  If you are planning to migrate due dates to a later date (i.e., the 28th of each month), have you already built that into your procedures?  Allowing members to choose an early due date just doesn't make sense if you are going to migrate them to a later date next month.

***

NCUA has decided to extend the 18 percent usury ceiling for another 18 months, beginning September 10, 2009.   I'm no good at date-related math (or really any math, for that matter), but I think this means we're good through early March 2011.  Read all about it here.

***

These photos of Kate sum up my thoughts about this 21-day issue.

First, it surprised us.

 

The more we read, the more confused we became.

It was so overwhelming, we just looked punch-drunk.

 

And then reality set in.

Have a great weekend, everyone!

Credit CARD Act: Title V; MDIA Webcast

Posted by Anthony Demangone

Ah, we've come to the end of our analysis of the Credit CARD Act.  It was time to move on anyway - the recent interim final rule has really overtaken events.  We'll move on to analyzing that next.  But for now, here's a small dose of information regarding the provisions of Title V.

Title V of the Credit CARD Act contains 13 provisions.  Most of the provisions simply call for studies.  For example, Section 508 calls for a study on emergency PIN technologies.   Others create task forces.  All in all, Title V does not strike fear in the heart of compliance officers.  That being said, I wanted to highlight the following Sections.

• Section 501 mandates a study on interchange fees.  Once the study is published, it could lead to a renewed push to limit or tap down the interchange fees received by financial institutions.
• Section 503 requires the U.S. Treasury to issue regulations to implement the Bank Secrecy Act concerning stored value cards.  If the time-line holds true, we'll see final rules on this next year.  If your credit union offers stored value cards, you'll need to tweak your BSA program.
• Section 511 will require the FTC, in consultation with the Fed, to issue a reg designed to outlaw unfair or deceptive mortgage practices.  Now, it isn't clear that such a reg would apply to federal credit unions.  But it very well could apply to state charted credit unions or CUSOs, depending on how it is written.  Stay tuned.
• And yes, Section 512 did deal with the ability of an individual to bring a firearm into a national park.  I'll leave the analysis of that section to others.

There you have it.  I hope you guys enjoyed our overview of the Credit CARD Act.  As I mentioned above, we'll now start to move through some of the issues we've uncovered in the interim final rule to Regulation Z.

***

Yesterday, we reminded you of the upcoming deadlines for early Truth in Lending disclosures. NAFCU is going to tackle this very topic in an August 19th Webcast. Suzanne Garwood, an associate at Venable, LLP, will be speaking on the MDIA and HOEPA amendments to Regulation Z. The webcast will specifically address:

• How HOEPA and MDIA have amended Regulation Z;

• Your credit union’s timeline for implementations; and

• How higher cost mortgage loans affect your use of credit reports.

You can register here, and if you do so by August 12th, you can receive the early bird pricing. Also, NCCOs can receive 1.5 hours of credit.