[Federal Register: January 29, 2009 (Volume 74, Number 18)]
[Rules and Regulations]
[Page 5244-5498]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29ja09-7]
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FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-1286]
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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SUMMARY: The Board is amending Regulation Z, which implements the Truth
in Lending Act (TILA), and the staff commentary to the regulation,
following a comprehensive review of TILA's rules for open-end
(revolving) credit that is not home-secured. Consumer testing was
conducted as a part of the review.
Except as otherwise noted, the changes apply solely to open-end
credit. Disclosures accompanying credit card applications and
solicitations must highlight fees and reasons penalty rates might be
applied, such as for paying late. Creditors are required to summarize
key terms at account opening and when terms are changed. Specific fees
are identified that must be disclosed to consumers in writing before an
account is opened, and creditors are given flexibility regarding how
and when to disclose other fees imposed as part of the open-end plan.
Costs for interest and fees are separately identified for the cycle and
year to date. Creditors are required to give 45 days' advance notice
prior to certain changes in terms and before the rate applicable to a
consumer's account is increased as a penalty. Rules of general
applicability such as the definition of open-end credit, dispute
resolution procedures, and payment processing limitations apply to all
open-end plans, including home-equity lines of credit. Rules regarding
the disclosure of debt cancellation and debt suspension agreements are
revised for both closed-end and open-end credit transactions. Loans
taken against employer-sponsored retirement plans are exempt from TILA
coverage.
DATES: The rule is effective July 1, 2010.
FOR FURTHER INFORMATION CONTACT: Benjamin K. Olson, Attorney, Amy Burke
or Vivian Wong, Senior Attorneys, or Krista Ayoub, Ky Tran-Trong, or
John Wood, Counsels, Division of Consumer and Community Affairs, Board
of Governors of the Federal Reserve System, at (202) 452-3667 or 452-
2412; for users of Telecommunications Device for the Deaf (TDD) only,
contact (202) 263-4869.
SUPPLEMENTARY INFORMATION:
I. Background on TILA and Regulation Z
Congress enacted the Truth in Lending Act (TILA) based on findings
that economic stability would be enhanced and competition among
consumer credit providers would be strengthened by the informed use of
credit resulting from consumers' awareness of the cost of credit. The
purposes of TILA are (1) to provide a meaningful disclosure of credit
terms to enable consumers to compare credit terms available in the
marketplace more readily and avoid the uninformed use of credit; and
(2) to protect consumers against inaccurate and unfair credit billing
and credit card practices.
TILA's disclosures differ depending on whether consumer credit is
an open-end (revolving) plan or a closed-end (installment) loan. TILA
also contains procedural and substantive protections for consumers.
TILA is implemented by the Board's Regulation Z. An Official Staff
Commentary interprets the requirements of Regulation Z. By statute,
creditors that follow in good faith Board or official staff
interpretations are insulated from civil liability, criminal penalties,
or administrative sanction.
II. Summary of Major Changes
The goal of the amendments to Regulation Z is to improve the
effectiveness of the disclosures that creditors provide to consumers at
application and throughout the life of an open-end (not home-secured)
account. The changes are the result of the Board's review of the
provisions that apply to open-end (not home-secured) credit. The Board
is adopting changes to format, timing, and content requirements for the
five main types of open-end credit disclosures governed by Regulation
Z: (1) Credit and charge card application and solicitation disclosures;
(2) account-opening disclosures; (3) periodic statement disclosures;
(4) change-in-terms notices; and (5) advertising provisions. The Board
is also adopting additional protections that complement rules issued by
the Board and other federal banking agencies published elsewhere in
today's Federal Register regarding certain credit card practices.
Applications and solicitations. Format and content changes are
adopted to make the credit and charge card application and solicitation
disclosures more meaningful and easier for consumers to use. The
changes include:
Adopting new format requirements for the summary table,
including rules regarding: type size and use of boldface type for
certain key terms, and placement of information.
Revising content, including: a requirement that
creditors disclose the duration that penalty rates may be in effect,
a shorter disclosure about variable rates, new descriptions when a
grace period is offered on purchases or when no grace period is
offered, and a reference to consumer education materials on the
Board's Web site.
Account-opening disclosures. Requirements for cost disclosures
provided at account opening are adopted to make the information more
conspicuous and easier to read. The changes include:
Disclosing certain key terms in a summary table at
account opening, in order to summarize for consumers key information
that is most important to informed decision-making. The table is
substantially similar to the table required for credit and charge
card applications and solicitations.
Adopting a different approach to disclosing fees, to
provide greater clarity for identifying fees that must be disclosed.
In addition, creditors would have flexibility to disclose charges
(other than those in the summary table) in writing or orally.
Periodic statement disclosures. Revisions are adopted to make
disclosures on periodic statements more understandable, primarily by
making changes to the format requirements, such as by grouping fees and
interest charges together. The changes include:
Itemizing interest charges for different types of
transactions, such as purchases and cash advances, grouping interest
charges and fees separately, and providing separate totals of fees
and interest for the month and year-to-date.
Eliminating the requirement to disclose an ``effective
APR.''
Requiring disclosure of the effect of making only the
minimum required payment on the time to repay balances, as required
by the Bankruptcy Act.
Changes in consumer's interest rate and other account terms. The
final rule expands the circumstances under which consumers receive
written notice of changes in the terms (e.g., an increase in the
interest rate) applicable to their accounts, and increase the amount of
time these notices must be sent before the change becomes effective.
The changes include:
Increasing advance notice before a changed term can be
imposed from 15 to 45 days, to better allow consumers to obtain
alternative financing or change their account usage.
Requiring creditors to provide 45 days' prior notice
before the creditor increases a rate either due to a change in the
terms applicable to the consumer's account or due to the consumer's
delinquency or default or as a penalty.
When a change-in-terms notice accompanies a periodic
statement, requiring
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a tabular disclosure on the front side of the periodic statement of
the key terms being changed.
Advertising provisions. Rules governing advertising of open-end
credit are revised to help ensure consumers better understand the
credit terms offered. These revisions include:
Requiring advertisements that state a periodic payment
amount on a plan offered to finance the purchase of goods or
services to state, in equal prominence to the periodic payment
amount, the time period required to pay the balance and the total of
payments if only periodic payments are made.
Permitting advertisements to refer to a rate as
``fixed'' only if the advertisement specifies a time period for
which the rate is fixed and the rate will not increase for any
reason during that time, or if a time period is not specified, if
the rate will not increase for any reason while the plan is open.
Additional protections. Rules are adopted that provide additional
protections to consumers. These include:
In setting reasonable cut-off hours for mailed payments
to be received on the due date and be considered timely, deeming 5
p.m. to be a reasonable time.
Requiring creditors that do not accept mailed payments
on the due date, such as on weekends or holidays, to treat a mailed
payment received on the next business day as timely.
Clarifying that advances that are separately
underwritten are generally not open-end credit, but closed-end
credit for which closed-end disclosures must be given.
III. The Board's Review of Open-end Credit Rules
A. Advance Notices of Proposed Rulemaking
December 2004 ANPR. The Board began a review of Regulation Z in
December 2004.\1\ The Board initiated its review of Regulation Z by
issuing an advance notice of proposed rulemaking (December 2004 ANPR).
69 FR 70925, December 8, 2004. At that time, the Board announced its
intent to conduct its review of Regulation Z in stages, focusing first
on the rules for open-end (revolving) credit accounts that are not
home-secured, chiefly general-purpose credit cards and retailer credit
card plans. The December 2004 ANPR sought public comment on a variety
of specific issues relating to three broad categories: the format of
open-end credit disclosures, the content of those disclosures, and the
substantive protections provided for open-end credit under the
regulation. The December 2004 ANPR solicited comment on the scope of
the Board's review, and also requested commenters to identify other
issues that the Board should address in the review. A summary of the
comments received in response to the December 2004 ANPR is contained in
the supplementary information to proposed revisions to Regulation Z
published by the Board in June 2007 (June 2007 Proposal). 72 FR 32948,
32949, June 14, 2007.
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\1\ The review was initiated pursuant to requirements of section
303 of the Riegle Community Development and Regulatory Improvement
Act of 1994, section 610(c) of the Regulatory Flexibility Act of
1980, and section 2222 of the Economic Growth and Regulatory
Paperwork Reduction Act of 1996.
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October 2005 ANPR. The Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005 (the Bankruptcy Act) primarily amended the
federal bankruptcy code, but also contained several provisions amending
TILA. Public Law 109-8, 119 Stat. 23. The Bankruptcy Act's TILA
amendments principally deal with open-end credit accounts and require
new disclosures on periodic statements, on credit card applications and
solicitations, and in advertisements.
In October 2005, the Board published a second ANPR to solicit
comment on implementing the Bankruptcy Act amendments (October 2005
ANPR). 70 FR 60235, October 17, 2005. In the October 2005 ANPR, the
Board stated its intent to implement the Bankruptcy Act amendments as
part of the Board's ongoing review of Regulation Z's open-end credit
rules. A summary of the comments received in response to the October
2005 ANPR also is contained in the supplementary information to the
June 2007 Proposal. 72 FR 32948, 32950, June 14, 2007.
B. Notices of Proposed Rulemakings
June 2007 Proposal. The Board published proposed amendments to
Regulation Z's rules for open-end plans that are not home-secured in
June 2007. 72 FR 32948, June 14, 2007. The goal of the proposed
amendments to Regulation Z was to improve the effectiveness of the
disclosures that creditors provide to consumers at application and
throughout the life of an open-end (not home-secured) account. In
developing the proposal, the Board conducted consumer research, in
addition to considering comments received on the two ANPRs.
Specifically, the Board retained a research and consulting firm (Macro
International) to assist the Board in using consumer testing to develop
proposed model forms, as discussed in C. Consumer Testing of this
section, below. The proposal would have made changes to format, timing,
and content requirements for the five main types of open-end credit
disclosures governed by Regulation Z: (1) Credit and charge card
application and solicitation disclosures; (2) account-opening
disclosures; (3) periodic statement disclosures; (4) change-in-terms
notices; and (5) advertising provisions.
For credit and charge card application and solicitation
disclosures, the June 2007 Proposal included new format requirements
for the summary table, such as rules regarding type size and use of
boldface type for certain key terms, placement of information, and the
use of cross-references. Content revisions included requiring creditors
to disclose the duration that penalty rates may be in effect and a
shorter disclosure about variable rates.
For disclosures provided at account opening, the June 2007 Proposal
called for creditors to disclose certain key terms in a summary table
that is substantially similar to the table required for credit and
charge card applications and solicitations. A different approach to
disclosing fees was proposed, to provide greater clarity for
identifying fees that must be disclosed, and to provide creditors with
flexibility to disclose charges (other than those in the summary table)
in writing or orally.
The June 2007 Proposal also included changes to the format
requirements for periodic statements, such as by grouping fees,
interest charges, and transactions together and providing separate
totals of fees and interest for the month and year-to-date. The
proposal also modified the provisions for disclosing the ``effective
APR,'' including format and terminology requirements to make it more
understandable. Because of concerns about the disclosure's
effectiveness, however, the Board also solicited comment on whether
this rate should be required to be disclosed. The proposal required
card issuers to disclose the effect of making only the minimum required
payment on repayment of balances, as required by the Bankruptcy Act.
For changes in consumer's interest rate and other account terms,
the June 2007 Proposal expanded the circumstances under which consumers
receive written notice of changes in the terms (e.g., an increase in
the interest rate) applicable to their accounts to include increases of
a rate due to the consumer's delinquency or default, and increased the
amount of time (from 15 to 45 days) these notices must be sent before
the change becomes effective.
For advertisements that state a minimum monthly payment on a plan
offered to finance the purchase of goods or services, the June 2007
Proposal required additional information about
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the time period required to pay the balance and the total of payments
if only minimum payments are made. The proposal also limited the
circumstances under which an advertisement may refer to a rate as
``fixed.''
The Board received over 2,500 comments on the June 2007 Proposal.
About 85% of these were from consumers and consumer groups, and of
those, nearly all (99%) were from individuals. Of the approximately 15%
of comment letters received from industry representatives, about 10%
were from financial institutions or their trade associations. The vast
majority (90%) of the industry letters were from credit unions and
their trade associations. Those latter comments mainly concerned a
proposed revision to the definition of open-end credit that could
affect how many credit unions currently structure their consumer loan
products.
In general, commenters generally supported the June 2007 Proposal
and the Board's use of consumer testing to develop revisions to
disclosure requirements. There was opposition to some aspects of the
proposal. For example, industry representatives opposed many of the
format requirements for periodic statements as being overly
prescriptive. They also opposed the Board's proposal to require
creditors to provide at least 45 days' advance notice before certain
key terms change or interest rates are increased due to default or
delinquency or as a penalty. Consumer groups opposed the Board's
proposed alternative that would eliminate the effective annual
percentage rate (effective APR) as a periodic statement disclosure.
Consumers and consumer groups also believed the Board's proposal was
too limited in scope and urged the Board to provide more substantive
protections and prohibit certain card issuer practices. Comments on
specific proposed revisions are discussed in VI. Section-by-Section
Analysis, below.
May 2008 Proposal. In May 2008, the Board published revisions to
several disclosures in the June 2007 Proposal (May 2008 Proposal). 73
FR 28866, May 19, 2008. In developing these revisions, the Board
considered comments received on the June 2007 Proposal and worked with
its testing consultant, Macro International, to conduct additional
consumer research, as discussed in C. Consumer Testing of this section,
below. In addition, the May 2008 Proposal contained proposed amendments
to Regulation Z that complemented a proposal published by the Board,
along with the Office of Thrift Supervision and the National Credit
Union Administration, to adopt rules prohibiting specific unfair acts
or practices with respect to consumer credit card accounts under their
authority under the Federal Trade Commission Act (FTC Act). See 15
U.S.C. 57a(f)(1). 73 FR 28904, May 19, 2008.
The May 2008 Proposal would have, among other things, required
changes for the summary table provided on or with application and
solicitations for credit and charge cards. Specifically, it would have
required different terminology than the term ``grace period'' as a
heading that describes whether the card issuer offers a grace period on
purchases, and added a de minimis dollar amount trigger of more than
$1.00 for disclosing minimum interest or finance charges.
Under the May 2008 Proposal, creditors assessing fees at account
opening that are 25% or more of the minimum credit limit would have
been required to provide in the account-opening summary table a notice
of the consumer's right to reject the plan after receiving disclosures
if the consumer has not used the account or paid a fee (other than
certain application fees).
Currently, creditors may require consumers to comply with
reasonable payment instructions. The May 2008 Proposal would have
deemed a cut-off hour for receiving mailed payments before 5 p.m. on
the due date to be an unreasonable instruction. The proposal also would
have prohibited creditors that set due dates on a weekend or holiday
but do not accept mailed payments on those days from considering a
payment received on the next business day as late for any reason.
For deferred interest plans that advertise ``no interest'' or
similar terms, the May 2008 Proposal would have added notice and
proximity requirements to require advertisements to state the
circumstances under which interest is charged from the date of purchase
and, if applicable, that the minimum payments required will not pay off
the balance in full by the end of the deferral period.
The Board received over 450 comments on the May 2008 Proposal.
About 88% of these were from consumers and consumer groups, and of
those, nearly all (98%) were from individuals. Six comments (1%) were
from government officials or organizations, and the remaining 11%
represented industry, such as financial institutions or their trade
associations and payment system networks.
Commenters generally supported the May 2008 Proposal, although like
the June 2007 Proposal, some commenters opposed aspects of the
proposal. For example, operational concerns and costs for system
changes were cited by industry representatives that opposed limitations
on when creditors may consider mailed payments to be untimely.
Regarding revised disclosure requirements, some industry and consumer
group commenters opposed proposed heading descriptions for accounts
offering a grace period, although these commenters were split between
those that favor retaining the current term (``grace period'') and
those that suggested other heading descriptions. Consumer groups
opposed the May 2008 proposal to permit card issuers and creditors to
omit charges in lieu of interest that are $1.00 or less from the table
provided with credit or charge card applications and solicitations and
the table provided at account opening. Some retailers opposed the
proposed advertising rules for deferred interest offers. Comments on
specific proposed revisions are discussed in VI. Section-by-Section
Analysis, below.
C. Consumer Testing
Developing the June 2007 Proposal. A principal goal for the
Regulation Z review was to produce revised and improved credit card
disclosures that consumers will be more likely to pay attention to,
understand, and use in their decisions, while at the same time not
creating undue burdens for creditors. In April 2006, the Board retained
a research and consulting firm (Macro International) that specializes
in designing and testing documents to conduct consumer testing to help
the Board review Regulation Z's credit card rules. Specifically, the
Board used consumer testing to develop model forms that were proposed
in June 2007 for the following credit card disclosures required by
Regulation Z:
Summary table disclosures provided in direct-mail
solicitations and applications;
Disclosures provided at account opening;
Periodic statement disclosures; and
Subsequent disclosures, such as notices provided when
key account terms are changed, and notices on checks provided to
access credit card accounts.
Working closely with the Board, Macro International conducted
several tests. Each round of testing was conducted in a different city
throughout the United States. In addition, the consumer testing groups
contained participants with a range of ethnicities, ages, educational
levels, and credit card behavior. The consumer testing groups also
contained participants likely to have subprime credit cards as well as
those likely to have prime credit cards.
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Initial research and design of disclosures for testing. In advance
of testing a series of revised disclosures, the Board conducted
research to learn what information consumers currently use in making
decisions about their credit card accounts, and how they currently use
disclosures that are provided to them. In May and June 2006, the Board
worked with Macro International to conduct two sets of focus groups
with credit card consumers. Through these focus groups, the Board
gathered information on what credit terms consumers usually consider
when shopping for a credit card, what information they find useful when
they receive a new credit card in the mail, and what information they
find useful on periodic statements. In August 2006, the Board worked
with Macro International to conduct one-on-one discussions with credit
card account holders. Consumers were asked to view existing sample
credit card disclosures. The goals of these interviews were: (1) To
learn more about what information consumers read when they receive
current credit card disclosures; (2) to research how easily consumers
can find various pieces of information in these disclosures; and (3) to
test consumers' understanding of certain credit card-related words and
phrases. In the fall of 2006, the Board worked with Macro International
to develop sample credit card disclosures to be used in the later
rounds of testing, taking into account information learned through the
focus groups and the one-on-one interviews.
Additional testing and revisions to disclosures. In late 2006 and
early 2007, the Board worked with Macro International to conduct four
rounds of one-on-one interviews (seven to nine participants per round),
where consumers were asked to view new sample credit card disclosures
developed by the Board and Macro International. The rounds of
interviews were conducted sequentially to allow for revisions to the
testing materials based on what was learned from the testing during
each previous round.
Several of the model forms contained in the June 2007 Proposal were
developed through the testing. A report summarizing the results of the
testing is available on the Board's public Web site: http://
www.federalreserve.gov (May 2007 Macro Report).\2\ See also VI.
Section-by-Section Analysis, below. To illustrate by example:
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\2\ Design and Testing of Effective Truth in Lending
Disclosures, Macro International, May 16, 2007.
Testing participants generally read the summary table
provided in direct-mail credit card solicitations and applications
and ignored information presented outside of the table. The June
2007 Proposal would have required that information about events that
trigger penalty rates and about important fees (late-payment fees,
over-the-credit-limit fees, balance transfer fees, and cash advance
fees) be placed in the table. Currently, this information may be
placed outside the table.
With respect to the account-opening disclosures,
consumer testing indicates that consumers commonly do not review
their account agreements, which currently are often in small print
and dense prose. The June 2007 Proposal would have required
creditors to include a table summarizing the key terms applicable to
the account, similar to the table required for credit card
applications and solicitations. The goal of setting apart the most
important terms in this way is to better ensure that consumers are
apprised of those terms.
With respect to periodic statement disclosures, many
consumers more easily noticed the number and amount of fees when the
fees were itemized and grouped together with interest charges.
Consumers also noticed fees and interest charges more readily when
they were located near the disclosure of the transactions on the
account. The June 2007 Proposal would have required creditors to
group all fees together and describe them in a manner consistent
with consumers' general understanding of costs (``interest charge''
or ``fee''), without regard to whether the fees would be considered
``finance charges,'' ``other charges'' or neither under the
regulation.
With respect to change-in-terms notices, creditors
commonly provide notices about changes to terms or rates in the same
envelope with periodic statements. Consumer testing indicates that
consumers may not typically look at the notices if they are provided
as separate inserts given with periodic statements. In such cases
under the June 2007 Proposal, a table summarizing the change would
have been required on the periodic statement directly above the
transaction list, where consumers are more likely to notice the
changes.
Developing the May 2008 Proposal. In early 2008, the Board worked
with a testing consultant, Macro International, to revise model
disclosures published in the June 2007 Proposal in response to comments
received. In March 2008, the Board conducted an additional round of
one-on-one interviews on revised disclosures provided with applications
and solicitations, on periodic statements, and with checks that access
a credit card account. A report summarizing the results of the testing
is available on the Board's public Web site: http://
www.federalreserve.gov (December 2008 Macro Report on Qualitative
Testing).\3\
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\3\ Design and Testing of Effective Truth in Lending
Disclosures: Findings from Qualitative Consumer Research, Macro
International, December 15, 2008.
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With respect to the summary table provided in direct-mail credit
card solicitations and applications, participants who read the heading
``How to Avoid Paying Interest on Purchases'' on the row describing a
grace period generally understood what the phrase meant. The May 2008
Proposal would have required issuers to use that phrase, or a
substantially similar phrase, as the row heading to describe an account
with a grace period for purchases, and the phrase ``Paying Interest,''
or a substantially similar phrase, if no grace period is offered. (The
same row headings were also proposed for tables provided at account-
opening and with checks that access credit card accounts.)
Prior to the May 2008 Proposal, the Board also tested a disclosure
of a use-by date applicable to checks that access a credit card
account. The responses given by testing participants indicated that
they generally did not understand prior to the testing that there may
be a use-by date applicable to an offer of a promotional rate for a
check that accesses a credit card account. However, the participants
that saw and read the tested language understood that a standard cash
advance rate, not the promotional rate, would apply if the check was
used after the date disclosed. Thus, in May 2008 the Board proposed to
require that creditors disclose any use-by date applicable to an offer
of a promotional rate for access checks.
Testing conducted after May 2008. In July and August 2008, the
Board worked with Macro International to conduct two additional rounds
of one-on-one interviews. See the December 2008 Macro Report on
Qualitative Testing, which summarizes the results of these interviews.
The results of this consumer testing were used to develop the final
rule, and are discussed in more detail in VI. Section-by-Section
Analysis.
For example, these rounds of interviews examined, among other
things, whether consumers understand the meaning of a minimum interest
charge disclosed in the summary table provided in direct-mail credit
card solicitations and applications. Most participants could correctly
explain the meaning of a minimum interest charge, and most participants
indicated that a minimum interest charge would not be important to them
because it is a relatively small sum of money ($1.50 on the forms
tested). The final rule accordingly establishes a threshold of $1.00;
if the minimum interest charge is $1.00 or less it is not required to
be disclosed in the table.
Consumers also were asked to review periodic statements that
disclosed an impending rate increase, with a tabular summary of the
change appearing on statement, as proposed by the Board in
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June 2007. This testing was used in the development of final Samples G-
20 and G-21, which give creditors guidance on how advance notice of
impending rate increases or changes in terms should be presented.
Quantitative testing. In September 2008, the Board worked with
Macro International to develop a survey to conduct quantitative
testing. The goal of quantitative testing was to measure consumers'
comprehension and the usability of the newly-developed disclosures
relative to existing disclosures and formats. A report summarizing the
results of the testing is available on the Board's public Web site:
http://www.federalreserve.gov (December 2008 Macro Report on
Quantitative Testing).\4\
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\4\ Design and Testing of Effective Truth in Lending
Disclosures: Findings from Experimental Study, Macro International,
December 15, 2008.
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The quantitative consumer testing conducted for the Board consisted
of mall-intercept interviews of a total of 1,022 participants in seven
cities: Dallas, TX; Detroit, MI; Los Angeles, CA; Seattle, WA;
Springfield, IL; St. Louis, MO; and Tallahassee, FL. Each interview
lasted approximately fifteen minutes and consisted of showing the
participant models of the summary table provided in direct-mail credit
card solicitations and applications and the periodic statement and
asking a series of questions designed to assess the effectiveness of
certain formatting and content requirements proposed by the Board or
suggested by commenters.
With regard to the summary table provided in direct-mail credit
card solicitations and applications, consumers were asked questions
intended to gauge the impact of (i) combining rows for APRs applicable
to different transaction types, (ii) the inclusion of cross-references
in the table, and (iii) the impact of splitting the table onto two
pages instead of presenting the table entirely on a single page. More
details about the specific forms used in the testing as well as the
questions asked are available in the December 2008 Macro Report on
Quantitative Testing.
The results of the testing demonstrated that combining the rows for
APRs applicable to different transaction types that have the same
applicable rate did not have a statistically significant impact on
consumers' ability to identify those rates. Thus, the final rule
permits creditors to combine rows disclosing the rates for different
transaction types to which the same rate applies.
Similarly, the testing indicated that the inclusion of cross-
references in the table did not have a statistically significant impact
on consumers' ability to identify fees and rates applicable to their
accounts. As a result, the Board has not adopted the proposed
requirement that certain cross-references between certain rates and
fees be included in the table.
Finally, the testing demonstrated that consumers have more
difficulty locating fees applicable to their accounts when the table is
split on two pages and the fee appears on the second page of the table.
As discussed further in VI. Section-by-Section Analysis, the Board is
not requiring that creditors use a certain paper size or present the
entire table on a single page, but is requiring creditors that split
the table onto two or more pages to include a reference indicating that
additional important information regarding the account is presented on
a separate page.
The Board also tested whether consumers' understanding of payment
allocation practices could be improved through disclosure. The testing
showed that a disclosure, even of the relatively simple payment
allocation practice of applying payments to lower-interest balances
before higher-interest balances,\5\ improved understanding for very few
consumers. The disclosure also confused some consumers who had
understood payment allocation based on prior knowledge before reviewing
the disclosure. Based on this result, and because of substantive
protections adopted by the Board and other federal banking agencies
published elsewhere in this Federal Register, the Board is not
requiring a payment allocation disclosure in the summary table provided
in direct-mail solicitations and applications or at account-opening.
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\5\ Under final rules issued by the Board and other federal
banking agencies published elsewhere in today's Federal Register,
issuers are prohibited from allocating payments to low-interest
balances before higher-interest balances. However, the Board chose
to test a disclosure of this practice in quantitative consumer
testing because (i) it is currently the practice of many issuers and
(ii) to test one of the simpler payment allocation methods on the
assumption that consumers might be more likely to understand
disclosure of a simpler payment allocation method than a more
complex one.
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With regard to periodic statements, the Board's testing consultant
examined (i) the effectiveness of grouping transactions and fees on the
periodic statement, (ii) consumers' understanding of the effective APR
disclosure, (iii) the formatting and location of change-in-terms
notices included with periodic statements, and (iv) the formatting and
grouping of various payment information, including warnings about the
effect of late payments and making only the minimum payment.
The testing demonstrated that grouping of fees and transactions, by
type, separately on the periodic statement improved consumers' ability
to find fees that were charged to the account and also moderately
improved consumers' ability to locate transactions. Grouping fees
separately from transactions made it more difficult for some consumers
to match a transaction fee to the relevant transaction, although most
consumers could successfully match the transaction and fee regardless
of how the transaction list was presented. As discussed in more detail
in VI. Section-by-Section Analysis, the final rule requires grouping of
fees and interest separate from transactions on the periodic statement,
but the Board has provided flexibility for issuers to disclose
transactions on the periodic statement.
With regard to the effective APR, testing overwhelmingly showed
that few consumers understood the disclosure and that some consumers
were less able to locate the interest rate applicable to cash advances
when the effective APR also was disclosed on the periodic statement.
Accordingly, and for the additional reasons discussed in more detail in
VI. Section-by-Section Analysis, the final rule eliminates the
requirement to disclose an effective APR for open-end (not home-
secured) credit.
When a change-in-terms notice for the APR for purchases was
included with the periodic statement, disclosure of a tabular summary
of the change on the front of the statement moderately improved
consumers' ability to identify the rate that would apply when the
changes take effect. However, whether the tabular summary was presented
on page one or page two of the statement did not have an effect on the
ability of participants to notice or comprehend the disclosure. Thus,
the final rule requires a tabular summary of key changes on the
periodic statement, when a change-in-terms notice is included with the
periodic statement, but permits creditors to disclose that summary on
the front of any page of the statement.
The formatting of certain grouped information regarding payments,
including the amount of the minimum payment, due date, and warnings
regarding the effect of making late or minimum payments did not have an
effect on consumers' ability to notice or comprehend these disclosures.
Thus, while the final rule requires that this
[[Page 5249]]
information be grouped, creditors are not required to format this
information in any particular manner.
D. Other Outreach and Research
Throughout the Board's review of Regulation Z's rules affecting
open-end (not home-secured) plans, the Board solicited input from
members of the Board's Consumer Advisory Council on various issues.
During 2005 and 2006, for example, the Council discussed the
feasibility and advisability of reviewing Regulation Z in stages, ways
to improve the summary table provided on or with credit card
applications and solicitations, issues related to TILA's substantive
protections (including dispute resolution procedures), and issues
related to the Bankruptcy Act amendments. In 2007 and 2008, the Council
discussed the June 2007 and May 2008 Proposals, respectively, and
comments received by the Board in response to the proposals. In
addition, Board met or conducted conference calls with various industry
and consumer group representatives throughout the review process
leading to the June 2007 and May 2008 Proposals. Consistent with the
Bankruptcy Act, the Board also met with the other federal banking
agencies, the National Credit Union Administration (NCUA), and the
Federal Trade Commission (FTC) regarding the clear and conspicuous
disclosure of certain information required by the Bankruptcy Act. The
Board also reviewed disclosures currently provided by creditors,
consumer complaints received by the federal banking agencies, and
surveys on credit card usage to help inform the June 2007 Proposal.\6\
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\6\ Surveys reviewed include: Thomas A. Durkin, Credit Cards:
Use and Consumer Attitudes, 1970-2000, FEDERAL RESERVE BULLETIN,
(September 2000); Thomas A. Durkin, Consumers and Credit
Disclosures: Credit Cards and Credit Insurance, FEDERAL RESERVE
BULLETIN (April 2002).
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E. Reviewing Regulation Z in Stages
The Board is proceeding with a review of Regulation Z in stages.
This final rule largely contains revisions to rules affecting open-end
plans other than home-equity lines of credit (HELOCs) subject to Sec.
226.5b. Possible revisions to rules affecting HELOCs will be considered
in the Board's review of home-secured credit, currently underway. To
minimize compliance burden for creditors offering HELOCs as well as
other open-end credit, many of the open-end rules have been reorganized
to delineate clearly the requirements for HELOCs and other forms of
open-end credit. Although this reorganization increases the size of the
regulation and commentary, the Board believes a clear delineation of
rules for HELOCs and other forms of open-end credit pending the review
of HELOC rules provides a clear compliance benefit to creditors.
In addition, as discussed elsewhere in this section and in VI.
Section-by-Section Analysis, the Board has eliminated the requirement
to disclose an effective annual percentage rate for open-end (not home-
secured) credit. For a home-equity plan subject to Sec. 226.5b, under
the final rule a creditor has the option to disclose an effective APR
(according to the current rules in Regulation Z for computing and
disclosing the effective APR), or not to disclose an effective APR. The
Board notes that the rules for computing and disclosing the effective
APR for HELOCs could be the subject of comment during the review of
rules affecting HELOCs.
IV. The Board's Rulemaking Authority
TILA mandates that the Board prescribe regulations to carry out the
purposes of the act. TILA also specifically authorizes the Board, among
other things, to do the following:
Issue regulations that contain such classifications,
differentiations, or other provisions, or that provide for such
adjustments and exceptions for any class of transactions, that in
the Board's judgment are necessary or proper to effectuate the
purposes of TILA, facilitate compliance with the act, or prevent
circumvention or evasion. 15 U.S.C. 1604(a).
Exempt from all or part of TILA any class of
transactions if the Board determines that TILA coverage does not
provide a meaningful benefit to consumers in the form of useful
information or protection. The Board must consider factors
identified in the act and publish its rationale at the time it
proposes an exemption for comment. 15 U.S.C. 1604(f).
Add or modify information required to be disclosed with
credit and charge card applications or solicitations if the Board
determines the action is necessary to carry out the purposes of, or
prevent evasions of, the application and solicitation disclosure
rules. 15 U.S.C. 1637(c)(5).
Require disclosures in advertisements of open-end
plans. 15 U.S.C. 1663.
In adopting this final rule, the Board has considered the
information collected from comment letters submitted in response to its
ANPRs and the June 2007 and May 2008 Proposals, its experience in
implementing and enforcing Regulation Z, and the results obtained from
testing various disclosure options in controlled consumer tests. For
the reasons discussed in this notice, the Board believes this final
rule is appropriate to effectuate the purposes of TILA, to prevent the
circumvention or evasion of TILA, and to facilitate compliance with the
act.
Also as explained in this notice, the Board believes that the
specific exemptions adopted are appropriate because the existing
requirements do not provide a meaningful benefit to consumers in the
form of useful information or protection. In reaching this conclusion,
the Board considered (1) the amount of the loan and whether the
disclosure provides a benefit to consumers who are parties to the
transaction involving a loan of such amount; (2) the extent to which
the requirement complicates, hinders, or makes more expensive the
credit process; (3) the status of the borrower, including any related
financial arrangements of the borrower, the financial sophistication of
the borrower relative to the type of transaction, and the importance to
the borrower of the credit, related supporting property, and coverage
under TILA; (4) whether the loan is secured by the principal residence
of the borrower; and (5) whether the exemption would undermine the goal
of consumer protection. The rationales for these exemptions are
explained in VI. Section-by-Section Analysis, below.
V. Discussion of Major Revisions
The goal of the revisions adopted in this final rule is to improve
the effectiveness of the Regulation Z disclosures that must be provided
to consumers for open-end accounts. A summary of the key account terms
must accompany applications and solicitations for credit card accounts.
For all open-end credit plans, creditors must disclose costs and terms
at account opening, generally before the first transaction. Consumers
must receive periodic statements of account activity, and creditors
must provide notice before certain changes in the account terms may
become effective.
To shop for and understand the cost of credit, consumers must be
able to identify and understand the key terms of open-end accounts.
However, the terms and conditions that impact credit card account
pricing can be complex. The revisions to Regulation Z are intended to
provide the most essential information to consumers when the
information would be most useful to them, with content and formats that
are clear and conspicuous. The revisions are expected to improve
consumers' ability to make informed credit decisions and enhance
competition among credit card issuers. Many of the changes are based on
the consumer testing that was conducted in
[[Page 5250]]
connection with the review of Regulation Z.
In considering whether to adopt the revisions, the Board has also
sought to balance the potential benefits for consumers with the
compliance burdens imposed on creditors. For example, the revisions
seek to provide greater certainty to creditors in identifying what
costs must be disclosed for open-end plans, and when those costs must
be disclosed. The Board has adopted the proposal that fees must be
grouped on periodic statements, but has withdrawn from the final rule
proposed requirements that would have required additional formatting
changes to the periodic statement, such as the grouping of
transactions, for which the burden to creditors may exceed the benefit
to consumers. More effective disclosures may also reduce customer
confusion and misunderstanding, which may also ease creditors' costs
relating to consumer complaints and inquiries.
A. Credit Card Applications and Solicitations
Under Regulation Z, credit and charge card issuers are required to
provide information about key costs and terms with their applications
and solicitations.\7\ This information is abbreviated, to help
consumers focus on only the most important terms and decide whether to
apply for the credit card account. If consumers respond to the offer
and are issued a credit card, creditors must provide more detailed
disclosures at account opening, generally before the first transaction
occurs.
---------------------------------------------------------------------------
\7\ Charge cards are a type of credit card for which full
payment is typically expected upon receipt of the billing statement.
To ease discussion, this notice will refer simply to ``credit
cards.''
---------------------------------------------------------------------------
The application and solicitation disclosures are considered among
the most effective TILA disclosures principally because they must be
presented in a standardized table with headings, content, and format
substantially similar to the model forms published by the Board. In
2001, the Board revised Regulation Z to enhance the application and
solicitation disclosures by adding rules and guidance concerning the
minimum type size and requiring additional fee disclosures.
Proposal. The proposal added new format requirements for the
summary table,\8\ including rules regarding type size and use of
boldface type for certain key terms, placement of information, and the
use of cross-references. Content revisions included a requirement that
creditors disclose the duration that penalty rates may be in effect, a
shorter disclosure about variable rates, and a reference to consumer
education materials available on the Board's Web site.
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\8\ This table is commonly referred to as the ``Schumer box.''
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Summary of final rule.
Penalty pricing. The final rule makes several revisions that seek
to improve consumers' understanding of default or penalty pricing.
Currently, credit card issuers must disclose inside the table the APR
that will apply in the event of the consumer's ``default.'' Some
creditors define a ``default'' as making one late payment or exceeding
the credit limit once. The actions that may trigger the penalty APR are
currently required to be disclosed outside the table.
Consumer testing indicated that many consumers did not notice the
information about penalty pricing when it was disclosed outside the
table. Under the final rule, card issuers are required to include in
the table the specific actions that trigger penalty APRs (such as a
late payment), the rate that will apply and the circumstances under
which the penalty rate will expire or, if true, the fact that the
penalty rate could apply indefinitely. The regulation requires card
issuers to use the term ``penalty APR'' because the testing
demonstrated that some consumers are confused by the term ``default
rate.''
Similarly, the final rule requires card issuers to disclose inside
(rather than outside) the table the fees for paying late, exceeding a
credit limit, or making a payment that is returned. Cash advance fees
and balance transfer fees also must be disclosed inside the table. This
change is also based on consumer testing results; fees disclosed
outside the table were often not noticed. Requiring card issuers to
disclose returned-payment fees, required credit insurance, debt
suspension, or debt cancellation coverage fees, and foreign transaction
fees are new disclosures.
Variable-rate information. Currently, applications and
solicitations offering variable APRs must disclose inside the table the
index or formula used to make adjustments and the amount of any margin
that is added. Additional details, such as how often the rate may
change, must be disclosed outside the table. Under the final rule,
information about variable APRs is reduced to a single phrase
indicating the APR varies ``with the market,'' along with a reference
to the type of index, such as ``Prime.'' Consumer testing indicated
that few consumers use the variable-rate information when shopping for
a card. Moreover, participants were distracted or confused by details
about margin values, how often the rate may change, and where an index
can be found.
Subprime accounts. The final rule addresses a concern that has been
raised about subprime credit cards, which are generally offered to
consumers with low credit scores or credit problems. Subprime credit
cards often have substantial fees associated with opening the account.
Typically, fees for the issuance or availability of credit are billed
to consumers on the first periodic statement, and can substantially
reduce the amount of credit available to the consumer. For example, the
initial fees on an account with a $250 credit limit may reduce the
available credit to less than $100. Consumer complaints received by the
federal banking agencies state that consumers were unaware when they
applied for subprime cards of how little credit would be available
after all the fees were assessed at account opening.
The final rule requires additional disclosures if the card issuer
requires fees or a security deposit to issue the card that are 15
percent or more of the minimum credit limit offered for the account. In
such cases, the card issuer is required to include an example in the
table of the amount of available credit the consumer would have after
paying the fees or security deposit, assuming the consumer receives the
minimum credit limit.
Balance computation methods. TILA requires creditors to identify
their balance computation method by name, and Regulation Z requires
that the disclosure be inside the table. However, consumer testing
demonstrates that these names hold little meaning for consumers, and
that consumers do not consider such information when shopping for
accounts. The final rule requires creditors to place the name of the
balance computation method outside the table, so that the disclosure
does not detract from information that is more important to consumers.
Description of grace period. The final rule requires card issuers
to use the heading ``How to Avoid Paying Interest on Purchases'' on the
row describing a grace period offered on all purchases, and the phrase
``Paying Interest'' if a grace period is not offered on all purchases.
Consumer testing indicates consumers do not understand the term ``grace
period'' as a description of actions consumers must take to avoid
paying interest.
B. Account-Opening Disclosures
Regulation Z requires creditors to disclose costs and terms before
the first transaction is made on the account. The disclosures must
specify the
[[Page 5251]]
circumstances under which a ``finance charge'' may be imposed and how
it will be determined. A ``finance charge'' is any charge that may be
imposed as a condition of or an incident to the extension of credit,
and includes, for example, interest, transaction charges, and minimum
charges. The finance charge disclosures include a disclosure of each
periodic rate of interest that may be applied to an outstanding balance
(e.g., purchases, cash advances) as well as the corresponding annual
percentage rate (APR). Creditors must also explain any grace period for
making a payment without incurring a finance charge. In addition, they
must disclose the amount of any charge other than a finance charge that
may be imposed as part of the credit plan (``other charges''), such as
a late-payment charge. Consumers' rights and responsibilities in the
case of unauthorized use or billing disputes must also be explained.
Currently, there are few format requirements for these account-opening
disclosures, which are typically interspersed among other contractual
terms in the creditor's account agreement.
Proposal. Certain key terms were proposed to be disclosed in a
summary table at account opening, which would be substantially similar
to the table required for applications and solicitations. A different
approach to disclosing fees was proposed, including providing creditors
with flexibility to disclose charges (other than those in the summary
table) in writing or orally after the account is opened, but before the
charge is imposed.
Summary of final rule.
Account-opening summary table. Account-opening disclosures have
often been criticized because the key terms TILA requires to be
disclosed are often interspersed within the credit agreements, and such
agreements are long and complex. To address this concern and make the
information more conspicuous, the final rule requires creditors to
provide at account-opening a table summarizing key terms. Creditors may
continue, however, to provide other account-opening disclosures, aside
from the fees and terms specified in the table, with other terms in
their account agreements.
The new table provided at account opening is substantially similar
to the table provided with direct-mail credit card applications and
solicitations. Consumer testing indicates that consumers generally are
aware of the table on applications and solicitations. Consumer testing
also indicates that consumers may not typically read their account
agreements, which are often in small print and dense prose. Thus,
setting apart the most important terms in a summary table will better
ensure that consumers are aware of those terms.
The table required at account opening includes more information
than the table required at application. For example, it includes a
disclosure whether or not there is a grace period for all features of
an account. For subprime credit cards, to give consumers the
opportunity to avoid fees, the final rule also requires issuers to
provide consumers at account opening, a notice about the right to
reject a plan when fees have been charged but the consumer has not used
the plan. However, to reduce compliance burden for creditors that
provide account-opening disclosures at application, the final rule
allows creditors to provide the more specific and inclusive account-
opening table at application in lieu of the table otherwise required at
application.
How charges are disclosed. Under the current rules, a creditor must
disclose any ``finance charge'' or ``other charge'' in the account-
opening disclosures. A subsequent notice is required if one of the fees
disclosed at account opening increases or if certain fees are newly
introduced during the life of the plan. The terms ``finance charge''
and ``other charge'' are given broad and flexible meanings in the
regulation and commentary. This ensures that TILA adapts to changing
conditions, but it also creates uncertainty. The distinctions among
finance charges, other charges, and charges that do not fall into
either category are not always clear. As creditors develop new kinds of
services, some find it difficult to determine if associated charges for
the new services meet the standard for a ``finance charge'' or ``other
charge'' or are not covered by TILA at all. This uncertainty can pose
legal risks for creditors that act in good faith to comply with the
law. Examples of included or excluded charges are in the regulation and
commentary, but these examples cannot provide definitive guidance in
all cases. Creditors are subject to civil liability and administrative
enforcement for under-disclosing the finance charge or otherwise making
erroneous disclosures, so the consequences of an error can be
significant. Furthermore, over-disclosure of rates and finance charges
is not permitted by Regulation Z for open-end credit.
The fee disclosure rules also have been criticized as being
outdated. These rules require creditors to provide fee disclosures at
account opening, which may be months, and possibly years, before a
particular disclosure is relevant to the consumer, such as when the
consumer calls the creditor to request a service for which a fee is
imposed. In addition, an account-related transaction may occur by
telephone, when a written disclosure is not feasible.
The final rule is intended to respond to these criticisms while
still giving full effect to TILA's requirement to disclose credit
charges before they are imposed. Accordingly, the rules are revised to
(1) specify precisely the charges that creditors must disclose in
writing at account opening (interest, minimum charges, transaction
fees, annual fees, and penalty fees such as for paying late), which
must be listed in the summary table, and; (2) permit creditors to
disclose other less critical charges orally or in writing before the
consumer agrees to or becomes obligated to pay the charge. Although the
final rule permits creditors to disclose certain costs orally for
purposes of TILA, the Board anticipates that creditors will continue to
identify fees in the account agreement for contract or other reasons.
Under the final rule, some charges are covered by TILA that the
current regulation, as interpreted by the staff commentary, excludes
from TILA coverage, such as fees for expedited payment and expedited
delivery. It may not have been useful to consumers to cover such
charges under TILA when such coverage would have meant only that the
charges were disclosed long before they became relevant to the
consumer. The Board believes it will be useful to consumers to cover
such charges under TILA as part of a rule that permits their disclosure
at a time and in a manner that consumers would be likely to notice the
disclosure of the charge. Further, as new services (and associated
charges) are developed, the proposal minimizes risk of civil liability
as well as inconsistency among creditors associated with the
determination as to whether a fee is a finance charge or an other
charge, or is not covered by TILA at all.
C. Periodic Statements
Creditors are required to provide periodic statements reflecting
the account activity for the billing cycle (typically, about one
month). In addition to identifying each transaction on the account,
creditors must identify each ``finance charge'' using that term, and
each ``other charge'' assessed against the account during the statement
period. When a periodic interest rate is applied to an outstanding
balance to compute the finance charge, creditors must disclose the
periodic rate and its corresponding APR. Creditors must also disclose
an ``effective'' or ``historical''
[[Page 5252]]
APR for the billing cycle, which, unlike the corresponding APR,
includes not just interest but also finance charges imposed in the form
of fees (such as cash advance fees or balance transfer fees). Periodic
statements must also state the time period a consumer has to pay an
outstanding balance to avoid additional finance charges (the ``grace
period''), if applicable.
Proposal. Interest charges for different types of transactions,
such as purchases and cash advances would be itemized, and separate
totals of fees and interest for the month and year-to-date would be
disclosed. The proposal offered two approaches regarding the
``effective APR.'' One modified the provisions for disclosing the
``effective APR,'' including format and terminology requirements,\9\
and the other solicited comment on whether this rate should be required
to be disclosed. To implement changes required by the Bankruptcy Act,
the proposal required creditors to disclose of the effect of making
only the minimum required payment on repayment of balances.
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\9\ The ``effective'' APR reflects interest and other finance
charges such as cash advance fees or balance transfer fees imposed
for the billing cycle.
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Summary of final rule.
Fees and interest costs. The final rule contains a number of
revisions to the periodic statement to improve consumers' understanding
of fees and interest costs. Currently, creditors must identify on
periodic statements any ``finance charges'' added to the account during
the billing cycle, and creditors typically intersperse these charges
with other transactions, such as purchases, chronologically on the
statement. The finance charges must be itemized by type. Thus, interest
charges might be described as ``finance charges due to periodic
rates.'' Charges such as late payment fees, which are not ``finance
charges,'' are typically disclosed individually and are interspersed
among other transactions.
Consumer testing indicated that consumers generally understand that
``interest'' is the cost that results from applying a rate to a balance
over time and distinguish ``interest'' from other fees, such as a cash
advance fee or a late payment fee. Consumer testing also indicated that
many consumers more easily determine the number and amount of fees when
the fees are itemized and grouped together.
Thus, under the final rule, creditors are required to group all
fees together and to separately itemize interest charges by transaction
type, and describe them in a manner consistent with consumers' general
understanding of costs (``interest charge'' or ``fee''), without regard
to whether the charges are considered ``finance charges,'' ``other
charges,'' or neither. Interest charges must be identified by type (for
example, interest on purchases or interest on balance transfers) as
must fees (for example, cash advance fee or late-payment fee).
Consumer testing also indicated that many consumers more quickly
and accurately determined the total dollar cost of credit for the
billing cycle when a total dollar amount of fees for the cycle was
disclosed. Thus, the final rule requires creditors to disclose the (1)
total fees and (2) total interest imposed for the cycle. Creditors must
also disclose year-to-date totals for interest charges and fees. For
many consumers, costs disclosed in dollars are more readily understood
than costs disclosed as percentage rates. The year-to-date figures are
intended to assist consumers in better understanding the overall cost
of their credit account and are an important disclosure and an
effective aid in understanding annualized costs. The Board believes
these figures will better ensure consumers understand the cost of
credit than the effective APR currently provided on periodic
statements.
The effective APR. The ``effective'' APR disclosed on periodic
statements reflects the cost of interest and certain other finance
charges imposed during the statement period. For example, for a cash
advance, the effective APR reflects both interest and any flat or
proportional fee assessed for the advance.
For the reasons discussed below, the Board is eliminating the
requirement to disclose the effective APR.
Consumer testing conducted prior to the June 2007 Proposal, in
March 2008, and after the May 2008 Proposal demonstrates that consumers
find the current disclosure of an APR that combines rates and fees to
be confusing. The June 2007 Proposal would have required disclosure of
the nominal interest rate and fees in a manner that is more readily
understandable and comparable across institutions. The Board believes
that this approach can better inform consumers and further the goals of
consumer protection and the informed use of credit for all types of
open-end credit.
The Board also considered whether there were potentially competing
considerations that would suggest retention of the requirement to
disclose an effective APR. First, the Board considered the extent to
which ``sticker shock'' from the effective APR benefits consumers, even
if the disclosure may not enable consumers to meaningfully compare
costs from month to month or between different credit products. A
second consideration is whether the effective APR may be a hedge
against fee-intensive pricing by creditors, and if so, the extent to
which it promotes transparency. On balance, however, the Board believes
that the benefits of eliminating the requirement to disclose the
effective APR outweigh these considerations.
The consumer testing conducted for the Board strongly supports this
determination. Although in one round of testing conducted prior to the
June 2007 Proposal a majority of participants evidenced some
understanding of the effective APR, the overall results of the testing
show that most consumers do not correctly understand the effective APR.
Some consumers in the testing offered no explanation of the difference
between the corresponding and effective APR, and others appeared to
have an incorrect understanding. The results were similar in the
consumer testing conducted in March 2008 and after the May 2008
proposal; in all rounds of the testing, a majority of participants did
not offer a correct explanation of the effective APR. In quantitative
testing conducted for the Board in the fall of 2008, only 7% of
consumers answered a question correctly that was designed to test their
understanding of the effective APR. In addition, including the
effective APR on the statement had an adverse effect on some consumers'
ability to identify the interest rate applicable to the account.
Even if some consumers have some understanding of the effective
APR, the Board believes sound reasons support eliminating the
requirement for its disclosure. Disclosure of the effective APR on
periodic statements does not assist consumers in credit shopping,
because the effective APR disclosed on a statement on one credit card
account cannot be compared to the nominal APR disclosed on a
solicitation or application for another credit card account. In
addition, even for the same account, the effective APR for a given
cycle is unlikely to accurately indicate the cost of credit in a future
cycle, because if any of several factors (such as timing of
transactions and payments) is different in the future cycle, the
effective APR will be different even if the amount of the transaction
is the same. As to suggestions that the effective APR for a particular
billing cycle provides the consumer a rough indication that it is
costly to engage in transactions that trigger transaction fees, the
Board believes the requirements adopted in the final rule to disclose
[[Page 5253]]
interest and fee totals for the cycle and year-to-date will better
serve the same purpose. In addition, the interest and fee total
disclosure requirements should address concerns that elimination of the
effective APR would remove disincentives for creditors to introduce new
fees.
Transactions. Currently, there are no format requirements for
disclosing different types of transactions, such as purchases, cash
advances, and balance transfers on periodic statements. Often,
transactions are presented together in chronological order. Consumer
testing indicated that participants found it helpful to have similar
types of transactions grouped together on the statement. Consumers also
found it helpful, within the broad grouping of fees and transactions,
when transactions were segregated by type (e.g., listing all purchases
together, separate from cash advances or balance transfers). Further,
consumers noticed fees and interest charges more readily when they were
located near the transactions. For these reasons, the final rule
requires creditors to group fees and interest charges together,
itemized by type, with the list of transactions. The Board has not
adopted the proposed requirement that creditors group transactions by
type on the periodic statement. In consumer testing, most consumers
indicated that they review the transactions on their periodic
statements, and grouping transactions together only moderately improved
consumers' ability to locate transactions compared to when the
transaction list was presented chronologically. In addition, the cost
to creditors of reformatting periodic statements to group transactions
by type appears to outweigh any benefit to consumers.
Late payments. Currently, creditors must disclose the date by which
consumers must pay a balance to avoid finance charges. Creditors must
also disclose any cut-off time for receiving payments on the payment
due date; this is usually disclosed on the reverse side of periodic
statements. The Bankruptcy Act amendments expressly require creditors
to disclose the payment due date (or if different, the date after which
a late-payment fee may be imposed) along with the amount of the late-
payment fee.
Under the final rule, creditors are required to disclose the
payment due date on the front side of the periodic statement. Creditors
also are required to disclose, in close proximity to the due date, the
amount of the late-payment fee and the penalty APR that could be
triggered by a late payment, to alert consumers to the consequence of
paying late.
Minimum payments. The Bankruptcy Act requires creditors offering
open-end plans to provide a warning about the effects of making only
minimum payments. The proposal would implement this requirement solely
for credit card issuers. Under the final rule, card issuers must
provide (1) a ``warning'' statement indicating that making only the
minimum payment will increase the interest the consumer pays and the
time it takes to repay the consumer's balance; (2) a hypothetical
example of how long it would take to pay a specified balance in full if
only minimum payments are made; and (3) a toll-free telephone number
that consumers may call to obtain an estimate of the time it would take
to repay their actual account balance using minimum payments. Most card
issuers must establish and maintain their own toll-free telephone
numbers to provide the repayment estimates. However, the Board is
required to establish and maintain, for two years, a toll-free
telephone number for creditors that are depository institutions having
assets of $250 million or less. This number is for the customers of
those institutions to call to get answers to questions about how long
it will take to pay their account in full making only the minimum
payment. The FTC must maintain a similar toll-free telephone number for
use by customers of creditors that are not depository institutions. In
order to standardize the information provided to consumers through the
toll-free telephone numbers, the Bankruptcy Act amendments direct the
Board to prepare a ``table'' illustrating the approximate number of
months it would take to repay an outstanding balance if the consumer
pays only the required minimum monthly payments and if no other
advances are made (``generic repayment estimate'').
Pursuant to the Bankruptcy Act amendments, the final rule also
allows a card issuer to establish a toll-free telephone number to
provide customers with the actual number of months that it will take
consumers to repay their outstanding balance (``actual repayment
disclosure'') instead of providing an estimate based on the Board-
created table. A card issuer that does so need not include a
hypothetical example on its periodic statements, but must disclose the
warning statement and the toll-free telephone number.
The final rule also allows card issuers to provide the actual
repayment disclosure on their periodic statements. Card issuers are
encouraged to use this approach. Participants in consumer testing who
typically carry credit card balances (revolvers) found an estimated
repayment period based on terms that apply to their own account more
useful than a hypothetical example. To encourage card issuers to
provide the actual repayment disclosure on their periodic statements,
the final rule provides that if card issuers do so, they need not
disclose the warning, the hypothetical example and a toll-free
telephone number on the periodic statement, nor need they maintain a
toll-free telephone number to provide the actual repayment disclosure.
As described above, the Bankruptcy Act also requires the Board to
develop a ``table'' that creditors, the Board and the FTC must use to
create generic repayment estimates. Instead of creating a table, the
final rule contains guidance for how to calculate generic repayment
estimates. Consumers that call the toll-free telephone number may be
prompted to input information about their outstanding balance and the
APR applicable to their account. Although issuers have the ability to
program their systems to obtain consumers' account information from
their account management systems, for the reasons discussed in the
section-by-section analysis to Appendix M1 to part 226, the final rule
does not require issuers to do so.
D. Changes in Consumer's Interest Rate and Other Account Terms
Regulation Z requires creditors to provide advance written notice
of some changes to the terms of an open-end plan. The proposal included
several revisions to Regulation Z's requirements for notifying
consumers about such changes.
Currently, Regulation Z requires creditors to send, in most cases,
notices 15 days before the effective date of certain changes in the
account terms. However, creditors need not inform consumers in advance
if the rate applicable to their account increases due to default or
delinquency. Thus, consumers may not realize until they receive their
monthly statement for a billing cycle that their late payment triggered
application of the higher penalty rate, effective the first day of the
month's statement.
Proposal. The proposal generally would have increased advance
notice before a changed term, such as a rate increase due to a change
in the contract, can be imposed from 15 to 45 days. The proposal also
would have required creditors to provide 45 days' prior notice before
the creditor increases a rate due to the consumer's delinquency
[[Page 5254]]
or default or as a penalty. When a change-in-terms notice accompanies a
periodic statement, the proposal would have required a tabular
disclosure on the front of the first page of the periodic statement of
the key terms being changed.
Summary of final rule.
Timing. Under the final rule, creditors generally must provide 45
days' advance notice prior to a change in any term required to be
disclosed in the tabular disclosure provided at account-opening, as
discussed above. This increase in the advance notice for a change in
terms is intended to give consumers approximately a month to act,
either to change their usage of the account or to find an alternative
source of financing before the change takes effect.
Penalty rates. Currently, creditors must inform consumers about
rates that are increased due to default or delinquency, but not in
advance of implementation of the increase. Contractual thresholds for
default are sometimes very low, and currently penalty pricing commonly
applies to all existing balances, including low-rate promotional
balances.
The final rule generally requires creditors to provide 45 days'
advance notice before rate increases due to the consumer's delinquency
or default or as a penalty, as proposed. Permitting creditors to apply
the penalty rate immediately upon the consumer triggering the rate may
lead to undue surprise and insufficient time for a consumer to consider
alternative options regarding use of the card. Even though the final
rule contain provisions intended to improve disclosure of penalty
pricing at account opening, the Board believes that consumers will be
more likely to notice and be motivated to act if they receive a
specific notice alerting them of an imminent rate increase, rather than
a general disclosure stating the circumstances when a rate might
increase.
When asked which terms were the most important to them when
shopping for an account, participants in consumer testing seldom
mentioned the penalty rate or penalty rate triggers. Some consumers may
not find this information relevant when shopping for or opening an
account because they do not anticipate that they will trigger penalty
pricing. As a result, they may not recall this information later, after
they have begun using the account, and may be surprised when penalty
pricing is subsequently imposed.
In addition, the Board believes that the notice required by Sec.
226.9(g) is the most effective time to inform consumers of the
circumstances under which penalty rates can be applied to their
existing balances for the reasons discussed above and in VI. Section-
by-Section Analysis.
Format. Currently, there are few format requirements for change-in-
terms disclosures. As with account-opening disclosures, creditors
commonly intersperse change-in-terms notices with other amendments to
the account agreement, and both are provided in pamphlets in small
print and dense prose. Consumer testing indicates many consumers set
aside and do not read densely-worded pamphlets.
Under the final rule, creditors may continue to notify consumers
about changes to terms required to be disclosed by Regulation Z,
together with other changes to the account agreement. However, if a
changed term is one that must be provided in the account-opening
summary table, creditors must provide that change in a summary table to
enhance the effectiveness of the change-in-terms notice. Consumer
testing conducted for the Board suggests that consumer understanding of
change in terms notices is improved by presentation of that information
in a tabular format.
Creditors commonly enclose notices about changes to terms or rates
with periodic statements. Under the final rule, if a notice enclosed
with a periodic statement discusses a change to a term that must be
disclosed in the account-opening summary table, or announces that a
penalty rate will be imposed on the account, a table summarizing the
impending change must appear on the periodic statement. The table must
appear on the front of the periodic statement, although it is not
required to appear on the first page. Consumers who participated in
testing often set aside change-in-terms pamphlets that accompanied
periodic statements, while participants uniformly looked at the front
side of periodic statements.
E. Advertisements
Currently, creditors that disclose certain terms in advertisements
must disclose additional information, to help ensure consumers
understand the terms of credit being offered.
Proposal. For advertisements that state a minimum monthly payment
on a plan offered to finance the purchase of goods or services,
additional information must also be stated about the time period
required to pay the balance and the total of payments if only minimum
payments are made. The proposal also limited the circumstances under
which advertisements may refer to a rate as ``fixed.''
Summary of final rule.
Advertising periodic payments. Consumers commonly are offered the
option to finance the purchase of goods or services (such as appliances
or furniture) by establishing an open-end credit plan. The periodic
payments (such as $20 a week or $45 per month) associated with the
purchase are often advertised as part of the offer. Under current
rules, advertisements for open-end credit plans are not required to
include information about the time it will take to pay for a purchase
or the total cost if only periodic payments are made; if the
transaction were a closed-end installment loan, the number of payments
and the total cost would be disclosed. Under the final rule,
advertisements stating a periodic payment amount for an open-end credit
plan that would be established to finance the purchase of goods or
services must state, in equal prominence to the periodic payment
amount, the time period required to pay the balance and the total of
payments if only periodic payments are made.
Advertising ``fixed'' rates. Creditors sometimes advertise the APR
for open-end accounts as a ``fixed'' rate even though the creditor
reserves the right to change the rate at any time for any reason.
Consumer testing indicated that many consumers believe that a ``fixed
rate'' will not change, and do not understand that creditors may use
the term ``fixed'' as a shorthand reference for rates that do not vary
based on changes in an index or formula. Under the final rule, an
advertisement may refer to a rate as ``fixed'' if the advertisement
specifies a time period the rate will be fixed and the rate will not
increase during that period. If a time period is not specified, the
advertisement may refer to a rate as ``fixed'' only if the rate will
not increase while the plan is open.
F. Other Disclosures and Protections
``Open-end'' plans comprised of closed-end features. Some creditors
give open-end credit disclosures on credit plans that include closed-
end features, that is, separate loans with fixed repayment periods.
These creditors treat these loans as advances on a revolving credit
line for purposes of Regulation Z even though the consumer's credit
information is separately evaluated, the consumer may have to complete
a separate application for each ``advance,'' and the consumer's
payments on the ``advance'' do not replenish the line. Provisions in
the commentary lend support to this approach.
Proposal. The proposal would have revised these provisions to
indicate
[[Page 5255]]
closed-end disclosures rather than open-end disclosures are appropriate
when advances that are individually approved and underwritten are being
extended, or if payments made on a particular sub-account do not
replenish the credit line available for that sub-account.
Summary of final rule. The final rule generally adopts the proposal
that would clarify that credit is not properly characterized as open-
end credit if individual advances are separately underwritten. The
proposed revision that would have required that payments on a sub-
account of an open-end credit plan replenish that sub-account has been
withdrawn, because of concerns that this revision would have had
unintended consequences for credit cards and HELOCs that the Board
believes are appropriately treated as open-end credit.
Checks that access a credit card account. Many credit card issuers
provide accountholders with checks that can be used to obtain cash, pay
the outstanding balance on another account, or purchase goods and
services directly from merchants. The solicitation letter accompanying
the checks may offer a low promotional APR for transactions that use
the checks. The proposed revisions would require the checks mailed by
card issuers to be accompanied by cost disclosures.
Currently, creditors need not disclose costs associated with using
the checks if the finance charges that would apply (that is, the
interest rate and transaction fees) have been previously disclosed,
such as in the account agreement. If the check is sent 30 days or more
after the account is opened, creditors must refer consumers to their
account agreements for more information about how the rate and fees are
determined.
Consumers may receive these checks throughout the life of the
credit card account. Thus, significant time may elapse between the time
account-opening disclosures are provided and the time a consumer
considers using the check. In addition, consumer testing indicates that
consumers may not notice references to other documents such as the
account-opening disclosures or periodic statements for rate information
because they tend to look for rates and dollar figures when reviewing
the information accompanying access checks.
Proposal. Under the proposal, checks that can access credit card
accounts would have been required to be accompanied by information
about the rates and fees that will apply if the checks are used, about
whether a grace period exists, and any date by which the consumer must
use the checks in order to receive any discounted initial rate offered
on the checks. This information would have been required to be
presented in a table, on the front side of the page containing the
checks.
Summary of final rule. The final rule requires the following key
terms to be disclosed in a summary table on the front of the page
containing checks that access credit card accounts: (1) Any discounted
initial rate, and when that rate will expire, if applicable; (2) the
type of rate that will apply to the checks after expiration of any
discounted initial rate (such as whether the purchase or cash advance
rate applies) and the applicable APR; (3) any transaction fees
applicable to the checks; (4) whether a grace period applies to the
checks, and if one does not apply, that interest will be charged
immediately; and (5) any date by which the consumer must use the checks
in order to receive any discounted initial rate offered on the checks.
The final rule requires that the tabular disclosure accompanying
checks that access a credit card account include a disclosure of the
actual rate or rates applicable to the checks. While the actual post-
promotional rate disclosed at the time the checks are sent to a
consumer may differ from the rate disclosed by the time it becomes
applicable to the consumer's account (if it is a variable rate tied to
an index), disclosure of the actual post-promotional rate in effect at
the time that the checks are sent to the consumer is an important piece
of information for the consumer to use in making an informed decision
about whether to use the checks. Consumer testing suggests that a
disclosure of the actual rate, rather than a toll-free number, also
will help to enhance consumer understanding regarding the rate that
will apply when the promotional rate expires.
Cut-off times and due dates for mailing payments. TILA generally
requires that payments be credited to a consumer's account as of the
date of receipt, provided the payment conforms to the creditor's
instructions. Under Regulation Z, creditors are permitted to specify
reasonable cut-off times for receiving payments on the due date. Some
creditors use different cut-off times depending on the payment method.
Consumer groups and others have raised concerns that the use of certain
cut-off times may effectively result in a due date that is one day
earlier than the due date disclosed. In addition, in response to the
June 2007 Proposal, consumer commenters urged the Board to address
creditors' practice of using due dates on days that the creditor does
not accept payments, such as weekends or holidays.
Proposal. The May 2008 Regulation Z Proposal provided that it would
be unreasonable for a creditor to require that mailed payments be
received earlier than 5 p.m. on the due date in order to be considered
timely. In addition, the proposal would have provided that if a
creditor does not receive and accept mailed payments on the due date
(e.g., a Sunday or holiday), a payment received on the next business
day is timely.
Recommendation. The draft final rule adopts the proposal regarding
weekend and holiday due dates. In addition, the draft final rule adopts
a modified version of the 5 p.m. cut-off time proposal to provide that
a 5 p.m. cut-off time is an example of a reasonable requirement for
payments.
Credit insurance, debt cancellation, and debt suspension coverage.
Under Regulation Z, premiums for credit life, accident, health, or
loss-of-income insurance are considered finance charges if the
insurance is written in connection with a credit transaction. However,
these costs may be excluded from the finance charge and APR (for both
open-end and closed-end credit transactions), if creditors disclose the
cost and the fact that the coverage is not required to obtain credit,
and the consumer signs or initials an affirmative written request for
the insurance. Since 1996, the same rules have applied to creditors'
``debt cancellation'' agreements, in which a creditor agrees to cancel
the debt, or part of it, on the occurrence of specified events.
Proposal and summary of final rule. As proposed, the existing rules
for debt cancellation coverage were applied to ``debt suspension''
coverage (for both open-end credit and closed-end transactions). ``Debt
suspension'' products are related to, but different from, debt
cancellation products. Debt suspension products merely defer consumers'
obligation to make the minimum payment for some period after the
occurrence of a specified event. During the suspension period, interest
may continue to accrue, or it may be suspended as well. Under the
proposal, to exclude the cost of debt suspension coverage from the
finance charge and APR, creditors would have been required to inform
consumers that the coverage suspends, but does not cancel, the debt.
Under the current rules, charges for credit insurance and debt
cancellation coverage are deemed not to be finance charges if a
consumer requests coverage after an open-end credit account is opened
or after a closed-end credit
[[Page 5256]]
transaction is consummated because the coverage is deemed not to be
``written in connection'' with the credit transaction. Since the
charges are defined as non-finance charges in such cases, Regulation Z
does not require a disclosure or written evidence of consent to exclude
them from the finance charge. The proposal would have implemented a
broader interpretation of ``written in connection'' with a credit
transaction and required creditors to provide disclosures, and obtain
evidence of consent, on sales of credit insurance or debt cancellation
or suspension coverage during the life of an open-end account. If a
consumer requests the coverage by telephone, creditors would have been
permitted to provide the disclosures orally, but in that case they
would have been required to mail written disclosures within three days
of the call.\10\ The final rule is unchanged from the proposal.
---------------------------------------------------------------------------
\10\ The revisions to Regulation Z requiring disclosures to be
mailed within three days of a telephone request for these products
are consistent with the rules of the federal banking agencies
governing insured depository institutions' sales of insurance and
with guidance published by the Office of the Comptroller of the
Currency (OCC) concerning national banks' sales of debt cancellation
and debt suspension products.
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VI. Section-by-Section Analysis
In reviewing the rules affecting open-end credit, the Board
proposed in June 2007 to reorganize some provisions to make the
regulation easier to use. Rules affecting home-equity lines of credit
(HELOCs) subject to Sec. 226.5b would have been separately delineated
in Sec. 226.6 (account-opening disclosures), Sec. 226.7 (periodic
statements), and Sec. 226.9 (subsequent disclosures). Rules contained
in footnotes would have been moved to the text of the regulation or
commentary, as appropriate, and the footnotes designated as reserved.
Commenters generally supported this approach. One commenter questioned
retaining the footnotes as reserved and suggested deleting references
to the footnotes entirely. The final rule is organized, and rules
currently stated in footnotes have been moved, as proposed. These
revisions are identified in a table below. See X. Redesignation Table.
The Board retains footnotes as ``reserved'' to preserve the current
footnote numbers in provisions of Regulation Z that will be the subject
of future rulemakings. When rules contained in all footnotes have been
moved to the regulation or commentary, as appropriate, references to
the footnotes will be removed.
Introduction
The official staff commentary to Regulation Z begins with an
Introduction. Comment I-6 discusses reference materials published at
the end of each section of the commentary adopted in 1981. 46 FR 50288,
Oct. 9, 1981. The references were intended as a compliance aid during
the transition to the 1981 revisions to Regulation Z. In June 2007, the
Board proposed to delete provisions addressing references and
transition rules applicable to 1981 revisions to Regulation Z. No
comments were received. Thus, the Board deletes the references and
comments I-3, I-4(b), I-6, and I-7, as obsolete and renumbers the
remaining comments accordingly.
Section 226.1 Authority, Purpose, Coverage, Organization, Enforcement,
and Liability
Section 226.1(c) generally outlines the persons and transactions
covered by Regulation Z. Comment 1(c)-1 provides, in part, that the
regulation applies to consumer credit extended to residents (including
resident aliens) of a state. In June 2007, technical revisions were
proposed for clarity, and comment was requested if further guidance on
the scope of coverage would be helpful. No comments were received and
the comment is adopted with technical revisions for clarity.
Section 226.1(d)(2), which summarizes the organization of the
regulation's open-end credit rules (Subpart B), is amended to reinsert
text inadvertently deleted in a previous rulemaking, as proposed. See
54 FR 24670, June 9, 1989. Section 226.1(d)(4), which summarizes
miscellaneous provisions in the regulation (Subpart D), is updated to
describe amendments made in 2001 to Subpart D relating to disclosures
made in languages other than English, as proposed. See 66 FR 17339,
Mar. 30, 2001. The substance of Footnote 1 is deleted as unnecessary,
as proposed.
In July 2008, the Board revised Subpart E to address certain
mortgage practices and disclosures. These changes are reflected in
Sec. 226.1(d)(5), as amended in the July 2008 Final HOEPA Rule. In
addition, transition rules for the July 2008 rulemaking are added as
comment 1(d)(5)-1. 73 FR 44522, July 30, 2008.
Section 226.2 Definitions and Rules of Construction
2(a) Definitions
2(a)(2) Advertisement
In the June 2007 Proposal, the Board proposed technical revisions
to the commentary to Sec. 226.2(a)(2), with no intended change in
substance or meaning. No changes were proposed for the regulatory text.
The Board received no comments on the proposed changes, and the changes
are adopted as proposed.
2(a)(4) Billing Cycle or Cycle
Section 226.2(a)(4) defines ``billing cycle'' as the interval
between the days or dates of regular periodic statements, and requires
that billing cycles be equal (with a permitted variance of up to four
days from the regular day or date) and no longer than a quarter of a
year. Comment 2(a)(4)-3 states that the requirement for equal cycles
does not apply to transitional billing cycles that occur when a
creditor occasionally changes its billing cycles to establish a new
statement day or date. The Board proposed in June 2007 to revise
comment 2(a)(4)-3 to clarify that this exception also applies to the
first billing cycle that occurs when a consumer opens an open-end
credit account.
Few commenters addressed this provision. One creditor requested
that the Board clarify that the proposed revision applies to the time
period between the opening of the account and the generation of the
first periodic statement (as opposed to the period between the
generation of the first statement and the generation of the second
statement). The comment has been revised to provide the requested
clarification.
The same commenter also requested clarification that the same
exception would apply when a previously closed account is reopened. The
reopening of a previously closed account is no different, for purposes
of comment 2(a)(4)-3, from the original opening of an account;
therefore, this clarification is unnecessary. A consumer group
suggested that an irregular first billing cycle should be limited to no
longer than twice the length of a regular billing cycle, and that
irregular billing cycles should permitted no more than once per year.
The Board believes that these limitations might unduly restrict
creditors' operations. Although it would be unlikely for a creditor to
utilize a billing cycle more than twice the length of the regular
cycle, or an irregular billing cycle more often than once per year,
such cycles might need to be used on rare occasions for operational
reasons.
2(a)(6) Business Day
Section 226.2(a)(6) and comment 2(a)(6)-2, as reprinted, reflect
revisions adopted in the Board's July 2008 Final HOEPA Rule to address
certain
[[Page 5257]]
mortgage practices and disclosures. 73 FR 44522, 44599, 44605, July 30,
2008.
2(a)(15) Credit Card
TILA defines ``credit card'' as ``any card, plate, coupon book or
other credit device existing for the purpose of obtaining money,
property, labor, or services on credit.'' TILA Section 103(k); 15
U.S.C. 1602(k). In addition, Regulation Z currently provides that a
credit card is a ``card, plate, coupon book, or other single credit
device that may be used from time to time to obtain credit.'' See Sec.
226.2(a)(15).
Checks that access credit card accounts. Credit card issuers
sometimes provide cardholders with checks that access a credit card
account (access checks), which can be used to obtain cash, purchase
goods or services or pay the outstanding balance on another account.
These checks are often mailed to cardholders on an unsolicited basis,
sometimes with their monthly statements. When a consumer uses an access
check, the amount of the check is billed to the consumer's credit card
account.
Historically, checks that access credit card accounts have not been
treated as ``credit cards'' under TILA because each check can be used
only once and not ``from time to time.'' See comment 2(a)(15)-1. As a
result, TILA's protections involving merchant disputes, unauthorized
use of the account, and the prohibition against unsolicited issuance,
which apply only to ``credit cards,'' do not apply to transactions
involving these checks. See Sec. 226.12. Nevertheless, billing error
rights apply with to these check transactions. See Sec. 226.13. In the
June 2007 Proposal, the Board declined to extend TILA's protections for
credit cards to access checks.
While industry commenters generally supported the Board's approach,
consumer groups asserted that excluding access checks from treatment as
credit cards does not adequately protect consumers, particularly
insofar as consumers would not be able to assert unauthorized use
claims under Sec. 226.12(b). Consumer groups thus observed that the
current rules lead to an anomalous result where a consumer would be
protected from unauthorized use under Sec. 226.12(b) if a thief used
the consumer's credit card number to initiate a credit card transaction
by telephone or on-line, but would not be similarly protected if the
thief used the consumer's access check to complete the same
transaction. Consumer groups also observed that consumers would be
unable to assert a merchant claim or defense under Sec. 226.12(c) in
connection with a good or service purchased with an access check, nor
would they be protected by the unsolicited issuance provisions in Sec.
226.12(a).
As stated in the proposal, the Board believes that existing
provisions under state law governing checks, specifically the Uniform
Commercial Code (UCC), coupled with the billing error provisions under
Sec. 226.13, provide consumers with appropriate protections from the
unauthorized use of access checks. For example, a consumer generally
would not have any liability for a forged access check under the UCC,
provided that the consumer complies with certain timing requirements in
reporting the forgery. In addition, in the event the consumer asserts a
timely notice of error for an unauthorized transaction involving an
access check under Sec. 226.13, the consumer would not have any
liability if the creditor's investigation determines that the
transaction was in fact unauthorized. Lastly, the Board understands
that, in most instances, consumers may ask their creditor to stop
sending access checks altogether, and these opt-out requests will be
honored by the creditor.
Coupon books. The Board stated in the supplementary information for
the June 2007 Proposal that it is unaware of devices existing today
that would qualify as a ``coupon book'' for purposes of the definition
of ``credit card'' under Sec. 226.2(a)(15). In addition, the Board
noted that elimination of this obsolete term from the definition of
``credit card'' would help to reduce potential confusion regarding
whether an access check or other single credit device that is used
once, if connected in some way to other checks or devices, becomes a
``coupon book,'' thus becoming a ``credit card'' for purposes of the
regulation. For these reasons, the June 2007 Proposal would have
deleted the reference to the term ``coupon book'' from the definition
of ``credit card'' under Sec. 226.2(a)(15).
Consumer groups opposed the Board's proposal, citing the statutory
reference in TILA Section 103(k) to a ``coupon book,'' and noting that
even if such products were not currently being offered, the proposed
deletion could provide issuers an incentive to develop such products
and in that event, consumers would be unable to avail themselves of the
protections against unauthorized use and unsolicited issuance.
The final rule removes the reference to ``coupon book'' in the
definition of ``credit card,'' as proposed. Commenters did not cite any
examples of products that could potentially qualify as a ``coupon
book.'' Thus, in light of the confusion today regarding whether access
checks are ``credit cards'' as a result of the existing reference to
``coupon books,'' the Board believes removal of the term is appropriate
in the final rule, and that the removal will not limit the availability
of Regulation Z protections overall.
Plans in which no physical device is issued. The June 2007 Proposal
did not explicitly address circumstances where a consumer may conduct a
transaction on an open-end plan that does not have a physical device.
In response, industry commenters agreed that it was premature and
unnecessary to address such open-end plans. Consumer groups in contrast
stated that it was appropriate to amend the regulation at this time to
explicitly cover such plans, particularly in light of the Board's
decision elsewhere to update the commentary to refer to biometric means
of verifying the identity of a cardholder or authorized user. See
comment 12(b)(2)(iii)-1, discussed below. While the final rule does not
explicitly address open-end plans in which no physical device is
issued, the Board will continue to monitor developments in the
marketplace and may update the regulation if and when such products
become common. Of course, to the extent a creditor has issued a device
that meets the definition of a ``credit card'' for an account, the
provisions that require use of a ``credit card,'' could apply even
though a particular transaction itself is not conducted using the
device (for example, in the case of telephone and Internet
transactions; see comments 12(b)(2)(iii)-3 and 12(c)(1)-1).
Charge cards. Comment 2(a)(15)-3 discusses charge cards and
identifies provisions in Regulation Z in which a charge card is
distinguished from a credit card. The June 2007 Proposal would have
updated comment 2(a)(15)-3 to reflect that the new late payment and
minimum payment disclosure requirements set forth by the Bankruptcy Act
do not apply to charge card issuers. As further discussed in more
detail below under Sec. 226.7, comment 2(a)(15)-3 is adopted as
proposed.
2(a)(17) Creditor
In June 2007, the Board proposed to exempt from TILA coverage
credit extended under employee-sponsored retirement plans. For reasons
explained in the section-by-section analysis to Sec. 226.3, this
provision is adopted with modifications, as discussed below. Comment
2(a)(17)(i)-8, which provides guidance on whether such a plan is a
[[Page 5258]]
creditor for purposes of TILA, is deleted as unnecessary, as proposed.
In addition, the substance of footnote 3 is moved to a new Sec.
226.2(a)(17)(v), and references revised, accordingly, as proposed. The
dates used to illustrate numerical tests for determining whether a
creditor ``regularly'' extends consumer credit are updated in comments
2(a)(17)(i)-3 through -6, as proposed. References in Sec.
226.2(a)(17)(iv) to provisions in Sec. 226.6 and Sec. 226.7 are
renumbered consistent with this final rule.
2(a)(20) Open-End Credit
Under TILA Section 103(i), as implemented by Sec. 226.2(a)(20) of
Regulation Z, ``open-end credit'' is consumer credit extended by a
creditor under a plan in which (1) the creditor reasonably contemplates
repeated transactions, (2) the creditor may impose a finance charge
from time to time on an outstanding unpaid balance, and (3) the amount
of credit that may be extended to the consumer during the term of the
plan, up to any limit set by the creditor, generally is made available
to the extent that any outstanding balance is repaid.
``Open-end'' plans comprised of closed-end features. In the June
2007 Proposal, the Board proposed several revisions to the commentary
regarding Sec. 226.2(a)(20) to address the concern that currently some
credit products are treated as open-end plans, with open-end
disclosures given to consumers, when such products would more
appropriately be treated as closed-end transactions. The proposal was
based on the Board's belief that closed-end disclosures are more
appropriate than open-end disclosures when the credit being extended is
individual loans that are individually approved and underwritten. As
stated in the June 2007 Proposal, the Board was particularly concerned
about certain credit plans, where each individual credit transaction is
separately evaluated.
For example, under certain so-called multifeatured open-end plans,
creditors may offer loans to be used for the purchase of an automobile.
These automobile loan transactions are approved and underwritten
separately from other credit made available on the plan. (In addition,
the consumer typically has no right to borrow additional amounts on the
automobile loan ``feature'' as the loan is repaid.) If the consumer
repays the entire automobile loan, he or she may have no right to take
further advances on that ``feature,'' and must separately reapply if he
or she wishes to obtain another automobile loan, or use that aspect of
the plan for similar purchases. Typically, while the consumer may be
able to obtain additional advances under the plan as a whole, the
creditor separately evaluates each request.
In the June 2007 Proposal, the Board proposed, among other things,
two main substantive revisions to the commentary to Sec. 226.2(a)(20).
First, the Board proposed to revise comment 2(a)(20)-2 to clarify that
while a consumer's account may contain different sub-accounts, each
with different minimum payment or other payment options, each sub-
account must meet the self-replenishing criterion. Proposed comment
2(a)(20)-2 would have provided that repayments of an advance for any
sub-account must generally replenish a single credit line for that sub-
account so that the consumer may continue to borrow and take advances
under the plan to the extent that he or she repays outstanding balances
without having to obtain separate approval for each subsequent advance.
Second, the Board proposed in June 2007 to clarify in comment
2(a)(20)-5 that in general, a credit line is self-replenishing if a
consumer can obtain further advances or funds without being required to
separately apply for those additional advances, and without undergoing
a separate review by the creditor of that consumer's credit
information, in order to obtain approval for each such additional
advance. TILA Section 103(i) provides that a plan can be an open-end
credit plan even if the creditor verifies credit information from time
to time. 15 U.S.C. 1602(i). As stated in the June 2007 Proposal,
however, the Board believes this provision is not intended to permit a
creditor to separately underwrite each advance made to a consumer under
an open-end plan or account. Such a process could result in closed-end
credit being deemed open-end credit.
General comments. The Board received approximately 300 comment
letters, mainly from credit unions, on the proposed changes to Sec.
226.2(a)(20). (See below for a discussion of the comments specific to
each portion of the proposed changes to Sec. 226.2(a)(20); more
general comments pertaining to the overall impact of recharacterizing
certain multifeatured plans as closed-end credit are discussed in this
subsection.)
Consumer groups and one credit union supported the proposed
changes. The credit union commenter noted that it currently uses a
multifeatured open-end lending program, but that it believes the
changes would be beneficial to consumers and financial institutions,
and that the benefit to consumers would outweigh any inconvenience and
cost imposed on the credit union. This commenter noted that under a
multifeatured open-end lending program, a consumer signs a master loan
agreement but does not receive meaningful disclosures with each
additional extension of credit. This commenter believes that consumers
often do not realize that subsequent extensions of credit are subject
to the terms of the master loan agreement.
Consumer groups stated that there is no meaningful difference
between a customer who obtains a conventional car loan from a bank
versus one who receives an advance to purchase a car via a sub-account
from an open-end plan. Consumer groups further noted that to the extent
a sub-account has fixed payments, fixed terms, and no replenishing
line, it is functionally indistinguishable from any other closed-end
loan for which closed-end disclosures must be given. The consumer
groups' comments stated that there is no legitimate basis on which to
continue to classify these plans as open-end credit.
Most comment letters opposed the proposed changes to the definition
of ``open-end credit.'' Many credit union commenters questioned the
need for the proposed changes, and stated that the Board had not
identified a specific harm arising out of multifeatured open-end
lending. These commenters stated that there is no evidence of harm to
consumers associated with these plans, such as complaints, information
about credit union members paying higher rates or purchasing
unnecessary products, or evidence of higher default rates. These
commenters noted that such plans have been offered by credit unions for
more than 25 years. These commenters also stated that open-end credit
disclosures are adequate and provide members with the information they
need on a timely basis, and that open-end lending members receive
frequent reminders, via periodic statements, of key financial terms
such as the APR. Also, commenters stated that to the extent credit
unions do not charge fees for advances with fixed repayment periods,
the APR disclosed for purposes of the open-end credit disclosures is
the same as the APR that would be disclosed if the transaction were
characterized as closed-end.
The National Credit Union Administration (NCUA) commented that
there are no problems that appear to be generated by or inherent to the
multifeatured aspect of credit unions' multifeatured open-end plans.
This agency urged the Board not to ignore the identity of the creditor
in considering
[[Page 5259]]
the appropriateness of disclosures because doing so ignores the
circumstances in which the disclosures are made; the comment letter
further noted that multifeatured open-end plans offered by credit
unions involve circumstances where there is an ongoing relationship
between the consumer-member and a regulated financial institution.
Credit union commenters and the NCUA also stated that the proposed
revisions would result in a loss of convenience to consumers because
credit unions generally would not be able to continue to offer
multifeatured open-end lending programs, and consumers would have to
sign additional paperwork in order to obtain closed-end advances.
Several of these commenters specifically noted that loss of convenience
would be a concern with respect to military personnel and other
customers they serve in geographically remote locations. Credit union
commenters stated that the proposed revisions, if adopted, would result
in increased costs of borrowing for consumers. Some comment letters
noted that credit unions' rates would become less competitive and that
consumers would be more likely to obtain financing from more expensive
sources, such as auto dealers, check cashing shops, or payday lenders.
Several credit union commenters discussed the likely cost
associated with providing closed-end disclosures instead of open-end
disclosures. The commenters indicated that such costs would include re-
training personnel, changing lending documents and data-processing
systems, purchasing new lending forms, potentially increased staffing
requirements, updating systems, and additional paperwork. Several
commenters offered estimates of the probable cost to credit unions of
converting multifeatured open-end plans to closed-end credit. Those
comments with regard to small entities are discussed in more detail
below in VIII. Final Regulatory Flexibility Analysis. One major service
provider to credit unions estimated that the conversion in loan
products would cost a credit union approximately $100,000, with total
expenses of at least $350 million for all credit unions and their
members. This commenter further noted that there would be annual
ongoing costs totaling millions of dollars, largely due to additional
staff costs that would arise because more business would take place in
person at the credit union.
One commenter indicated that the proposed changes to the commentary
could give rise to litigation risk, and may create more confusion and
unintended consequences than currently exist under the existing
commentary to Regulation Z. This commenter stated that changing the
definition of open-end credit would jeopardize many legitimate open-end
credit plans.
Comments regarding hybrid disclosure. Several comment letters from
credit unions, one credit union trade association, and the NCUA
suggested that the Board should adopt a hybrid disclosure approach for
multifeatured open-end plans. Under this approach, these commenters
indicated that the Board should continue to permit multifeatured open-
end plans, as they are currently structured, to provide open-end
disclosures to consumers, but should also impose a new subsequent
disclosure requirement. Shortly after obtaining credit, such as for an
auto loan, that is individually underwritten or not self-replenishing,
the creditor would be required to give disclosures that mirror the
disclosures given for closed-end credit.
The Board is not adopting this hybrid disclosure approach. The
Board believes that the statutory framework clearly provides for two
distinct types of credit, open-end and closed-end, for which different
types of disclosures are deemed to be appropriate. Such a hybrid
disclosure regime would be premised on the fact that the closed-end
disclosures are beneficial to consumers in connection with certain
types of advances made under these plans. If this is the case, the
Board believes that consumers should receive the closed-end disclosures
prior to consummation of the transaction, when a consumer is shopping
for credit.
Replenishment. As discussed above, the Board proposed in June 2007
to revise comment 2(a)(20)-2 to clarify that while a consumer's account
may contain different sub-accounts, each with different minimum payment
or other payment options, each sub-account must meet the self-
replenishing criterion.
Several industry commenters specifically objected to the new
requirement in proposed comment 2(a)(20)-2 that open-end credit
replenish on a sub-account by sub-account basis. Some commenters
expressed concern about the applicability of proposed comment 2(a)(20)-
2 to promotional rate offers. The commenters noted that a creditor may
make a balance transfer offer or send out convenience checks at a
promotional APR. As the balance subject to the promotional APR is
repaid, the available credit on the account will be replenished,
although the available credit for the original promotional rate offer
is not replenished. These commenters stated that unless the Board can
define sub-accounts in a manner that excludes balances subject to
special terms, the Board should withdraw the proposed revision to
comment 2(a)(20)-2. Other commenters indicated that the critical
requirement should be that repayment of balances in any sub-account
replenishes the overall account, not that each sub-account itself must
be replenishing.
Similarly, the Board received several industry comment letters
indicating that the proposed changes to comment 2(a)(20)-2 would have
adverse consequences for certain HELOCs. The comments noted that many
creditors use multiple features or sub-accounts in order to provide
consumers with flexibility and choices regarding the terms applicable
to certain portions of an open-end credit balance. They noted as an
example a feature on a HELOC that permits a consumer to convert a
portion of the balance into a fixed-rate, fixed-term sub-account; the
sub-account is never replenished but payments on the sub-account
replenish the master open-end account.
In addition, the Board received a comment from an association of
state regulators of credit unions raising concerns that proposed
comment 2(a)(20)-2 would present a safety and soundness concern for
institutions. These comments noted that a self-replenishing sub-account
for an auto loan, for example, would be a safety and soundness concern
because the value of the collateral would decline and eventually be
less than the credit limit.
In light of the comments received and upon further analysis, the
Board has withdrawn the proposed changes to comment 2(a)(20)-2 from the
final rule. The Board believes that one unintended consequence of the
proposed requirement that payments on each sub-account replenish is
that some sub-accounts (like HELOCs) would be re-characterized as
closed-end credit when they are properly treated as open-end credit.
Generally, the proposed changes to comment 2(a)(20)-2 were intended to
ensure that repayments of advances on an open-end credit plan generally
would replenish the credit available to the consumer. The Board
believes that replenishment of an open-end plan on an overall basis
achieves this purpose and that, as discussed below, the best way to
address loans that are more properly characterized as closed-end credit
being treated as features of open-end plans is through clarifications
[[Page 5260]]
regarding verification of credit information and separate underwriting
of individual advances.
Verification and underwriting of separate advances. As discussed
above, the Board proposed in June 2007 to clarify in comment 2(a)(20)-5
that, in general, a credit line is self-replenishing if a consumer can
obtain further advances or funds without being required to separately
apply for those additional advances, and without undergoing a separate
review by the creditor of that consumer's credit information, in order
to obtain such additional advance.
Notwithstanding this proposed change, the Board noted that a
creditor would be permitted to verify credit information to ensure that
the consumer's creditworthiness has not deteriorated (and could revise
the consumer's credit limit or account terms accordingly). This is
consistent with the statutory definition of ``open end credit plan,''
which provides that a credit plan may be an open end credit plan even
if credit information is verified from time to time. See 15 U.S.C.
1602(i). However, the Board noted in the June 2007 Proposal its belief
that performing a distinct underwriting analysis for each specific
credit request would go beyond the verification contemplated by the
statute and would more closely resemble underwriting of closed-end
credit. For example, assume that based on the initial underwriting of
an open-end plan, a consumer were initially approved for a line of
credit with a $20,000 credit limit. Under the proposal, if that
consumer subsequently took a large advance of $10,000, it would be
inconsistent with the definition of open-end credit for the creditor to
independently evaluate the consumer's creditworthiness in connection
with that advance. However, proposed comment 2(a)(20)-5 would have
stated that a creditor could continue to review, and as appropriate,
decrease the amount of credit available to a consumer from time to time
to address safety and soundness and other concerns.
The NCUA agreed with the Board that the statutory provision
regarding verification is not intended to permit separate underwriting
and applications for each sub-account. The agency encouraged the Board
to focus any commentary changes regarding the definition of open-end
credit on the distinctions between verification versus a credit
evaluation as a more appropriate and less burdensome response to its
concerns than the proposed revisions regarding replenishment.
Several industry commenters indicated that proposed comment
2(a)(20)-5 could have unintended adverse consequences for legitimate
open-end products. One industry trade association and several industry
commenters stated creditors finance purchases that may utilize a
substantial portion of available credit or even exceed the credit line
under pre-established credit criteria. According to these commenters,
creditors may have over-the-limit buffers or strategies in place that
contemplate such purchases, and these transactions should not be
considered a separate underwriting. The commenters further stated that
any legitimate authorization procedures or consideration of a credit
line increase should not exclude a transaction from open-end credit.
One credit card association and one large credit card issuer
commented that some credit cards have no preset spending limits, and
issuers may need to review a cardholder's credit history in connection
with certain transactions on such accounts. These commenters stated
that regardless of how an issuer handles individual transactions on
such accounts, they should be characterized as open-end.
One other industry commenter stated that a creditor should be able
to verify the consumer's creditworthiness in connection with a request
for an advance on an open-end credit account. This creditor noted that
the statute does not impose any limitation on the frequency with which
verification is made, nor does it indicate that verification can be
made only as part of an account review, and not also when a consumer
requests an advance. The commenter stated that the most important time
to conduct verification is when an advance is requested.
This commenter further suggested that the concept of
``verification'' is, by itself, distinguishable from a de novo credit
decision on an application for a new loan. This commenter posited that
comment 2(a)(20)-5 recognizes this insofar as it contemplates a
determination of whether the consumer continues to meet the lender's
credit standards and provides that the consumer should have a
reasonable expectation of obtaining additional credit as long as the
consumer continues to meet those credit standards. An application for a
new extension of credit contemplates a de novo credit determination,
while verification involves a determination of whether a borrower
continues to meet the lender's credit standards.
The changes to comment 2(a)(20)-5 are adopted as proposed, with one
revision discussed below in the subsection titled Credit cards. Under
revised comment 2(a)(20)-5, verification of a consumer's
creditworthiness consistent with the statute continues to be permitted
in connection with an open-end plan; however, underwriting of specific
advances is not permitted for an open-end plan. The Board believes that
underwriting of individual advances exceeds the scope of the
verification contemplated by the statute and is inconsistent with the
definition of open-end credit. The Board believes that the rule does
not undermine safe and sound lending practices, but simply clarifies
that certain types of advances for which underwriting is done must be
treated as closed-end credit with closed-end disclosures provided to
the consumer.
The revisions to comment 2(a)(20)-5 are intended only to have
prospective application to advances made after the effective date of
the final rule. A creditor may continue to give open-end disclosures in
connection with an advance that met the definition of ``open-end
credit'' under current Sec. 226.2(a)(20) and the associated
commentary, if that advance was made prior to the effective date of the
final rule. However, a creditor that makes a new advance under an
existing credit plan after the effective date of the final rule will
need to determine whether that advance is properly characterized as
open-end or closed-end credit under the revised definition, and give
the appropriate disclosures.
One commenter asked the Board to clarify the ``reasonable
expectation'' language in comment 2(a)(20)-5. This commenter noted that
a consumer should not expect to obtain additional advances if the
consumer is in default in any provision of the loan agreement (it is
not enough to merely be ``current'' in their payments), and otherwise
does not comply with the requirements for advances in the loan
agreement (such as minimum advance requirements or the method for
requesting advances). The Board believes that under the current rule a
creditor may suspend a consumer's credit privileges or reduce a
consumer's credit limit if the consumer is in default under his or her
loan agreement. Thus, the Board does not believe that this
clarification is necessary and has not adopted it in the final rule.
Verification of collateral. Several commenters stated that comment
2(a)(20)-5 should expressly permit routine collateral valuation and
verification procedures at any time, including as a condition of
approving an advance. One of these commenters
[[Page 5261]]
stated that Regulation U (Credit by Banks and Persons Other than
Brokers or Dealers for the Purpose of Purchasing or Carrying Margin
Stock) requires a bank in connection with margin lending, to not
advance funds in excess of a certain collateral value. 12 CFR part 221.
The commenter also pointed out that for some accounts, a borrower's
credit limit is determined from time to time based on the market value
of the collateral securing the account.
In response to commenters' concerns, new comment 2(a)(20)-(6) is
added to clarify that creditors that otherwise meet the requirements of
Sec. 226.2(a)(20) extend open-end credit notwithstanding the fact that
the creditor must verify collateral values to comply with federal,
state, or other applicable laws or verifies the value of collateral in
connection with a particular advance under the plan. Current comment
2(a)(20)-6 is renumbered as comment 2(a)(20)-7.
Credit cards. Several credit and charge card issuers commented that
the proposal could have adverse effects on those products. One credit
card issuer indicated that the proposed changes could have unintended
adverse consequences for certain credit card securitizations. This
commenter noted that securitization documentation for credit cards
typically provides that an account must be a revolving credit card
account for the receivables arising in that account to be eligible for
inclusion in the securitization. If the proposal were to recharacterize
accounts that are currently included in securitizations as closed-end
credit, this commenter stated that it could require restructuring of
existing and future securitization transactions.
As discussed above, several industry commenters noted other
circumstances in which proposed comment 2(a)(20)-5 could have adverse
consequences for credit cards. Several commenters stated that creditors
may have over-the-limit buffers or strategies in place that contemplate
purchases utilizing a substantial portion of, or even exceed, the
credit line, and these transactions should not be considered a separate
underwriting. Commenters also stated that any legitimate authorization
procedures or consideration of a credit line increase should not
exclude a transaction from open-end credit. Finally, one credit card
association and one large credit card issuer commented that some credit
cards have no preset spending limits, and issuers may need to review a
cardholder's credit history in connection with certain transactions on
such accounts. These commenters stated that regardless of how an issuer
handles individual transactions on such accounts, they should be
characterized as open-end.
The Board has addressed credit card issuers' concerns about
emergency underwriting and underwriting of amounts that may exceed the
consumer's credit limit by expressly providing in comment 2(a)(20)-5
that a credit card account where the plan as a whole replenishes meets
the self-replenishing criterion, notwithstanding the fact that a credit
card issuer may verify credit information from time to time in
connection with specific transactions. The Board did not intend in the
June 2007 Proposal and does not intend in the final rule to exclude
credit cards from the definition of open-end credit and believes that
the revised final rule gives certainty to creditors offering credit
cards. The Board believes that the strategies identified by commenters,
such as over-the-limit buffers, treatment of certain advances for cards
without preset spending limits, and consideration of credit line
increases generally do not constitute separate underwriting of
advances, and that open-end disclosures are appropriate for credit
cards for which the plan as a whole replenishes. The Board also
believes that this clarification will help to promote uniformity in
credit card disclosures by clarifying that all credit cards are subject
to the open-end disclosure rules. The Board notes that charge card
accounts may not meet the definition of open-end credit but pursuant to
Sec. 226.2(a)(17)(iii) are subject to the rules that apply to open-end
credit.
Examples regarding repeated transactions. Due to the concerns noted
above regarding closed-end automobile loans being characterized as
features of so-called open-end plans, the Board also proposed in June
2007 to delete comment 2(a)(20)-3.ii., which states that it would be
more reasonable for a financial institution to make advances from a
line of credit for the purchase of an automobile than it would be for
an automobile dealer to sell a car under an open-end plan. As stated in
the proposal, the Board was concerned that the current example placed
inappropriate emphasis on the identity of the creditor rather than the
type of credit being extended by that creditor. Similarly, the Board
proposed to revise current comment 2(a)(20)-3.i., which referred to a
thrift institution, to refer more generally to a bank or financial
institution and to move the example into the body of comment 2(a)(20)-
3. The Board received no comments opposing the revisions to these
examples, and the changes are adopted as proposed.
Technical amendments. The Board also proposed in the June 2007
Proposal a technical update to comment 2(a)(20)-4 to delete, without
intended substantive change, a reference to ``china club plans,'' which
may no longer be very common. No comments were received on this aspect
of the proposal, and the update to comment 2(a)(20)-4 is adopted as
proposed.
Comment 2(a)(20)-5.ii. currently notes that a creditor may reduce a
credit limit or refuse to extend new credit due to changes in the
economy, the creditor's financial condition, or the consumer's
creditworthiness. The Board's proposal would have deleted the reference
to changes in the economy to simplify this provision. No comments were
received on this change, which is adopted as proposed.
Implementation date. Many credit union commenters on the June 2007
Proposal expressed concern about the effect of successive regulatory
changes. These commenters stated that the June 2007 Proposal, if
adopted, would require them to give closed-end disclosures in
connection with certain advances, such as the purchase of an
automobile, for which they currently give open-end disclosures. The
commenters noted that because the Board is also considering regulatory
changes to closed-end lending, it could require such creditors to make
two sets of major systematic changes in close succession. These
commenters stated that such successive regulatory changes could impose
a significant burden that would impair the ability of credit unions to
serve their members effectively. The Board expects all creditors to
provide closed-end or open-end disclosures, as appropriate in light of
revised Sec. 226.2(a)(20) and the associated commentary, as of the
effective date of the final rule. The Board has not delayed the
effectiveness of the changes to the definition of ``open-end credit.''
The Board is mindful that the changes to the definition may impose
costs on certain credit unions and other creditors, and that any future
changes to the provisions of Regulation Z dealing with closed-end
credit may impose further costs. However, the Board believes that it is
important that consumers receive the appropriate type of disclosures
for a given extension of credit, and that it is not appropriate to
delay effectiveness of these changes pending the Board's review of the
rules pertaining to closed-end credit.
[[Page 5262]]
2(a)(24) Residential Mortgage Transaction
Comment 2(a)(24)-1, which identifies key provisions affected by the
term ``residential mortgage transaction,'' and comment 2(a)(24)-5.ii.,
which provides guidance on transactions financing the acquisition of a
consumer's principal dwelling, are revised from the June 2007 Proposal
to conform to changes adopted by the Board in the July 2008 Final HOEPA
Rule to address certain mortgage practices and disclosures. 73 FR
44522, 44605, July 30, 2008.
Section 226.3 Exempt Transactions
Section 226.3 implements TILA Section 104 and provides exemptions
for certain classes of transactions specified in the statute. 15 U.S.C.
1603.
In June 2007, the Board proposed several substantive and technical
revisions to Sec. 226.3 as described below. The Board also proposed to
move the substance of footnote 4 to the commentary. See comment 3-1. No
comments were received on moving footnote 4 to the commentary, and that
change is adopted in the final rule.
3(a) Business, Commercial, Agricultural, or Organizational Credit
Section 226.3(a) provides, in part, that the regulation does not
apply to extensions of credit primarily for business, commercial or
agricultural purposes. As the Board noted in the supplementary
information to the June 2007 Proposal, questions have arisen from time
to time regarding whether transactions made for business purposes on a
consumer-purpose credit card are exempt from TILA. The Board proposed
to add a new comment 3(a)-2 to clarify transactions made for business
purposes on a consumer-purpose credit card are covered by TILA (and,
conversely, that purchases made for consumer purposes on a business-
purpose credit card are exempt from TILA). The Board received several
comments on proposed comment 3(a)-2. One consumer group and one large
financial institution commented in support of the change. One industry
trade association stated that the proposed clarification was anomalous
given the general exclusion of business credit from TILA coverage. The
Board acknowledges that this clarification will result in certain
business purpose transactions being subject to TILA, and certain
consumer purpose transactions being exempt from TILA. However, the
Board believes that the determination as to whether a credit card
account is primarily for consumer purposes or business purposes is best
made when an account is opened (or when an account is reclassified as a
business-purpose or consumer-purpose account) and that comment 3(a)-2
provides important clarification and certainty to consumers and
creditors. In addition, determining whether specific transactions
charged to the credit card account are for consumer or business
purposes could be operationally difficult and burdensome for issuers.
Accordingly, the Board adopts new comment 3(a)-2 as proposed with
several technical revisions described below. Other sections of the
commentary regarding Sec. 226.3(a) are renumbered accordingly. The
Board also adopts new comment 3(a)-7, which provides guidance on credit
card renewals consistent with new comment 3(a)-2, as proposed.
The examples in proposed comment 3(a)-2 contained several
references to credit plans, which are deleted from the final rule as
unnecessary because comment 3(a)-2 was intended to address only credit
cards. Credit plans are addressed by the examples in redesignated
comment 3(a)-3, which is unaffected by this rulemaking.
3(g) Employer-Sponsored Retirement Plans
The Board has received questions from time to time regarding the
applicability of TILA to loans taken against employer-sponsored
retirement plans. Pursuant to TILA Section 104(5), the Board has the
authority to exempt transactions for which it determines that coverage
is not necessary in order to carry out the purposes of TILA. 15 U.S.C.
1603(5). The Board also has the authority pursuant to TILA Section
105(a) to provide adjustments and exceptions for any class of
transactions, as in the judgment of the Board are necessary or proper
to effectuate the purposes of TILA. 15 U.S.C. 1604(a).
The June 2007 Proposal included a new Sec. 226.3(g), which would
have exempted loans taken by employees against their employer-sponsored
retirement plans qualified under Section 401(a) of the Internal Revenue
Code and tax-sheltered annuities under Section 403(b) of the Internal
Revenue Code, provided that the extension of credit is comprised of
fully-vested funds from such participant's account and is made in
compliance with the Internal Revenue Code. 26 U.S.C. 1 et seq.; 26
U.S.C. 401(a); 26 U.S.C. 403(b). The Board stated several reasons for
this proposed exemption in the supplementary information to the June
2007 Proposal, including the fact that the consumer's interest and
principal payments on such a loan are reinvested in the consumer's own
account and there is no third-party creditor imposing finance charges
on the consumer. In addition, the costs of a loan taken against assets
invested in a 401(k) plan, for example, are not comparable to the costs
of a third-party loan product, because a consumer pays the interest on
a 401(k) loan to himself or herself rather than to a third party.
The Board received several comments regarding proposed Sec.
226.3(g), which generally supported the proposed exemption for loans
taken by employees against their employer-sponsored retirement plans.
Two commenters asked the Board to expand the proposed exemption to
include loans taken against governmental 457(b) plans, which are a type
of retirement plan offered by certain state and local government
employers. 26 U.S.C. 457(b). The comments noted that governmental
457(b) plans may permit participant loans, subject to the requirements
of section 72(p) of the Internal Revenue Code (26 U.S.C. 1 et seq.),
which are the same requirements that are applicable to qualified 401(a)
plans and 403(b) plans. The comments also stated that the Board's
reasons for proposing the exemption apply equally to governmental
457(b) plans. The final rule expands the scope of the exemption to
include loans taken against governmental 457(b) plans. The exemption
for loans taken against employer-sponsored retirement plans was
intended to cover all such similar plans, and the omission of
governmental 457(b) plans from the proposed exemption was
unintentional. The Board believes the rationales stated above and in
the June 2007 Proposal for the proposed exemption for qualified 401(a)
plans and 403(b) plans apply equally to governmental 457(b) plans.
In addition to the rationales stated above, another reason given
for the proposed exception in the June 2007 Proposal was a statement
that plan administration fees must be disclosed under applicable
Department of Labor regulations. One commenter noted that the
Department of Labor regulations cited in the supplementary information
to the June 2007 Proposal do not apply to governmental 403(b) plans,
governmental 457(b) plans, and certain other 403(b) programs that are
not subject to the Employee Retirement Income Security Act of 1974
(ERISA). 29 U.S.C. 1001 et seq. The commenter asked for clarification
regarding whether the exemption will apply to loans taken from plans
and programs which are not subject to ERISA. Section 226.3(g) itself
does not contain a reference to ERISA or the Department of Labor
regulations pertaining to ERISA, and, accordingly,
[[Page 5263]]
the exemption applies even if the particular plan is not subject to
ERISA. For the other reasons stated above and in the June 2007
Proposal, the Board believes that the exemption for the plans specified
in new Sec. 226.3(g) is appropriate even for those plans to which
ERISA disclosure requirements do not apply.
Section 226.4 Finance Charge
Various provisions of TILA and Regulation Z specify how and when
the cost of consumer credit expressed as a dollar amount, the ``finance
charge,'' is to be disclosed. The rules for determining which charges
make up the finance charge are set forth in TILA Section 106 and
Regulation Z Sec. 226.4. 15 U.S.C. 1605. Some rules apply only to
open-end credit and others apply only to closed-end credit, while some
apply to both. With limited exceptions, the Board did not propose in
June 2007 to change Sec. 226.4 for either closed-end credit or open-
end credit. The areas in which the Board did propose to revise Sec.
226.4 and related commentary relate to (1) transaction charges imposed
by credit card issuers, such as charges for obtaining cash advances
from automated teller machines (ATMs) and for making purchases in
foreign currencies or foreign countries, and (2) charges for credit
insurance, debt cancellation coverage, and debt suspension coverage.
4(a) Definition
Transaction charges. Under the definition of ``finance charge'' in
TILA Section 106 and Regulation Z Sec. 226.4(a), a charge specific to
a credit transaction is ordinarily a finance charge. 15 U.S.C. 1605.
See also Sec. 226.4(b)(2). However, under current comment 4(a)-4, a
fee charged by a card issuer for using an ATM to obtain a cash advance
on a credit card account is not a finance charge to the extent that it
does not exceed the charge imposed by the card issuer on its
cardholders for using the ATM to withdraw cash from a consumer asset
account, such as a checking or savings account. Another comment
indicates that the fee is an ``other charge.'' See current comment
6(b)-1.vi. Accordingly, the fee must be disclosed at account opening
and on the periodic statement, but it is not labeled as a ``finance
charge'' nor is it included in the effective APR.
In the June 2007 Proposal, the Board proposed new comment 4(a)-4 to
address questions that have been raised about the scope and application
of the existing comment. For example, assume the issuer assesses an ATM
fee for one kind of deposit account (for example, an account with a low
minimum balance) but not for another. The existing comment does not
indicate which account is the proper basis for comparison, nor is it
clear in all cases which account should be the appropriate one to use.
Questions have also been raised about whether disclosure of an ATM
cash advance fee pursuant to comments 4(a)-4 and 6(b)-1.vi. is
meaningful to consumers. Under the comments, the disclosure a consumer
receives after incurring a fee for taking a cash advance through an ATM
depends on whether the credit card issuer provides asset accounts and
offers debit cards on those accounts and whether the fee for using the
ATM for the cash advance exceeds the fee for using the ATM for a cash
withdrawal from an asset account. It is not clear that these
distinctions are meaningful to consumers.
In addition, questions have arisen about the proper disclosure of
fees that cardholders are assessed for making purchases in a foreign
currency or outside the United States--for example, when the cardholder
travels abroad. The question has arisen in litigation between consumers
and major card issuers.\11\ Some card issuers have reasoned by analogy
to comment 4(a)-4 that a foreign transaction fee is not a finance
charge if the fee does not exceed the issuer's fee for using a debit
card for the same purchase. Some card issuers disclose the foreign
transaction fee as a finance charge and include it in the effective
APR, but others do not.
---------------------------------------------------------------------------
\11\ See, e.g., Third Consolidated Amended Class Action
Complaint at 47-48, In re Currency Conversion Fee Antitrust
Litigation, MDL Docket No. 1409 (S.D.N.Y.). The court approved a
settlement on a preliminary basis on November 8, 2006. See also,
e.g., LiPuma v. American Express Company, 406 F. Supp. 2d 1298
(S.D.Fla. 2005).
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The uncertainty about proper disclosure of charges for foreign
transactions and for cash advances from ATMs reflects the inherent
complexity of seeking to distinguish transactions that are ``comparable
cash transactions'' to credit card transactions from transactions that
are not. In June 2007, the Board proposed to replace comment 4(a)-4
with a new comment of the same number stating a simple interpretive
rule that any transaction fee on a credit card plan is a finance
charge, regardless of whether the issuer imposes the same or lesser
charge on withdrawals of funds from an asset account, such as a
checking or savings account. The proposed comment would have provided
as examples of such finance charges a fee imposed by the issuer for
taking a cash advance at an ATM,\12\ as well as a fee imposed by the
issuer for foreign transactions. The Board stated its belief that
clearer guidance might result from a new and simpler approach that
treats as a finance charge any fee charged by credit card issuers for
transactions on their credit card plans, and accordingly proposed new
comment 4(a)-4.
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\12\ The change to comment 4(a)-4 does not affect disclosure of
ATM fees assessed by institutions other than the credit card issuer.
See proposed Sec. 226.6(b)(1)(ii)(A), adopted in the final rule as
Sec. 226.6(b)(3)(iii)(A).
---------------------------------------------------------------------------
Few commenters addressed proposed comment 4(a)-4. Some commenters
supported the proposed comment, including a financial institution
(although the commenter noted that its support of the proposal was
predicated on the effective APR disclosure requirements being
eliminated, as the Board proposed under one alternative). Other
commenters opposed the proposed comment, some expressing concern that
including all transaction fees as finance charges might cause the
effective APR to exceed statutory interest rate limits contained in
other laws (for example, the 18 percent statutory interest rate ceiling
applicable to federal credit unions).
One commenter stated particular concerns about the proposed
inclusion of foreign transaction fees as finance charges. The commenter
stated that the settlements in the litigation referenced above have
already resolved the issues involved and that adopting the proposal
would cause disruption to disclosure practices established under the
settlements. A consumer group that supported including all transaction
fees in the finance charge noted its concern that the positive effect
of the proposal would be nullified by specifying a limited list of fees
that must be disclosed in writing at account opening (see the section-
by-section analysis to Sec. 226.6(b)(2) and (b)(3), below), and by
eliminating the effective APR assuming the Board adopted that
alternative. The commenter urged the Board to go further and include a
number of other types of fees in the finance charge.
The Board is adopting proposed comment 4(a)-4 with some changes for
clarification. As adopted in final form, comment 4(a)-4 includes
language clarifying that foreign transaction fees include charges
imposed when transactions are made in foreign currencies and converted
to U.S. dollars, as well as charges imposed when transactions are made
in U.S. dollars outside the United States and charges imposed when
transactions are made (whether in a foreign currency or
[[Page 5264]]
in U.S. dollars) with a foreign merchant, such as via a merchant's Web
site. For example, a consumer may use a credit card to make a purchase
in Bermuda, in U.S. dollars, and the card issuer may impose a fee
because the transaction took place outside the United States. The
comment also clarifies that foreign transaction fees include charges
imposed by the card issuer and charges imposed by a third party that
performs the conversion, such as a credit card network or the card
issuer's corporate parent. (For example, in a transaction processed
through a credit card network, the network may impose a 1 percent
charge and the card-issuing bank may impose an additional 2 percent
charge, for a total of a 3 percentage point foreign transaction fee
being imposed on the consumer.)
However, the comment also clarifies that charges imposed by a third
party are included only if they are directly passed on to the consumer.
For example, if a credit card network imposes a 1 percent fee on the
card issuer, but the card issuer absorbs the fee as a cost of doing
business (and only passes it on to consumers in the general sense that
the interest and fees are imposed on all its customers to recover its
costs), then the fee is not a foreign transaction fee that must be
disclosed. In another example, if the credit card network imposes a 1
percent fee for a foreign transaction on the card issuer, and the card
issuer imposes this same fee on the consumer who engaged in the foreign
transaction, then the fee is a foreign transaction fee and must be
included in finance charges to be disclosed. The comment also makes
clear that a card issuer is not required to disclose a charge imposed
by a merchant. For example, if the merchant itself performs the
currency conversion and adds a fee, this would be not be a foreign
transaction fee that card issuers must disclose. Under Sec. 226.9(d),
the card issuer is not required to disclose finance charges imposed by
a party honoring a credit card, such as a merchant, although the
merchant itself is required to disclose such a finance charge (assuming
the merchant is covered by TILA and Regulation Z generally).
The foreign transaction fee is determined by first calculating the
dollar amount of the transaction, using a currency conversion rate
outside the card issuer's and third party's control. Any amount in
excess of that dollar amount is a foreign transaction fee. The comment
provides examples of conversion rates outside the card issuer's and
third party's control. (Such a rate is deemed to be outside the card
issuer's and third party's control, even if the card issuer or third
party could arguably in fact have some degree of control over the rate
used, by selecting the rate from among a number of rates available.)
With regard to the conversion rate, the comment also clarifies that
the rate used for a particular transaction need not be the same rate
that the card issuer (or third party) itself obtains in its currency
conversion operations. The card issuer or third party may convert
currency in bulk amounts, as opposed to performing a conversion for
each individual transaction. The comment also clarifies that the rate
used for a particular transaction need not be the rate in effect on the
date of the transaction (purchase or cash advance), because the
conversion calculation may take place on a later date.
Concerns of some commenters that inclusion of all transaction
charges in the finance charge would cause the effective APR to exceed
permissible ceilings are moot due to the fact that the final rule
eliminates the effective APR requirements as to open-end (not home-
secured) credit, as discussed in the general discussion on the
effective APR in the section-by-section analysis to Sec. 226.7(b). As
to the consumer group comment that eliminating the effective APR would
negate the beneficial impact of the proposed comment for consumers, the
Board believes that adoption of the comment will nevertheless result in
better and more meaningful disclosures to consumers. Transaction fees
such as ATM cash advance fees and foreign transaction fees will be
disclosed more consistently. The Board also believes that the comment
will provide clearer guidance to card issuers, as discussed above.
With regard to foreign transaction fees, the Board believes that
although the settlements in the litigation mentioned above may have led
to some standardization of disclosure practices, the proposed comment
is appropriate because it will bring a uniform disclosure approach to
foreign transaction fees (as opposed to possibly differing approaches
under the different settlement terms), and will be a continuing federal
regulatory requirement (whereas settlements can be modified or expire).
Existing comment 4(b)(2)-1 (which is not revised in the final rule)
states that if a checking or transaction account charge imposed on an
account with a credit feature does not exceed the charge for an account
without a credit feature, the charge is not a finance charge. Comment
4(b)(2)-1 and revised comment 4(a)-4 address different situations.
Charges in comparable cash transactions. Comment 4(a)-1 provides
examples of charges in comparable cash transactions that are not
finance charges. Among the examples are discounts available to a
particular group of consumers because they meet certain criteria, such
as being members of an organization or having accounts at a particular
institution. In the June 2007 Proposal, the Board solicited comment on
whether the example is still useful, or should be deleted as
unnecessary or obsolete. No comments were received on this issue.
Nonetheless, because many of the examples provide guidance to creditors
offering closed-end credit, comment 4(a)-1 is retained in the final
rule and the examples will be reviewed in a future rulemaking
addressing closed-end credit.
4(b) Examples of Finance Charges
Charges for credit insurance or debt cancellation or suspension
coverage. Premiums or other charges for credit life, accident, health,
or loss-of-income insurance are finance charges if the insurance or
coverage is ``written in connection with'' a credit transaction. 15
U.S.C. 1605(b); Sec. 226.4(b)(7). Creditors may exclude from the
finance charge premiums for credit insurance if they disclose the cost
of the insurance and the fact that the insurance is not required to
obtain credit. In addition, the statute requires creditors to obtain an
affirmative written indication of the consumer's desire to obtain the
insurance, which, as implemented in Sec. 226.4(d)(1)(iii), requires
creditors to obtain the consumer's initials or signature. 15 U.S.C.
1605(b). In 1996, the Board expanded the scope of the rule to include
plans involving charges or premiums for debt cancellation coverage. See
Sec. 226.4(b)(10) and (d)(3). See also 61 FR 49237, Sept. 19, 1996.
Currently, however, insurance or coverage sold after consummation of a
closed-end credit transaction or after the opening of an open-end plan
and upon a consumer's request is considered not to be ``written in
connection with the credit transaction,'' and, therefore, a charge for
such insurance or coverage is not a finance charge. See comment 4(b)(7)
and (8)-2.
In June 2007, the Board proposed a number of revisions to these
rules:
(1) The same rules that apply to debt cancellation coverage would
have been applied explicitly to debt suspension coverage. However, to
exclude the cost of debt suspension coverage from the finance charge,
creditors would have been required to inform consumers, as
[[Page 5265]]
applicable, that the obligation to pay loan principal and interest is
only suspended, and that interest will continue to accrue during the
period of suspension. These proposed revisions would have applied to
all open-end plans and closed-end credit transactions.
(2) Creditors could exclude from the finance charge the cost of
debt cancellation and suspension coverage for events in addition to
those permitted today, namely, life, accident, health, or loss-of-
income. This proposed revision would also have applied to all open-end
plans and closed-end credit transactions.
(3) The meaning of insurance or coverage ``written in connection
with'' an open-end plan would have been expanded to cover sales made
throughout the life of an open-end (not home-secured) plan. Under the
proposal, for example, consumers solicited for the purchase of optional
insurance or debt cancellation or suspension coverage for existing
credit card accounts would have received disclosures about the cost and
optional nature of the product at the time of the consumer's request to
purchase the insurance or coverage. HELOCs subject to Sec. 226.5b and
closed-end transactions would not have been affected by this proposed
revision.
(4) For telephone sales, creditors offering open-end (not home-
secured) plans would have been provided with flexibility in evidencing
consumers' requests for optional insurance or debt cancellation or
suspension coverage, consistent with rules published by federal banking
agencies to implement Section 305 of the Gramm-Leach-Bliley Act
regarding the sale of insurance products by depository institutions and
guidance published by the Office of the Comptroller of the Currency
(OCC) regarding the sale of debt cancellation and suspension products.
See 12 CFR Sec. 208.81 et seq. regarding insurance sales; 12 CFR part
37 regarding debt cancellation and debt suspension products. For
telephone sales, creditors could have provided disclosures orally, and
consumers could have requested the insurance or coverage orally, if the
creditor maintained evidence of compliance with the requirements, and
mailed written information within three days after the sale. HELOCs
subject to Sec. 226.5b and closed-end transactions would not have been
affected by this proposed revision.
All of these products serve similar functions but some are
considered insurance under state law and others are not. Taken
together, the proposed revisions were intended to provide consistency
in how creditors deliver, and consumers receive, information about the
cost and optional nature of similar products. The revisions are
discussed in detail below.
4(b)(7) and (8) Insurance Written in Connection With Credit Transaction
Premiums or other charges for insurance for credit life, accident,
health, or loss-of-income, loss of or damage to property or against
liability arising out of the ownership or use of property are finance
charges if the insurance or coverage is written in connection with a
credit transaction. 15 U.S.C. 1605(b) and (c); Sec. 226.4(b)(7) and
(b)(8). Comment 4(b)(7) and (8)-2 provides that insurance is not
written in connection with a credit transaction if the insurance is
sold after consummation on a closed-end transaction or after an open-
end plan is opened and the consumer requests the insurance. As stated
in the June 2007 Proposal, the Board believes this approach remains
sound for closed-end transactions, which typically consist of a single
transaction with a single advance of funds. Consumers with open-end
plans, however, retain the ability to obtain advances of funds long
after account opening, so long as they pay down the principal balance.
That is, a consumer can engage in credit transactions throughout the
life of a plan.
Accordingly, in June 2007 the Board proposed revisions to comment
4(b)(7) and (8)-2, to state that insurance purchased after an open-end
(not home-secured) plan was opened would be considered to be written
``in connection with a credit transaction.'' Proposed new comment
4(b)(10)-2 would have given the same treatment to purchases of debt
cancellation or suspension coverage. As proposed, therefore, purchases
of voluntary insurance or debt cancellation or suspension coverage
after account opening would trigger disclosure and consent
requirements.
Few commenters addressed this issue. One financial institution
trade association supported the proposed revisions to comments 4(b)(7)
and (8)-2 and 4(b)(10)-2, while two other commenters (a financial
institution and a trade association) opposed them, arguing that the
rules for open-end (not home-secured) plans should remain consistent
with the rules for home-equity and closed-end credit, that there is no
demonstrable harm to consumers from the existing rule, and that other
state and federal law provides adequate protection.
The revisions to comments 4(b)(7) and (8)-2 and 4(b)(10)-2 are
adopted as proposed. In an open-end plan, where consumers can engage in
credit transactions after the opening of the plan, a creditor may have
a greater opportunity to influence a consumer's decision whether or not
to purchase credit insurance or debt cancellation or suspension
coverage than in the case of closed-end credit. Accordingly, the
disclosure and consent requirements are important in open-end plans,
even after the opening of the plan, to ensure that the consumer is
fully informed about the offer of insurance or coverage and that the
decision to purchase it is voluntary. In addition, under the final
rule, creditors will be permitted to provide disclosures and obtain
consent by telephone (provided they mail written disclosures to the
consumer after the purchase), so long as they meet requirements
intended to ensure the purchase is voluntary. See the section-by-
section analysis to Sec. 226.4(d)(4) below. As to consistency between
the rules for open-end (not home-secured) plans and home-equity plans,
the Board intends to consider this issue when the home-equity credit
plan rules are reviewed in the future.
4(b)(9) Discounts
Comment 4(b)(9)-2, which addresses cash discounts to induce
consumers to use cash or other payment means instead of credit cards or
other open-end plans is revised for clarity, as proposed in June 2007.
No substantive change is intended. No comments were received on this
change.
4(b)(10) Debt Cancellation and Debt Suspension Fees
As discussed above, premiums or other charges for credit life,
accident, health, or loss-of-income insurance are finance charges if
the insurance or coverage is written in connection with a credit
transaction. This same rule applies to charges for debt cancellation
coverage. See Sec. 226.4(b)(10). Although debt cancellation fees meet
the definition of ``finance charge,'' they may be excluded from the
finance charge on the same conditions as credit insurance premiums. See
Sec. 226.4(d)(3).
The Board proposed in June 2007 to revise the regulation to provide
the same treatment to debt suspension coverage as to credit insurance
and debt cancellation coverage. Thus, under proposed Sec.
226.4(b)(10), charges for debt suspension coverage would be finance
charges. (The conditions under which debt suspension charges may be
excluded from the finance charge are discussed in the section-by-
section
[[Page 5266]]
analysis to Sec. 226.4(d)(3), below.) Debt suspension is the
creditor's agreement to suspend, on the occurrence of a specified
event, the consumer's obligation to make the minimum payment(s) that
would otherwise be due. During the suspension period, interest may
continue to accrue or it may be suspended as well, depending on the
plan. The borrower may be prohibited from using the credit plan during
the suspension period. In addition, debt suspension may cover events
other than loss of life, health, or income, such as a wedding, a
divorce, the birth of child, or a medical emergency.
In the June 2007 Proposal, debt suspension coverage would have been
defined as coverage that suspends the consumer's obligation to make one
or more payments on the date(s) otherwise required by the credit
agreement, when a specified event occurs. See proposed comment
4(b)(10)-1. The comment would have clarified that the term debt
suspension coverage as used in Sec. 226.4(b)(10) does not include
``skip payment'' arrangements in which the triggering event is the
borrower's unilateral election to defer repayment, or the bank's
unilateral decision to allow a deferral of payment.
This aspect of the proposal would have applied to closed-end as
well as open-end credit transactions. As discussed in the supplementary
information to the June 2007 Proposal, it appears appropriate to
consider charges for debt suspension products to be finance charges,
because these products operate in a similar manner to debt
cancellation, and reallocate the risk of nonpayment between the
borrower and the creditor.
Industry commenters supported the proposed approach of including
charges for debt suspension coverage as finance charges generally, but
permitting exclusion of such charges if the coverage is voluntary and
meets the other conditions contained in the proposal. Consumer group
commenters did not address this issue. Comment 4(b)(10)-1 is adopted as
proposed with some minor changes for clarification. Exclusion of
charges for debt suspension coverage from the definition of finance
charge is discussed in the section-by-section analysis to Sec.
226.4(d)(3) below.
4(d) Insurance and Debt Cancellation Coverage
4(d)(3) Voluntary Debt Cancellation or Debt Suspension Fees
As explained in the section-by-section analysis to Sec.
226.4(b)(10), debt cancellation fees and, as clarified in the final
rule, debt suspension fees meet the definition of ``finance charge.''
Under current Sec. 226.4(d)(3), debt cancellation fees may be excluded
from the finance charge on the same conditions as credit insurance
premiums. These conditions are: the coverage is not required and this
fact is disclosed in writing, and the consumer affirmatively indicates
in writing a desire to obtain the coverage after the consumer receives
written disclosure of the cost. Debt cancellation coverage that may be
excluded from the finance charge is limited to coverage that provides
for cancellation of all or part of a debtor's liability (1) in case of
accident or loss of life, health, or income; or (2) for amounts
exceeding the value of collateral securing the debt (commonly referred
to as ``gap'' coverage, frequently sold in connection with motor
vehicle loans).
Debt cancellation coverage and debt suspension coverage are
fundamentally similar to the extent they offer a consumer the ability
to pay in advance for the right to reduce the consumer's obligations
under the plan on the occurrence of specified events that could impair
the consumer's ability to satisfy those obligations. The two types of
coverage are, however, different in a key respect. One cancels debt, at
least up to a certain agreed limit, while the other merely suspends the
payment obligation while the debt remains constant or increases,
depending on coverage terms.
In June 2007, the Board proposed to revise Sec. 226.4(d)(3) to
expressly permit creditors to exclude charges for voluntary debt
suspension coverage from the finance charge when, after receiving
certain disclosures, the consumer affirmatively requests such a
product. The Board also proposed to add a disclosure (Sec.
226.4(d)(3)(iii)), to be provided as applicable, that the obligation to
pay loan principal and interest is only suspended, and that interest
will continue to accrue during the period of suspension. These proposed
revisions would have applied to closed-end as well as open-end credit
transactions. Model clauses and samples were proposed at Appendix G-
16(A) and G-16(B) and Appendix H-17(A) and H-17(B) to part 226.
In addition, the Board proposed in the June 2007 Proposal to
continue to limit the exclusion permitted by Sec. 226.4(d)(3) to
charges for coverage for accident or loss of life, health, or income or
for gap coverage. The Board also proposed, however, to add comment
4(d)(3)-3 to clarify that, if debt cancellation or debt suspension
coverage for two or more events is sold at a single charge, the entire
charge may be excluded from the finance charge if at least one of the
events is accident or loss of life, health, or income. The proposal is
adopted in the final rule, with a few modifications discussed below.
A few industry commenters suggested that the exclusion of debt
cancellation or debt suspension coverage from the finance charge should
not be limited to instances where one of the triggering events is
accident or loss of life, health, or income. The commenters contended
that such a rule would lead to an inconsistent result; for example, if
debt cancellation or suspension coverage has only divorce as a
triggering event, the charge could not be excluded from the finance
charge, while if the coverage applied to divorce and loss of income,
the charge could be excluded. The proposal is adopted without change in
this regard. The identification of accident or loss of life, health, or
income in current Sec. 226.4(d)(3)(ii) (renumbered Sec. 226.4(d)(3)
in the final rule) with respect to debt cancellation coverage is based
on TILA Section 106(b), which addresses credit insurance for accident
or loss of life or health. 15 U.S.C. 1605(b). That statutory provision
reflects the regulation of credit insurance by the states, which may
limit the types of insurance that insurers may sell. The approach in
the final rule is consistent with the purpose of Section 106(b), but
also recognizes that debt cancellation and suspension coverage often
are not limited by applicable law to the events allowed for insurance.
A few commenters addressed the proposed disclosure for debt
suspension programs that the obligation to pay loan principal and
interest is only suspended, and that interest will continue to accrue
during the period of suspension. A commenter suggested that in programs
combining elements of debt cancellation and debt suspension, the
disclosure should not be required. The final rule retains the
disclosure requirement in Sec. 226.4(d)(3)(iii). However, comment
4(d)(3)-4 has been added stating that if the debt can be cancelled
under certain circumstances, the disclosure may be modified to reflect
that fact. The disclosure could, for example, state (in addition to the
language required by Sec. 226.4(d)(3)(iii)) that ``in some
circumstances, my debt may be cancelled.'' However, the disclosure
would not be permitted to list the specific events that would result in
debt cancellation, to avoid ``information overload.''
Another commenter noted that the model disclosures proposed at
Appendix G-16(A), G-16(B), H-17(A),
[[Page 5267]]
and H-17(B) to part 226 were phrased assuming interest continues to
accrue in all cases of debt suspension programs. The commenter
contended that interest does not continue to accrue during the period
of suspension in all cases, and suggested revising the forms. However,
the disclosures under Sec. 226.4(d)(3)(iii) are only required as
applicable; thus, if the disclosure that interest will continue to
accrue during the period of suspension is not applicable, it need not
be provided.
A commenter noted that proposed model and sample forms G-16(A) and
G-16(B), for open-end credit, and H-17(A) and H-17(B), for closed-end
credit are virtually identical, but that the model language regarding
cost of coverage is more appropriate for open-end credit. Model Clause
H-17(A) and Sample H-17(B) have been revised in the final rule to
include language regarding cost of coverage that is appropriate for
closed-end credit.
A consumer group suggested that in debt suspension programs where
interest continues to accrue during the suspension period, periodic
statements should be required to include a disclosure of the amount of
the accrued interest. The Board believes that the requirement under
Sec. 226.7, as adopted in the final rule, for each periodic statement
to disclose total interest for the billing cycle as well as total year-
to-date interest on the account adequately addresses this concern.
The Board noted in the June 2007 Proposal that the regulation
provides guidance on how to disclose the cost of debt cancellation
coverage (in proposed Sec. 226.4(d)(3)(ii)), and sought comment on
whether additional guidance was needed for debt suspension coverage,
particularly for closed-end loans. No commenters addressed this issue
except for one industry commenter that responded that no additional
guidance was needed.
In a technical revision, as proposed in June 2007, the substance of
footnotes 5 and 6 is moved to the text of Sec. 226.4(d)(3).
4(d)(4) Telephone Purchases
Under Sec. 226.4(d)(1) and (d)(3), creditors may exclude from the
finance charge premiums for credit insurance and debt cancellation or
(as provided in revisions in the final rule) debt suspension coverage
if, among other conditions, the consumer signs or initials an
affirmative written request for the insurance or coverage. In the June
2007 Proposal, the Board proposed an exception to the requirement to
obtain a written signature or initials for telephone purchases of
credit insurance or debt cancellation and debt suspension coverage on
an open-end (not home-secured) plan. Under proposed new Sec.
226.4(d)(4), for telephone purchases, the creditor would have been
permitted to make the disclosures orally and the consumer could
affirmatively request the insurance or coverage orally, provided that
the creditor (1) maintained reasonable procedures to provide the
consumer with the oral disclosures and maintains evidence that
demonstrates the consumer then affirmatively elected to purchase the
insurance or coverage; and (2) mailed the disclosures under Sec.
226.4(d)(1) or (d)(3) within three business days after the telephone
purchase. Comment 4(d)(4)-1 would have provided that a creditor does
not satisfy the requirement to obtain an affirmative request if the
creditor uses a script with leading questions or negative consent.
Commenters supported proposed Sec. 226.4(d)(4), with some
suggested modifications, and it is adopted in final form with a few
modifications discussed below. A few commenters requested that the
Board expand the proposed telephone purchase rule to home-equity plans
and closed-end credit for consistency. HELOCs and closed-end credit are
largely separate product lines from credit card and other open-end (not
home-secured) plans, and the Board anticipates reviewing the rules
applying to these types of credit separately; the issue of telephone
sales of credit insurance and debt cancellation or suspension coverage
can better be addressed in the course of those reviews. In addition, as
discussed above, comment 4(b)(7) and (8)-2, as amended in the final
rule, provides that insurance is not written in connection with a
credit transaction if the insurance is sold after consummation of a
closed-end transaction, or after a home-equity plan is opened, and the
consumer requests the insurance. Accordingly, the requirements for
disclosure and affirmative written consent to purchase the insurance or
coverage do not apply in these situations, and thus the relief that
would be afforded by the telephone purchase rule appears less
necessary.
A commenter stated that the requirement (in Sec. 226.4(d)(4)(ii))
to mail the disclosures under Sec. 226.4(d)(1) or (d)(3) within three
business days after the telephone purchase would be difficult
operationally, and recommended that the rule allow five business days
instead of three. The Board believes that three business days should
provide adequate time to creditors to mail the written disclosures. In
addition, the three-business-day period for mailing written disclosures
is consistent with the rules published by the federal banking agencies
to implement Section 305 of the Gramm-Leach-Bliley Act regarding the
sale of insurance products by depository institutions, as well as with
the OCC rules regarding the sale of debt cancellation and suspension
products.
A few commenters expressed concern about proposed comment 4(d)(4)-
1, prohibiting the use of leading questions or negative consent in
telephone sales. The commenters stated that the leading questions rule
would be difficult to comply with, because the distinction between a
leading question and routine marketing language may not be apparent in
many cases. The commenters were particularly concerned about being able
to ensure that the enrollment question itself not be considered
leading. The final comment includes an example of an enrollment
question (``Do you want to enroll in this optional debt cancellation
plan?'') that would not be considered leading.
Section 226.4(d)(4)(i) in the June 2007 Proposal would have
required that the creditor must, in addition to providing the required
disclosures orally and maintaining evidence that the consumer
affirmatively elected to purchase the insurance or coverage, also
maintain reasonable procedures to provide the disclosures orally. The
final rule does not contain the requirement to maintain procedures to
provide the disclosures orally; this requirement is unnecessary because
creditors must actually provide the disclosures orally in each case.
The Board proposed this approach pursuant to its exception and
exemption authorities under TILA Section 105. Section 105(a) authorizes
the Board to make exceptions to TILA to effectuate the statute's
purposes, which include facilitating consumers' ability to compare
credit terms and helping consumers avoid the uniformed use of credit.
15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes the Board to
exempt any class of transactions (with an exception not relevant here)
from coverage under any part of TILA if the Board determines that
coverage under that part does not provide a meaningful benefit to
consumers in the form of useful information or protection. 15 U.S.C.
1604(f)(1). Section 105(f) directs the Board to make this determination
in light of specific factors. 15 U.S.C. 1604(f)(2). These factors are
(1) the amount of the loan and whether the disclosure provides a
benefit to consumers who are parties to the transaction involving a
loan of such amount; (2) the extent to which the requirement
complicates, hinders, or
[[Page 5268]]
makes more expensive the credit process; (3) the status of the
borrower, including any related financial arrangements of the borrower,
the financial sophistication of the borrower relative to the type of
transaction, and the importance to the borrower of the credit, related
supporting property, and coverage under TILA; (4) whether the loan is
secured by the principal residence of the borrower; and (5) whether the
exemption would undermine the goal of consumer protection.
As stated in the June 2007 Proposal, the Board has considered each
of these factors carefully, and based on that review, believes it is
appropriate to exempt, for open-end (not home-secured) plans, telephone
sales of credit insurance or debt cancellation or debt suspension plans
from the requirement to obtain a written signature or initials from the
consumer. Requiring a consumer's written signature or initials is
intended to evidence that the consumer is purchasing the product
voluntarily; the proposal contained safeguards intended to insure that
oral purchases are voluntary. Under the proposal and as adopted in the
final rule, creditors must maintain tapes or other evidence that the
consumer received required disclosures orally and affirmatively
requested the product. Comment 4(d)(4)-1 indicates that a creditor does
not satisfy the requirement to obtain an affirmative request if the
creditor uses a script with leading questions or negative consent. In
addition to oral disclosures, under the proposal consumers will receive
written disclosures shortly after the transaction.
The fee for the credit insurance or debt cancellation or debt
suspension coverage will also appear on the first monthly periodic
statement after the purchase, and, as applicable, thereafter. Consumer
testing conducted for the Board suggests that consumers review the
transactions on their statements carefully. Moreover, as discussed in
the section-by-section analysis under Sec. 226.7, under the final rule
fees, including insurance and debt cancellation or suspension coverage
charges, will be better highlighted on statements. Consumers who are
billed for insurance or coverage they did not purchase may dispute the
charge as a billing error. These safeguards are expected to ensure that
purchases of credit insurance or debt cancellation or suspension
coverage by telephone are voluntary.
At the same time, the amendments should facilitate the convenience
to both consumers and creditors of conducting transactions by
telephone. The amendments, therefore, have the potential to better
inform consumers and further the goals of consumer protection and the
informed use of credit for open-end (not home-secured) credit.
Section 226.5 General Disclosure Requirements
Section 226.5 contains format and timing requirements for open-end
credit disclosures. In the June 2007 Proposal, the Board proposed,
among other changes to Sec. 226.5, to reform the rules governing the
disclosure of charges before they are imposed in open-end (not home-
secured) credit. Under the proposal, all charges imposed as part of the
plan would have had to be disclosed before they were imposed; however,
while certain specified charges would have continued to be disclosed in
writing in the account-opening disclosures, other charges imposed as
part of the plan could have been disclosed orally or in writing at any
time before the consumer becomes obligated to pay the charge.
5(a) Form of Disclosures
In the June 2007 Proposal, the Board proposed changes to Sec.
226.5(a) and the associated commentary regarding the standard to
provide ``clear and conspicuous'' disclosures. In addition, in both the
June 2007 Proposal and the May 2008 Proposal, the Board proposed
changes to Sec. 226.5(a) and the associated commentary with respect to
terminology. To improve clarity, the Board also proposed technical
revisions to Sec. 226.5(a) in the June 2007 Proposal.
5(a)(1) General
Clear and conspicuous standard. Under TILA Section 122(a), all
required disclosures must be ``clear and conspicuous.'' 15 U.S.C.
1632(a). The Board has interpreted ``clear and conspicuous'' for most
open-end disclosures to mean that they must be in a reasonably
understandable form. Comment 5(a)(1)-1. In most cases, this standard
does not require that disclosures be segregated from other material or
located in any particular place on the disclosure statement, nor that
disclosures be in any particular type size. Certain disclosures in
credit and charge card applications and solicitations subject to Sec.
226.5a, however, must meet a higher standard of clear and conspicuous
due to the importance of the disclosures and the context in which they
are given. For these disclosures, the Board has required that they be
both in a reasonably understandable form and readily noticeable to the
consumer. Comment 5(a)(1)-1. In the June 2007 Proposal, the Board
proposed to amend comment 5(a)(1)-1 to expand the list of disclosures
that must be both in a reasonably understandable form and readily
noticeable to the consumer.
Readily noticeable standard. Certain disclosures in credit and
charge card applications and solicitations subject to Sec. 226.5a are
currently required to be in a tabular format. In the June 2007
Proposal, the Board proposed to require information be highlighted in a
tabular format in additional circumstances, including: In the account-
opening disclosures pursuant to Sec. 226.6(b)(4) (adopted as Sec.
226.6(b)(1) below); with checks that access a credit card account
pursuant to Sec. 226.9(b)(3); in change-in-terms notices pursuant to
Sec. 226.9(c)(2)(iii)(B); and in disclosures when a rate is increased
due to delinquency, default or as a penalty pursuant to Sec.
226.9(g)(3)(ii). Because these disclosures would be highlighted in a
tabular format similar to the table required with respect to credit
card applications and solicitations under Sec. 226.5a, the Board
proposed that these disclosures also be in a reasonably understandable
form and readily noticeable to the consumer.
As discussed in further detail in the section-by-section analysis
to Sec. Sec. 226.6(b), 226.9(b), 226.9(c), and 226.9(g), many
commenters supported the Board's proposal to require certain
information to be presented in a tabular format, and consumer testing
showed that tabular presentation of disclosures improved consumer
attention to, and understanding of, the disclosures. As a result, the
Board adopts the proposal to require a tabular format for certain
information required by these sections as well as the proposal to amend
comment 5(a)(1)-1. Technical amendments proposed under the June 2007
Proposal, including moving the guidance on the meaning of ``reasonably
understandable form'' to comment 5(a)(1)-2, and moving guidance on what
constitutes an ``integrated document'' to comment 5(a)(1)-4, are also
adopted.
In the June 2007 Proposal, the Board also proposed to add comment
5(a)(1)-3 to provide guidance on the meaning of the readily noticeable
standard. Specifically, the Board proposed that to meet the readily
noticeable standard, the following disclosures must be given in a
minimum of 10-point font: Disclosures for credit card applications and
solicitations under Sec. 226.5a, highlighted account-opening
disclosures under Sec. 226.6(b)(4) (adopted as Sec. 226.6(b)(1)
below), highlighted disclosures accompanying checks that access a
credit card account under
[[Page 5269]]
Sec. 226.9(b)(3), highlighted change-in-terms disclosures under Sec.
226.9(c)(2)(iii)(B), and highlighted disclosures when a rate is
increased due to delinquency, default or as a penalty under Sec.
226.9(g)(3)(ii).
The Board received numerous consumer comments that credit card
disclosures are in fine print and that disclosures should be given in a
larger font. Many consumer and consumer group commenters suggested that
disclosures should be given in a minimum 12-point font. Several of
these comments also suggested that the 12-point font minimum be applied
to disclosures other than the highlighted disclosures proposed to be
subjected to the readily noticeable standard as proposed in comment
5(a)(1)-1. Industry commenters suggested that there be no minimum font
size or that the minimum should be 9-point font. One industry commenter
stated that the 10-point font minimum should not apply to any
disclosures on a periodic statement.
The Board adopts comment 5(a)(1)-3 as proposed. As discussed in the
June 2007 Proposal, the Board believes that for certain disclosures,
special formatting requirements, such as a tabular format and font size
requirements, are needed to highlight for consumers the importance and
significance of the disclosures. The Board does not believe, however,
that all TILA-required disclosures should be subject to this same
standard. For certain disclosures, such as periodic statements,
requiring all TILA-required disclosures to be highlighted in the same
way could be burdensome for creditors because it would cause the
disclosures to be longer and more expensive to provide to consumers. In
addition, the benefits to consumers would not outweigh such costs. The
Board believes that a more balanced approach is to require such
highlighting only for certain important disclosures. The Board, thus,
declines to extend the minimum font size requirement to disclosures
other than those listed in proposed comment 5(a)(1)-3. Similarly, for
disclosures that may appear on periodic statements, such as the
highlighted change-in-terms disclosures under Sec. 226.9(c)(2)(iii)(B)
and highlighted disclosures when a rate is increased due to
delinquency, default or as a penalty under Sec. 226.9(g)(3)(ii), the
Board believes that the minimum 10-point font size for these
disclosures is appropriate because these are disclosures that consumers
do not expect to see each billing cycle. Therefore, the Board believes
that it is especially important to highlight these disclosures.
As discussed in the June 2007 Proposal, the Board proposed a
minimum of 10-point font for these disclosures to be consistent with
the approach taken by eight federal agencies (including the Board) in
issuing a proposed model form that financial institutions may use to
comply with the privacy notice requirements under Section 503 of the
Gramm-Leach-Bliley Act. 15 U.S.C. 6803(e); 72 FR 14940, Mar. 29, 2007.
Furthermore, in consumer testing conducted for the Board, participants
were able to read and notice information in a 10-point font. Therefore,
the Board adopts the comment as proposed.
Disclosures subject to the clear and conspicuous standard. The
Board proposed comment 5(a)(1)-5 in the June 2007 Proposal to address
questions on the types of communications that are subject to the clear
and conspicuous standard. The comment would have clarified that all
required disclosures and other communications under subpart B of
Regulation Z are considered disclosures required to be clear and
conspicuous, including the disclosure by a person other than the
creditor of a finance charge imposed at the time of honoring a
consumer's credit card under Sec. 226.9(d) and any correction notice
required to be sent to the consumer under Sec. 226.13(e). No comments
were received regarding the proposed comment, and the comment is
adopted as proposed.
Oral disclosure. In order to give guidance about the meaning of
``clear and conspicuous'' for oral disclosures, the Board proposed in
the June 2007 Proposal to amend the guidance on what constitutes a
``reasonably understandable form,'' in proposed comment 5(a)(1)-2.
Specifically, the Board proposed that oral disclosures be considered to
be in a reasonably understandable form when they are given at a volume
and speed sufficient for a consumer to hear and comprehend the
disclosures. No comments were received on the Board's proposed guidance
concerning clear and conspicuous oral disclosures. Comment 5(a)(1)-2 is
adopted as proposed. The Board believes the comment provides necessary
guidance not only for the oral disclosure of certain charges under
Sec. 226.5(a)(1)(ii), but also for other oral disclosure, such as
radio and television advertisements.
5(a)(1)(ii)
Section 226.5(a)(1)(ii) provides that in general, disclosures for
open-end plans must be provided in writing and in a retainable form.
Oral disclosures. As discussed in the June 2007 Proposal, the Board
proposed that certain charges may be disclosed after account opening
and that disclosure of those charges may be provided orally or in
writing before the cost is imposed. Many industry commenters supported
the Board's proposal to permit oral disclosure of certain charges while
consumer group commenters opposed the Board's proposal. Some of these
consumer group commenters acknowledged the usefulness of oral
disclosure of fees at a time when the consumer is about to incur the
fee but suggested that it should be in addition to, but not take the
place of, written disclosure.
As the Board discussed in the June 2007 Proposal, in proposing to
permit certain charges to be disclosed after account opening, the
Board's goal was to better ensure that consumers receive disclosures at
a time and in a manner that they would be likely to notice them. As
discussed in the June 2007 Proposal, at account opening, written
disclosure has obvious merit because it is a time when a consumer must
assimilate information that may influence major decisions by the
consumer about how, or even whether, to use the account. During the
life of an account, however, a consumer will sometimes need to decide
whether to purchase a single service from the creditor that may not be
central to the consumer's use of the account (for example, the service
of providing documentary evidence of transactions). The consumer may
become accustomed to purchasing such services by telephone, and will,
accordingly, expect to receive an oral disclosure of the charge for the
service during the same telephone call. Permitting oral disclosure of
charges that are not central to the consumer's use of the account would
be consistent with consumer expectations and with the business
practices of creditors. For these reasons, the Board adopts its
proposal to permit creditors to disclose orally charges not
specifically identified in the account-opening table in Sec.
226.6(b)(2) (proposed as Sec. 226.6(b)(4)). Further, the Board adopts
its proposal that creditors be provided with the same flexibility when
the cost of such a charge changes or is newly introduced, as discussed
in the section-by-section analysis to Sec. 226.9(c).
One industry commenter stated its concerns that oral disclosure may
make it difficult for creditors to demonstrate compliance with TILA. As
the Board discussed in the June 2007 Proposal, creditors may continue
to comply with
[[Page 5270]]
TILA by providing written disclosures at account opening for all fees.
The Board anticipates that creditors will likely continue to identify
fees in the account agreement for contract and other reasons even if
the regulation does not specifically require creditors to do so.
In technical revisions, as proposed in the June 2007 Proposal, the
final rule moves to Sec. 226.5(a)(1)(ii)(A) the current exemption in
footnote 7 under Sec. 226.5(a)(1) that disclosures required by Sec.
226.9(d) need not be in writing. Section 226.9(d) requires disclosure
when a finance charge is imposed by a person other than the card issuer
at the time of a transaction. Specific wording in Sec.
226.5(a)(1)(ii)(A) also has been amended from the proposal in order to
provide greater clarity, with no intended substantive change from the
June 2007 Proposal. In another technical revision, the substance of
footnote 8, regarding disclosures that do not need to be in a
retainable form the consumer may keep, is moved to Sec.
226.5(a)(1)(ii)(B) as proposed.
Electronic communication. Commenters on the June 2007 Proposal
suggested that for disclosures that need not be provided in writing at
account opening, creditors should be permitted to provide disclosures
in electronic form, without having to comply with the consumer notice
and consent procedures of the Electronic Signatures in Global and
National Commerce Act (E-Sign Act), 15 U.S.C. 7001 et seq., at the time
an on-line or other electronic service is used. For example, commenters
suggested, if a consumer wishes to make an on-line payment on the
account, for which the creditor imposes a fee (which has not previously
been disclosed), the creditor should be allowed to disclose the fee
electronically, without E-Sign notice and consent, at the time the on-
line payment service is requested. Commenters contended that such a
provision would not harm consumers and would expedite transactions, and
also that it would be consistent with the Board's proposal to permit
oral disclosure of such fees.
Under section 101(c) of the E-Sign Act, if a statute or regulation
requires that consumer disclosures be provided in writing, certain
notice and consent procedures must be followed in order to provide the
disclosures in electronic form. Accordingly because the disclosures
under Sec. 226.5(a)(1)(ii)(A) are not required to be provided in
writing, the Board proposed to add comment 5(a)(1)(ii)(A)-1 in May 2008
to clarify that disclosures not required to be in writing may be
provided in writing, orally, or in electronic form without regard to
the consumer consent or other provisions of the E-Sign Act.
Most commenters supported the Board's proposal. Some consumer group
commenters, however, suggested that the Board require that any
electronic disclosure be in a format that can be printed and retained.
The Board declines to impose such a requirement. Disclosures that the
Board permits to be made orally are not required to be in written or
retainable form. The Board believes that the same standard should apply
if such disclosures are made electronically. In order to clarify this
point, the Board has amended Sec. 226.5(a)(1)(ii)(B) to specify that
disclosures that need not be in writing also do not need to be in
retainable form. This would encompass both oral and electronic
disclosures.
5(a)(1)(iii)
In a final rule addressing electronic disclosures published in
November 2007 (November 2007 Final Electronic Disclosure Rule), the
Board adopted amendments to Sec. 226.5(a)(1) to clarify that creditors
may provide open-end disclosures to consumers in electronic form,
subject to compliance with the consumer consent and other applicable
provisions of the E-Sign Act. 72 FR 63462, Nov. 9, 2007; 72 FR 71058,
Dec. 14, 2007. These amendments also provide that the disclosures
required by Sec. Sec. 226.5a, 226.5b, and 226.16 may be provided to
the consumer in electronic form, under the circumstances set forth in
those sections, without regard to the consumer consent or other
provisions in the E-Sign Act. These amendments have been moved to Sec.
226.5(a)(1)(iii) for organizational purposes.
Furthermore, in May 2008, the Board proposed comment 5(a)(1)(iii)-1
to clarify that the disclosures specified in Sec. 226.5(a)(1)(ii)(A)
also may be provided in electronic form without regard to the E-Sign
Act when the consumer requests the service in electronic form, such as
on a creditor's Web site. Consistent with the Board's decision to adopt
comment 5(a)(1)(ii)(A)-1, as discussed above, the Board adopts comment
5(a)(1)(iii)-1.
5(a)(2) Terminology
Consistent terminology. As proposed in June 2007, disclosures
required by the open-end provisions of Regulation Z (Subpart B) would
have been required to use consistent terminology under proposed Sec.
226.5(a)(2)(i). The Board also proposed comment 5(a)(2)-4 to clarify
that terms do not need to be identical but must be close enough in
meaning to enable the consumer to relate the disclosures to one
another.
The Board received no comments objecting to this proposal.
Accordingly, the Board adopts Sec. 226.5(a)(2)(i) and comment 5(a)(2)-
4 as proposed. The Board, however, received one comment requesting
clarification on the implementation of this provision. Specifically,
the commenter pointed out that creditors will likely phase in changes
during a transitional period, and as a result, may not be able to align
terminology in all their disclosures to consumers during this
transitional period. The Board agrees; thus, some disclosures may
contain existing terminology required currently under Regulation Z
while other disclosures may contain new terminology required in this
final rule or the final rules issued by the Board and other federal
banking agencies published elsewhere in today's Federal Register.
Therefore, during this transitional period, terminology need not be
consistent across all disclosures. By the effective date of this rule,
however, all disclosures must have consistent terminology.
Terms required to be more conspicuous than others. TILA Section
122(a) requires that the terms ``annual percentage rate'' and ``finance
charge'' be disclosed more conspicuously than other terms, data, or
information. 15 U.S.C. 1632(a). The Board has implemented this
provision in current Sec. 226.5(a)(2) by requiring that the terms
``finance charge'' and ``annual percentage rate,'' when disclosed with
a corresponding amount or percentage rate, be disclosed more
conspicuously than any other required disclosure. Currently, the terms
do not need to be more conspicuous when used under Sec. Sec. 226.5a,
226.7(d), 226.9(e), and 226.16. In June 2007, the Board proposed to
expand this list to include the account-opening disclosures that would
be highlighted under proposed Sec. 226.6(b)(4) (adopted as Sec.
226.6(b)(1) and (b)(2) below), the disclosure of the effective APR
under proposed Sec. 226.7(b)(7) under one approach, disclosures on
checks that access a credit card account under proposed Sec.
226.9(b)(3), the information on change-in-terms notices that would be
highlighted under proposed Sec. 226.9(c)(2)(iii)(B), and the
disclosures given when a rate is increased due to delinquency, default
or as a penalty under proposed Sec. 226.9(g)(3)(ii). In addition, the
Board sought comment in the June 2007 Proposal on ways to address
criticism by the United States Government Accountability Office (GAO)
that credit card disclosure
[[Page 5271]]
documents ``unnecessarily emphasized specific terms.'' \13\
---------------------------------------------------------------------------
\13\ United States Government Accountability Office, Credit
Cards: Increased Complexity in Rates and Fees Heightens Need for
More Effective Disclosures to Consumers, 06-929 (September 2006).
---------------------------------------------------------------------------
As discussed in the June 2007 Proposal, the Board agreed with the
GAO's assessment that overemphasis of these terms may make disclosures
more difficult for consumers to read. One approach the Board had
considered to remedy this problem was to prohibit the terms ``finance
charge'' and ``annual percentage rate'' from being disclosed more
conspicuously than other required disclosures except when the
regulation so requires. However, the Board acknowledged in the June
2007 Proposal that this approach could produce unintended consequences.
Commenters agreed with the Board.
Many industry commenters suggested that in light of the Board's
requirement to disclose APRs and certain other finance charges at
account-opening and at other times in the life of the account in a
tabular format with a minimum 10-point font size pursuant to comment
5(a)(1)-3 (or 16-point font size as required for the APR for purchases
under Sec. Sec. 226.5a(b)(1) and 226.6(b)(2)), requiring the terms
``annual percentage rate'' and ``finance charge'' to be more
conspicuous than other disclosures to draw attention to the terms was
not necessary. Furthermore, commenters pointed out that the Board is no
longer requiring use of the term ``finance charge'' in TILA disclosures
to consumers for open-end (not home-secured) plans, and in fact, is
requiring creditors to disclose finance charges as either ``fees'' or
``interest'' on periodic statements. As a result, creditors would, in
many cases, no longer have the term ``finance charge'' to make more
conspicuous than other terms.
For the reasons discussed above, the Board is eliminating for open-
end (not home-secured) plans the requirement to disclose ``annual
percentage rate'' and ``finance charge'' more conspicuously, using its
authority under Section 105(a) of TILA to make ``such adjustments and
exceptions for any class of transaction as in the judgment of the Board
are necessary or proper to effectuate the purposes of the title, to
prevent circumvention or evasion thereof, or to facilitate compliance
therewith.'' 15 U.S.C. 1604(a). Therefore, the requirement in Sec.
226.5(a)(2)(ii) that ``annual percentage rate'' and ``finance charge''
be disclosed more conspicuously than any other required disclosures
when disclosed with a corresponding amount or percentage rate applies
only to home-equity plans subject to Sec. 226.5b. As is currently the
case, even for home-equity plans subject to Sec. 226.5b, these terms
need not be more conspicuous when used under Sec. 226.7(a)(4) on
periodic statements and under section Sec. 226.16 in advertisements.
Other exceptions currently in footnote 9 to Sec. 226.5(a)(2), which
reference Sec. Sec. 226.5a and 226.9(e), have been deleted as
unnecessary since these disclosures do not apply to home-equity plans
subject to Sec. 226.5b. The requirement, as it applies to home-equity
plans subject to Sec. 226.5b, may be re-evaluated when the Board
conducts its review of the regulations related to home-equity plans.
Use of the term ``grace period''. In the June 2007 Proposal, the
Board proposed Sec. 226.5(a)(2)(iii) to require that the term ``grace
period'' be used, as applicable, in any disclosure that must be in a
tabular format under proposed Sec. 226.5(a)(3). The Board's proposal
was meant to make other disclosures consistent with credit card
applications and solicitations where use of the term ``grace period''
is required by TILA Section 122(c)(2)(C) and Sec. 226.5a(a)(2)(iii).
15 U.S.C. 1632(c)(2)(C). Based on comments received as part of the June
2007 Proposal and further consumer testing, the Board proposed in the
May 2008 Proposal to delete Sec. 226.5a(a)(2)(ii) and withdraw the
requirement to use the term ``grace period'' in proposed Sec.
226.5(a)(2)(iii).
As discussed in the section-by-section analysis to Sec.
226.5a(b)(5), the Board is exercising its authority under TILA Sections
105(a) and (f), and TILA Section 127(c)(5) to delete the requirement to
use the term ``grace period'' in the table required by Sec. 226.5a. 15
U.S.C. 1604(a) and (f), 1637(c)(5). The purpose of the proposed
requirement was to provide consistency for headings in a tabular
summary. Accordingly, the Board withdraws the requirement to use the
term ``grace period'' in proposed Sec. 226.5(a)(2)(iii).
Other required terminology. The Board proposed Sec.
226.5(a)(2)(iii) in the June 2007 Proposal to provide that if
disclosures are required to be presented in a tabular format, the term
``penalty APR'' shall be used to describe an increased rate that may
result because of the occurrence of one or more specific events
specified in the account agreement, such as a late payment or an
extension of credit that exceeds the credit limit. Therefore, the term
``penalty APR'' would have been required when creditors provide
information about penalty rates in the table given with credit card
applications and solicitations under Sec. 226.5a, in the summary table
given at account opening under Sec. 226.6(b)(1) and (b)(2) (proposed
as Sec. 226.6(b)(4)), if the penalty rate is changing, in the summary
table given on or with a change-in-terms notice under Sec.
226.9(c)(2)(iii)(B), or if a penalty rate is triggered, in the table
given under Sec. 226.9(g)(3)(ii).
Commenters were generally supportive of the Board's efforts to
develop some common terminology and the Board's proposal to require use
of the term ``penalty APR'' to describe an increased rate resulting
from the occurrence of one or more specific events. Some industry
commenters, however, urged the Board to reconsider requiring use of the
term ``penalty APR,'' especially when used to describe the loss of an
introductory rate or promotional rate. As discussed in the June 2007
Proposal, the term ``penalty APR'' proved the most successful of the
terms tested with participants in the Board's consumer testing efforts.
In the interest of uniformity, the Board adopts the provision as
proposed, with one exception for promotional rates. To prevent consumer
confusion over use of the term ``penalty rate'' to describe the loss of
a promotional rate where the rate applied is the same or is calculated
in the same way as the rate that would have applied at the end of the
promotional period, the Board is amending proposed Sec.
226.5(a)(2)(iii) to provide that the term ``penalty APR'' need not be
used in reference to the APR that applies with the loss of a
promotional rate, provided the APR that applies is no greater than the
APR that would have applied at the end of the promotional period; or if
the APR that applies is a variable rate, the APR is calculated using
the same index and margin as would have been used to calculate the APR
that would have applied at the end of the promotional period. In
addition, the Board is also modifying the required disclosure related
to the loss of an introductory rate as discussed below in the section-
by-section analysis to Sec. 226.5a, which should also address these
concerns.
Under the June 2007 Proposal, proposed Sec. 226.5(a)(2)(iii) also
would have provided that if credit insurance or debt cancellation or
debt suspension coverage is required as part of the plan and
information about that coverage is required to be disclosed in a
tabular format, the term ``required'' shall be used in describing the
coverage and the program shall be identified by its name. No comments
were received on this provision, and the provision is adopted as
proposed.
[[Page 5272]]
Consistent with the Board's proposal under the advertising rules in
the June 2007 Proposal, proposed Sec. 226.5(a)(2)(iii), would have
provided that if required to be disclosed in a tabular format, an APR
may be described as ``fixed,'' or using any similar term, only if that
rate will remain in effect unconditionally until the expiration of a
specified time period. If no time period is specified, then the term
``fixed,'' or any similar term, may not be used to describe the rate
unless the rate remains in effect unconditionally until the plan is
closed. The final rule adopts Sec. 226.5(a)(2)(iii) as proposed,
consistent with the Board's decision with respect to use of the term
``fixed'' in describing an APR stated in an advertisement, as further
discussed in the section-by-section analysis to Sec. 226.16(f) below.
5(a)(3) Specific Formats
As proposed in June 2007, for clarity, the special rules regarding
the specific format for disclosures under Sec. 226.5a for credit and
charge card applications and solicitations and Sec. 226.5b for home-
equity plans have been consolidated in Sec. 226.5(a)(3) as proposed.
In addition, as discussed below, the Board is requiring certain
account-opening disclosures, periodic statement disclosures and
subsequent disclosures, such as change-in-terms disclosures, to be
provided in specific formats under Sec. 226.6(b)(1); Sec. 226.7(b)(6)
and (b)(13); and Sec. 226.9(b), (c) and (g). The final rule includes
these special format rules in Sec. 226.5(a)(3), as proposed in the
June 2007 Proposal, with one exception. Because the Board is not
requiring disclosure of the effective APR pursuant to Sec.
226.7(b)(7), as discussed further in the general discussion on the
effective APR in the section-by-section analysis to Sec. 226.7(b), the
proposed special format rule relating to the effective APR is not
contained in the final rule.
5(b) Time of Disclosures
5(b)(1) Account-opening Disclosures
Creditors are required to make certain disclosures to consumers
``before opening any account.'' TILA Section 127(a) (15 U.S.C.
1637(a)). Under Sec. 226.5(b)(1), these disclosures, as identified in
Sec. 226.6, must be furnished ``before the first transaction is made
under the plan,'' which the Board has interpreted as ``before the
consumer becomes obligated on the plan.'' Comment 5(b)(1)-1. There are
limited circumstances under which creditors may provide the disclosures
required by Sec. 226.6 after the first transaction, and the Board
proposed in the June 2007 Proposal to move this guidance from comment
5(b)(1)-1 to proposed Sec. 226.5(b)(1)(iii)-(v). In the May 2008
Proposal, the Board proposed additional revisions to Sec.
226.5(b)(1)(iv) regarding membership fees.
The Board also proposed revisions in the June 2007 Proposal to the
timing rules for disclosing certain costs imposed on an open-end (not
home-secured) plan and in connection with certain transactions
conducted by telephone. Furthermore, the Board proposed additional
guidance on providing timely disclosures when the first transaction is
a balance transfer. Finally, technical revisions were proposed to
change references from ``initial'' disclosures required by Sec. 226.6
to ``account-opening'' disclosures, without any intended substantive
change.
5(b)(1)(i) General Rule
Creditors generally must provide the account-opening disclosures
before the first transaction is made under the plan. The renumbering of
this rule as Sec. 226.5(b)(1)(i) is adopted as proposed in the June
2007 Proposal.
Balance transfers. Under existing commentary and consistent with
the general rule on account-opening disclosures, creditors must provide
account-opening disclosures before a balance transfer occurs. In the
June 2007 Proposal, the Board proposed to update this commentary to
reflect current business practices. As the Board discussed in the June
2007 Proposal, some creditors offer balance transfers for which the
APRs that may apply are disclosed as a range, depending on the
consumer's creditworthiness. Consumers who respond to such an offer,
and are approved for the transfer later receive account-opening
disclosures, including the actual APR that will apply to the
transferred balance. The Board proposed to clarify in comment
5(b)(1)(i)-5 that a creditor must provide disclosures sufficiently in
advance of the balance transfer to allow the consumer to review and
respond to the terms that will apply to the transfer, including to
contact the creditor before the balance is transferred and decline the
transfer. The Board, however, did not propose a specific time period
that would be considered ``sufficiently in advance.''
Industry commenters indicated that following the Board's guidance
would cause delays in making transfers, which would be contrary to
consumer expectations that these transfers be effected quickly. A
consumer group commenter suggested that requiring the APR that will
apply, as opposed to allowing a range, to be disclosed on the
application or solicitation would be simpler. The Board notes that
creditors may, at their option, provide account-opening disclosures,
including the specific APRs, along with the balance transfer offer and
account application to avoid delaying the transfer.
The Board believes that, consistent with the general rule,
consumers should receive account-opening information, including the APR
that will apply, before the first transaction, which is the balance
transfer. Comment 5(b)(1)(i)-5 is adopted as proposed, and states that
a creditor must provide the consumer with the annual percentage rate
(along with the fees and other required disclosures) that would apply
to the balance transfer in time for the consumer to contact the
creditor and withdraw the request. The Board has made one revision to
comment 5(b)(1)(i)-5 as adopted. In response to commenters' requests
for additional guidance, comment 5(b)(1)(i)-5 provides a safe harbor
that may be used by creditors that permit a consumer to decline the
balance transfer by telephone. In such cases, a creditor has provided
sufficient time to the consumer to contact the creditor and withdraw
the request if the creditor does not effect the balance transfer until
10 days after the creditor has sent out information, assuming the
consumer has not canceled the transaction.
Disclosure before the first transaction. Comment 5(b)(1)-1,
renumbered as comment 5(b)(1)(i)-1 in the June 2007 Proposal, addresses
a creditor's general duty to provide account-opening disclosures
``before the first transaction.'' In the May 2008 Proposal, the comment
was proposed to be reorganized for clarity to provide existing examples
of ``first transactions'' related to purchases and cash advances. Other
guidance in current comment 5(b)(1)-1 was proposed to be amended and
moved to proposed Sec. 226.5(b)(1)(iv) and associated commentary in
the June 2007 and May 2008 Proposals, as discussed below in the
section-by-section analysis to Sec. 226.5(b)(1)(iv).
The Board did not receive comment on the proposed reorganization
but received many comments on the guidance that was amended and moved
to proposed Sec. 226.5(b)(1)(iv). These comments are discussed below
in the section-by-section analysis to Sec. 226.5(b)(1)(iv). Some
consumer group commenters noted that the Board's reorganization of this
comment made them realize that they opposed current guidance on cash
advances in comment 5(b)(1)-1 (now renumbered as comment 5(b)(1)(i)-1),
which permits creditors to
[[Page 5273]]
provide account-opening disclosures along with the first cash advance
check as long as the consumer can return the cash advance without
obligation. The Board continues to believe that this approach is
appropriate because of the lack of harm to consumers. Therefore, the
Board declines to amend its current guidance on cash advances in
comment 5(b)(1)(i)-1, which is renumbered as proposed without
substantive change.
5(b)(1)(ii) Charges Imposed as Part of an Open-End (Not Home-Secured)
Plan
Under the June 2007 Proposal, the Board proposed in new Sec.
226.5(b)(1)(ii) and comment 5(b)(1)(ii)-1 to except charges imposed as
part of an open-end (not home-secured) plan, other than those specified
in proposed Sec. 226.6(b)(4)(iii) (adopted as Sec. 226.6(b)(2)), from
the requirement to disclose charges before the first transaction.
Creditors would have been permitted, at their option, to disclose those
charges either before the first transaction or later, so long as they
were disclosed before the cost was imposed. The current rule requiring
the disclosure of costs before the first transaction (in writing and in
a retainable form) would have continued to apply to certain specified
costs. These costs are fees of which consumers should be aware before
using the account, such as annual or late payment fees, or fees that
the creditor would not otherwise have an opportunity to disclose before
the fee is triggered, such as a fee for using a cash advance check
during the first billing cycle.
Numerous industry commenters supported the Board's proposal.
Consumer group commenters, on the other hand, opposed the Board's
proposal, arguing that all charges should be required to be disclosed
at account opening before the first transaction. While consumer group
commenters acknowledged that disclosure of the amount of the fee at a
time when the consumer is about to incur it is a good business
practice, the commenters indicated that the Board's proposal would
encourage creditors to create new fees that are not specified to be
given in writing at account-opening. The final rule adopts Sec.
226.5(b)(1)(ii) and comment 5(b)(1)(ii)-1 largely as proposed with some
clarifying amendments and additional illustrative examples.
As the Board discussed in the June 2007 Proposal, the charges
covered by the proposed exception from disclosure at account opening
are triggered by events or transactions that may take place months, or
even years, into the life of the account, when the consumer may not
reasonably be expected to recall the amount of the charge from the
account-opening disclosure, nor readily to find or obtain a copy of the
account-opening disclosure or most recent change-in-terms notice.
Requiring such charges to be disclosed before account opening may not
provide a meaningful benefit to consumers in the form of useful
information or protection. The rule would allow flexibility in the
timing of certain cost disclosures by permitting creditors to disclose
such charges--orally or in writing--before the fee is imposed. As a
result, creditors would be disclosing the charge when the consumer is
deciding whether to take the action that would trigger the charge, such
as purchasing a service, which is a time at which consumers would
likely notice the charge. The Board intends to continue monitoring
credit card fees and practices, and could add additional fees to the
specified costs that must be disclosed in the account-opening table
before the first transaction, as appropriate.
In addition, as discussed in the June 2007 Proposal, the Board
believes the exception may facilitate compliance by creditors.
Determining whether charges are a finance charge or an other charge or
not covered by TILA (and thus whether advance notice is required) can
be challenging, and the rule reduces these uncertainties and risks. The
creditor will not have to determine whether a charge is a finance
charge or other charge or not covered by TILA, so long as the creditor
discloses the charge, orally or in writing, before the consumer becomes
obligated to pay it, which creditors, in general, already do for
business and other legal reasons.
Electronic Disclosures. In the May 2008 Proposal, the Board
proposed to revise comment 5(b)(1)(ii)-1 to clarify that for
disclosures not required to be provided in writing at account opening,
electronic disclosure, without regard to the E-Sign Act notice and
consent requirements, is a permissible alternative to oral or written
disclosure, when a consumer requests a service in electronic form, such
as on a creditor's Web site. As discussed in the section-by-section
analysis to comment 5(a)(1)(ii)(A)-1 above, the Board received many
comments in support of permitting electronic disclosure, without regard
to the E-Sign Act notice and consent requirements, for disclosures that
are not required to be provided in writing at account opening. Some
consumer group commenters objected to allowing any electronic
disclosure without the protections of the E-Sign Act. As discussed in
the May 2008 Proposal, since the disclosure of charges imposed as part
of an open-end (not home-secured) plan, other than those specified in
Sec. 226.6(b)(2), are not required to be provided in writing, the
Board believes that E-Sign notice and consent requirements do not apply
when the consumer requests the service in electronic form. The revision
to comment 5(b)(1)(ii)-1 proposed in May 2008 is adopted as proposed.
5(b)(1)(iii) Telephone Purchases
In the June 2007 Proposal, the Board proposed Sec.
226.5(b)(1)(iii) to address situations where a consumer calls a
merchant to order goods by telephone and concurrently establishes a new
open-end credit plan to finance that purchase. Because TILA account-
opening disclosures must be provided before the first transaction under
the current timing rule, merchants must delay the shipment of goods
until a consumer has received the disclosures. Consumers who want goods
shipped immediately may use another method to finance the purchase, but
they may lose any incentives the merchant may offer with opening a new
plan, such as discounted purchase prices or promotional payment plans.
The Board's proposal was meant to provide additional flexibility to
merchants and consumers in such cases.
Under proposed Sec. 226.5(b)(1)(iii), merchants that established
an open-end plan in connection with a telephone purchase of goods
initiated by the consumer would have been able to provide account-
opening disclosures as soon as reasonably practicable after the first
transaction if the merchant (1) permits consumers to return any goods
financed under the plan at the time the plan is opened and provides the
consumer sufficient time to reject the plan and return the items free
of cost after receiving the written disclosures required by Sec.
226.6, and (2) informs the consumer about the return policy as a part
of the offer to finance the purchase. Alternatively, the merchant would
have been able to delay shipping the goods until after the account
disclosures have been provided.
The Board also proposed comment 5(b)(1)(iii)-1 to provide that a
return policy is of sufficient duration if the consumer is likely to
receive the disclosures and have sufficient time to decide about the
financing plan. A return policy includes returns via the United States
Postal Service for goods delivered by private couriers. The proposed
commentary also clarified that retailers' policies regarding the return
of merchandise need not provide a right to return goods if the consumer
consumes or damages the goods. As discussed in
[[Page 5274]]
the June 2007 Proposal, the regulation and commentary would not have
affected merchandise purchased after the plan was initially established
or purchased by another means of financing, such as a credit card
issued by another creditor.
Consumer group commenters opposed the proposal arguing that
providing a right to cancel is much less protective of consumers'
rights than requiring that a consumer receive disclosures before goods
are shipped. As discussed above and in the June 2007 Proposal, the
Board believes proposed Sec. 226.5(b)(1)(iii) would provide consumers
with greater flexibility. Consumers may have their goods shipped
immediately, and in some cases, take advantage of merchant incentives,
such as discounted purchase prices or promotional payment plans, but
still retain the right to reject the plan, without cost, after
receiving account-opening disclosures.
Industry commenters were supportive of the Board's proposal, but
several commenters asked for additional extensions or clarifications to
the policy. First, commenters requested clarification that the
exception is available for third-party creditors that are not
retailers, arguing that few merchants are themselves creditors and that
the same flexibility should be available to creditors offering private
label or co-brand credit arrangements in connection with the purchase
of a merchant's goods. The Board agrees, and revisions have been made
to Sec. 226.5(b)(1)(iii) accordingly. Industry commenters also
suggested that the provision in Sec. 226.5(b)(1)(iii) be available not
only for telephone purchases ``initiated by the consumer,'' but also
telephone purchases where the merchant contacts the consumer. Outbound
calls to a consumer may raise many telemarketing issues and concerns
about questionable marketing tactics. As a result, the Board declines
to extend Sec. 226.5(b)(1)(iii) to telephone purchases that have not
been initiated by the consumer.
A few industry commenters also suggested that this exception be
available for all creditors opening an account by telephone, regardless
of whether it is in connection with the purchase of goods or not. These
commenters stated that for certain consumers, such as active duty
military members, immediate use of the account after it is opened may
be necessary to take care of personal or family needs. The Board notes
that the exception under Sec. 226.5(b)(1)(iii) turns on the ability of
consumers to return any goods financed under the plan free of cost
after receiving the written disclosures required by Sec. 226.6. In the
case of an account opened by telephone that is not in connection with
the purchase of goods from the creditor or an affiliated third party, a
creditor would likely have no way to reverse any purchases or other
transactions made before the disclosures required by Sec. 226.6 are
received by the consumer should the consumer wish to reject the plan if
the purchase was made with an unaffiliated third party. Thus, the Board
declines to extend Sec. 226.5(b)(1)(iii) to accounts opened by
telephone that are not in connection with the contemporaneous purchase
of goods.
The Board also received comments requesting that Sec.
226.5(b)(1)(iii) be made applicable to the on-line purchase of goods or
that merchants have the option to refer consumers purchasing by
telephone to a Web site to obtain disclosures required by Sec. 226.6.
This issue has been addressed in the November 2007 Final Electronic
Disclosure Rule. The E-Sign Act clearly states that any consumer to
whom written disclosures are required to be given must affirmatively
consent to the use of electronic disclosures before such disclosures
can be used in place of paper disclosures. The November 2007 Final
Electronic Disclosure Rule created certain instances where E-Sign
consent does not need to be obtained before disclosures may be provided
electronically. Specifically, open-end credit disclosures required by
Sec. Sec. 226.5a (credit card applications and solicitations), 226.5b
(HELOC applications), and 226.16 (open-end credit advertising) may be
provided to the consumer in electronic form, under the circumstances
set forth in those sections, without regard to the consumer consent or
other provisions of the E-Sign Act. Disclosures required by Sec.
226.6, however, may only be provided electronically if the creditor
obtains consumer consent consistent with the E-Sign Act. 72 FR 63462,
Nov. 9, 2007; 72 FR 71058, Dec. 14, 2007.
The Board also received comments requesting clarification of the
return policy; in particular, whether this would cause creditors to
provide those consumers who open a new credit plan concurrently with
the purchase of goods over the telephone with a different return policy
from other customers. For example, assume a merchant's customers are
normally charged a restocking fee for returning goods, and the merchant
does not wish to wait until the disclosures under Sec. 226.6 are sent
out before shipping the goods. A commenter asked whether this means
that a customer opening a new credit plan concurrently with the
purchase of goods over the telephone is exempted from paying that
restocking fee if the goods are returned. As proposed in the June 2007
Proposal, the final rule requires that in order to use the exception
from providing disclosures under Sec. 226.6 before the consumer
becomes obligated on the account, the consumer must have sufficient
time to reject the plan and return the items free of cost after
receiving the written disclosures required by Sec. 226.6. This means
that there can be no cost to the consumer for returning the goods even
if for the merchant's other customers, a fee is normally charged. As
the Board discussed in the June 2007 Proposal, merchants always have
the option to delay shipping of the goods until after the disclosures
are given if the merchant does not want to maintain a potentially
different return policy for consumers opening a new credit plan
concurrently with the purchase of goods over the telephone.
Commenters also requested guidance on what would be considered
``sufficient time'' for the consumer to reject the plan and return the
goods. Because the amount of time that would be deemed to be sufficient
would depend on the nature of the goods and the transaction, and the
locations of the various parties to the transaction, the Board does not
believe that it is appropriate to specify a particular time period
applicable to all transactions.
The Board also received requests for other clarifications. One
commenter suggested that the Board expressly acknowledge that if the
consumer rejects the credit plan, the consumer may substitute another
reasonable form of payment acceptable to the merchant other than the
credit plan to pay for the goods in full. This clarification has been
included in comment 5(b)(1)(iii)-1. Furthermore, this commenter also
suggested that the exception in comment 5(b)(1)(iii)-1 allowing for no
return policy for consumed or damaged goods should be revised to
expressly cover installed appliances or fixtures, provided a reasonable
repair or replacement policy covers defective goods or installations.
The Board concurs and changes have been made to comment 5(b)(1)(iii)-1
accordingly.
5(b)(1)(iv) Membership Fees
TILA Section 127(a) requires creditors to provide specified
disclosures ``before opening any account.'' 15 U.S.C. 1637(a). Section
226.5(b)(1) requires these disclosures (identified in Sec. 226.6) to
be furnished before the first transaction is made under the plan.
Currently and under the June 2007 and
[[Page 5275]]
May 2008 Proposals, creditors may collect or obtain the consumer's
promise to pay a membership fee before the account-opening disclosures
are provided, if the consumer can reject the plan after receiving the
disclosures. If a consumer rejects the plan, the creditor must promptly
refund the fee if it has been paid or take other action necessary to
ensure the consumer is not obligated to pay the fee. In the June 2007
Proposal, guidance currently in comment 5(b)(1)-1 about creditors'
ability to assess certain membership fees before consumers receive the
account-opening disclosures was moved to Sec. 226.5(b)(1)(iv).
In the June 2007 and May 2008 Proposals, the Board proposed
clarifications to the consumer's right not to pay membership fees that
were assessed or agreed to be paid before the consumer received
account-opening disclosures, if a consumer rejects a plan after
receiving the account-opening disclosures. In the May 2008 Proposal,
the Board proposed in revised Sec. 226.5(b)(1)(iv) and new comment
5(b)(1)(iv)-1 that ``membership fee'' has the same meaning as fees for
issuance or availability of a credit or charge card under Sec.
226.5a(b)(2), including annual or other periodic fees, or ``start-up''
fees, such as account-opening fees. The Board also proposed in the May
2008 Proposal under revised Sec. 226.5(b)(1)(iv) to clarify that if a
consumer rejects an open-end (not home-secured) plan as permitted under
that provision, consumers are not obligated to pay any membership fee,
or any other fee or charge (other than an application fee that is
charged to all applicants whether or not they receive the credit).
Some consumer group commenters opposed the Board's clarification on
the term ``membership fee'' and argued that the definition could expand
the ability of creditors to charge additional types of fees prior to
sending out account-opening disclosures. These consumer group
commenters, however, supported that the Board's clarification could
allow for a greater number of fees that consumers would not be
obligated to pay should they reject the plan. One industry commenter
opposed the Board's reference to annual fees as ``membership fees.''
The Board notes that the term ``membership fee'' is not currently
defined, and, therefore, there is little guidance as to what fees would
be covered by that term. As discussed in the May 2008 Proposal, the
Board proposed that ``membership fee'' have the same meaning as fees
for issuance or availability under Sec. 226.5a(b)(2) for consistency
and ease of compliance. The Board continues to believe this
clarification is warranted, and Sec. 226.5(b)(1)(iv) is adopted
generally as proposed, with one change discussed below.
The final rule expands the types of fees for which consumers must
not be obligated if they reject an open-end (not home-secured) plan as
permitted under Sec. 226.5(b)(1)(iv) to include application fees
charged to all applicants. The Board believes that it is important that
consumers have the opportunity, after receiving the account-opening
disclosures which set forth the fees and other charges that will be
applicable to the account, to reject the plan without being obligated
for any charges. It is the Board's understanding that some creditors
may debit application fees to the account, and thus these fees should
be treated in the same manner as other fees debited at account opening.
Conforming changes have been made to Sec. 226.5a(d)(2).
Furthermore, in May 2008, the Board proposed to revise and move to
comment 5(b)(1)(iv)-2, guidance in current comment 5(b)(1)-1
(renumbered as comment 5(b)(1)(i)-1 in the June 2007 Proposal)
regarding instances when a creditor may consider an account not
rejected. In the May 2008 Proposal, the Board proposed to revise the
guidance to provide that a consumer who has received the disclosures
and uses the account, or makes a payment on the account after receiving
a billing statement, is deemed not to have rejected the plan. In the
May 2008 Proposal, the Board also proposed to provide a ``safe harbor''
that a creditor may deem the plan to be rejected if, 60 days after the
creditor mailed the account-opening disclosures, the consumer has not
used the account or made a payment on the account.
The Board received mixed comments on the 60 day ``safe harbor''
proposal. Some industry commenters opposed the ``safe harbor'' citing
operational complexity and uncertainty in account administration
procedures. Some consumer group commenters and an industry trade group
commenter supported the Board's proposal. These commenters also
suggested that the Board either require or encourage as a ``best
practice'' a notice to be given to consumers stating that inactivity
for 60 days will cause an account to be closed. After considering
comments on the proposal, the Board is amending comment 5(b)(1)(iv)-2
to delete the 60 day ``safe harbor'' because the Board believes the
potential confusion this guidance may cause and the operational
difficulties the guidance could impose outweigh the benefits of the
guidance.
In the June 2007 Proposal, the Board proposed to provide guidance
in comment 5(b)(1)(i)-1 on what it means to ``use'' the account. The
June 2007 proposed clarification was intended to address concerns about
some subprime card accounts that assess a large number of fees at
account opening. In the May 2008 Proposal, this provision was moved to
new proposed comment 5(b)(1)(iv)-3 and revised to clarify that a
consumer does not ``use'' an account when the creditor assesses fees to
the account (such as start-up fees or fees associated with credit
insurance or debt cancellation or suspension programs agreed to as a
part of the application and before the consumer receives account-
opening disclosures). The May 2008 Proposal also clarified in comment
5(b)(1)(iv)-3 that the consumer does not ``use'' an account when, for
example, a creditor sends a billing statement with start-up fees, there
is no other activity on the account, the consumer does not pay the
fees, and the creditor subsequently assesses a late fee or interest on
the unpaid fee balances. In the May 2008 Proposal, the Board also
proposed to add that a consumer is not considered to ``use'' an account
when, for example, a consumer receives a credit card in the mail and
calls to activate the card for security purposes.
The Board received several comments regarding the guidance on
whether activation of the card constitutes ``use'' of the account. Some
commenters supported the Board's proposed guidance. Other commenters
opposed the proposal noting that a consumer will have received account-
opening disclosures at the time the consumer activates the card. These
commenters also stated that when a consumer affirmatively activates a
card, it should constitute acceptance of the account. Some consumer
group commenters suggested that the Board also include guidance that
payment of fees on the first billing statement should not constitute
acceptance of the account and that consumers should only be considered
to have used an account by affirmatively using the credit, such as by
making a purchase or obtaining a cash advance.
The Board is adopting comment 5(b)(1)(iv)-3 as proposed with one
modification. The Board believes that what constitutes ``use'' of the
account should be consistent with consumer understanding of the term. A
consumer is likely to think he or she has not ``used'' the account if
the only action he or she has taken is to activate the account.
Conversely, a consumer who has made a purchase or a payment on the
account would likely believe that he
[[Page 5276]]
or she is ``using'' the account. The Board, however, is amending the
comment to delete the phrase ``such as for security purposes'' in
relation to the discussion about card activation. One industry
commenter, while supportive of the Board's general guidance that
activation alone does not indicate a consumer's acceptance of a credit
plan, was concerned about any suggestion that a customer should
activate, for security purposes, an account that a consumer does not
intend to use.
In technical revisions, comment 5(b)(1)-1, renumbered as comment
5(b)(1)(i)-1 in the June 2007 Proposal, currently addresses a
creditor's general duty to provide account-opening disclosures ``before
the first transaction'' and provides that HELOCs are not subject to the
prohibition on the payment of fees other than application or refundable
membership fees before account-opening disclosures are provided. See
Sec. 226.5b(h) regarding limitations on the collection of fees. In the
May 2008 Proposal, the existing guidance about HELOCs was moved to
revised Sec. 226.5(b)(1)(iv) and a new comment 5(b)(1)(iv)-4 for
clarity. The Board received no comment on the proposed reorganization,
and the reorganization of the guidance regarding HELOCs is adopted as
proposed.
5(b)(2) Periodic Statements
TILA Sections 127(b) and 163 set forth the timing requirements for
providing periodic statements for open-end credit accounts. 15 U.S.C.
1637(b) and 1666b. In the June 2007 Proposal, the Board proposed to
retain the existing regulation and commentary related to the timing
requirements for providing periodic statements for open-end credit
accounts, with a few changes and clarifications as discussed below.
5(b)(2)(i)
TILA Section 127(b) establishes that creditors generally must send
periodic statements at the end of billing cycles in which there is an
outstanding balance or a finance charge is imposed. 15 U.S.C. 1637(b).
Section 226.5(b)(2)(i) provides for a number of exceptions to a
creditor's duty to send periodic statements.
De minimis amounts. Under the current regulation, creditors need
not send periodic statements if an account balance, whether debit or
credit, is $1 or less and no finance charge is imposed. The Board
proposed no changes to and received no comments on this provision. As a
result, the Board retains this provision as currently written.
Uncollectible accounts. Creditors are not required to send periodic
statements on accounts the creditor has deemed ``uncollectible,'' which
is not specifically defined. In the June 2007 Proposal, the Board
sought comment on whether guidance on the term ``uncollectible'' would
be helpful.
Commenters to the June 2007 Proposal stated that guidance would be
helpful but differed on what that guidance should be. Several consumer
group commenters suggested that an account should be deemed
``uncollectible'' only when a creditor has ceased collection efforts,
either directly or through a third party. These commenters stated that
for a consumer whose account is delinquent but still subject to
collection, a periodic statement is important to show the consumer when
and how much interest is accruing and whether the consumer's payments
have been credited. Industry commenters suggested instead that an
account should be deemed ``uncollectible'' once the account is charged
off in accordance with loan-loss provisions.
Based on the plain language of the term ``uncollectible'' and the
importance of periodic statements to show consumers when interest
accrues or fees are assessed on the account, the Board is adopting new
comment 5(b)(2)(i)-3 (accordingly, as discussed below comment
5(b)(2)(i)-3 as proposed in the June 2007 Proposal is adopted as
5(b)(2)(i)-4). The comment clarifies that an account is
``uncollectible'' when a creditor has ceased collection efforts, either
directly or through a third party.
In addition, if an account has been charged off in accordance with
loan-loss provisions and the creditor no longer accrues new interest or
charges new fees on the account, the Board believes that the value of a
periodic statement does not justify the cost of providing the
disclosure because the amount of a consumer's obligation will not be
increasing. As a result, the Board is modifying Sec. 226.5(b)(2)(i) to
state that in such cases, the creditor also need not provide a periodic
statement. However, this provision does not apply if a creditor has
charged off the account but continues to accrue new interest or charge
new fees.
Instituting collection proceedings. Creditors need not send
statements if ``delinquency collection proceedings have been
instituted'' under Sec. 226.5(b)(2)(i). In the June 2007 Proposal, the
Board proposed to add comment 5(b)(2)(i)-3 to clarify that a collection
proceeding entails a filing of a court action or other adjudicatory
process with a third party, and not merely assigning the debt to a debt
collector. Several consumer groups strongly supported the Board's
proposal while industry commenters recommended that the Board provide
greater flexibility in interpreting when delinquency collection
proceedings have been instituted. In particular, an industry commenter
stated that the minimum payment warning could conflict with the
creditor's collection demand and create consumer confusion.
Nonetheless, as discussed in more detail in the section-by-section
analysis to Sec. 226.7(b)(12), the minimum payment disclosure is not
required where a fixed repayment period has been specified in the
account agreement, such as where the account has been closed due to
delinquency and the required monthly payment has been reduced or the
balance decreased to accommodate a fixed payment for a fixed period of
time designed to pay off the outstanding balance.
The Board believes that clarifying that a collection proceeding
entails the filing of a court action or other adjudicatory process with
a third party provides clear and uniform guidance to creditors as to
when periodic statements are no longer required. Accordingly, the Board
adopts the comment as proposed, though for organizational purposes, the
comment is renumbered as comment 5(b)(2)(i)-4.
Workout arrangements. Comment 5(b)(2)(i)-2 provides that creditors
must continue to comply with all the rules for open-end credit,
including sending a periodic statement, when credit privileges end,
such as when a consumer stops taking draws and pays off the outstanding
balance over time. Another comment provides that ``if an open-end
credit account is converted to a closed-end transaction under a written
agreement with the consumer, the creditor must provide a set of closed-
end credit disclosures before consummation of the closed-end
transaction.'' Comment 17(b)-2.
To provide flexibility and reduce burden and uncertainty, the Board
proposed to clarify in the June 2007 Proposal that creditors entering
into workout agreements for delinquent open-end plans without
converting the debt to a closed-end transaction comply with the
regulation if creditors continue to comply with the open-end provisions
for the work-out period. The Board received only one comment concerning
workout arrangements, which supported the Board's proposal. Therefore,
amendments to comment 5(b)(2)(i)-2 are adopted as proposed.
5(b)(2)(ii)
TILA Section 163(a) requires creditors that provide a grace period
to send statements at least 14 days before the
[[Page 5277]]
grace period ends. 15 U.S.C. 1666b(a). The 14-day period runs from the
date creditors mail their statements, not from the end of the statement
period nor from the date consumers receive their statements. As
discussed in the June 2007 Proposal, the Board has anecdotal evidence
that some consumers receive statements relatively close to the payment
due date, which leaves consumers with little time to review the
statement before payment must be mailed to meet the due date. As a
result, the Board requested comment on (1) whether it should recommend
to Congress that the 14-day period be increased to a longer time
period, so that consumers will have additional time to receive their
statements and mail their payments to ensure that payments will be
received by the due date, and (2) if so, what time period the Board
should recommend to Congress.
The Board received numerous comments on this issue. Consumer and
consumer group commenters complained that the time period from when
consumers received their statements to the payment due date was too
short, causing consumers often to incur late fees and lose the benefit
of the grace period, and creditors to raise consumers' rates to the
penalty rate. Industry commenters, on the other hand, stated that the
14-day period under TILA Section 163(a) was appropriate and that the
Board should not recommend a longer time frame to Congress.
Based in part on these comments, the Board and other federal
banking agencies proposed in May 2008 to prohibit institutions from
treating a payment as late for any purpose unless the consumer has been
provided a reasonable amount of time to make that payment. Treating a
payment as late for any purpose includes increasing the APR as a
penalty, reporting the consumer as delinquent to a credit reporting
agency, or assessing a late or any other fee based on the consumer's
failure to make payment within the amount of time provided. 73 FR
28904, May 19, 2008. The Board is opting not to address the 14-day
period under TILA Section 163(a) and is retaining Sec. 226.5(b)(2)(ii)
as currently written. Consumer comment letters mainly focused on the
due date with respect to having their payments credited in time to
avoid a late fee and an increase in their APR to the penalty rate and
not with the loss of a grace period. Therefore, the Board has chosen to
address these concerns in final rules issued by the Board and other
federal banking agencies published elsewhere in today's Federal
Register.
Technical Revisions. Changes conforming with final rules issued by
the Board and other federal banking agencies published elsewhere in
today's Federal Register have been made to comment 5(b)(2)(ii)-1. In
addition, the substance of comment 5(c)-4, which was inadvertently
placed as commentary to Sec. 226.5(c), has been moved and renumbered
as comment 5(b)(2)(ii)-2.
5(b)(2)(iii)
As proposed in the June 2007 Proposal, the substance of footnote 10
is moved to the regulatory text.
5(c) Through 5(e)
Sections 226.5(c), (d), and (e) address, respectively: The basis of
disclosures and the use of estimates; multiple creditors and multiple
consumers; and the effect of subsequent events.
In the June 2007 Proposal, the Board did not propose any changes to
these provisions, except the addition of new comment 5(d)-3,
referencing the statutory provisions pertaining to charge cards with
plans that allow access to an open-end credit plan maintained by a
person other than the charge card issuer. TILA 127(c)(4)(D); 15 U.S.C.
1637(c)(4)(D). (See the section-by-section analysis to Sec.
226.5a(f).) No comments were received on comment 5(d)-3. The Board
adopts this comment as proposed. In addition, comment 5(c)-4 is
redesignated as comment 5(b)(2)(ii)-2 to correct a technical error in
placement.
Section 226.5a Credit and Charge Card Applications and Solicitations
TILA Section 127(c), implemented by Sec. 226.5a, requires card
issuers to provide certain cost disclosures on or with an application
or solicitation to open a credit or charge card account.\14\ 15 U.S.C.
1637(c). The format and content requirements differ for cost
disclosures in card applications or solicitations, depending on whether
the applications or solicitations are given through direct mail,
provided electronically, provided orally, or made available to the
general public such as in ``take-one'' applications and in catalogs or
magazines. Disclosures in applications and solicitations provided by
direct mail or electronically must be presented in a table. For oral
applications and solicitations, certain cost disclosures must be
provided orally, except that issuers in some cases are allowed to
provide the disclosures later in a written form. Applications and
solicitations made available to the general public, such as in a take-
one application, must contain one of the following: (1) The same
disclosures as for direct mail presented in a table; (2) a narrative
description of how finance charges and other charges are assessed; or
(3) a statement that costs are involved, along with a toll-free
telephone number to call for further information.
---------------------------------------------------------------------------
\14\ Charge cards are a type of credit card for which full
payment is typically expected upon receipt of the billing statement.
To ease discussion, this section of the supplementary information
will refer to ``credit cards'' which includes charge cards.
---------------------------------------------------------------------------
5a(a) General Rules
Combining disclosures. Currently, comment 5a-2 states that account-
opening disclosures required by Sec. 226.6 do not substitute for the
disclosures required by Sec. 226.5a; however, a card issuer may
establish procedures so that a single disclosure document meets the
requirements of both sections. In the June 2007 Proposal, the Board
proposed to retain this comment, but to revise it to account for
proposed revisions to Sec. 226.6. Specifically, the Board proposed to
revise comment 5a-2 to provide that a card issuer may satisfy Sec.
226.5a by providing the account-opening summary table on or with a card
application or solicitation, in lieu of the Sec. 226.5a table. See
proposed Sec. 226.6(b)(4). The account-opening table is substantially
similar to the table required by Sec. 226.5a, but the content required
is not identical. The account-opening table requires information that
is not required in the Sec. 226.5a table, such as a reference to
billing error rights. The Board adopts this comment provision as
proposed, except for one technical edit which is discussed in the
section-by-section analysis to Sec. 226.5a(d)(2). Commenters on the
June 2007 Proposal generally supported the proposed comment allowing
the account-opening summary table to substitute for the table required
by Sec. 226.5a. For various reasons, card issuers may want to provide
the account-opening disclosures with the card application or
solicitation. To ease compliance burden on issuers, this comment allows
them to provide the account-opening summary table in lieu of the table
containing the Sec. 226.5a disclosures. Otherwise, issuers in these
circumstances would be required to provide the table required by Sec.
226.5a and the account-opening table. In addition, allowing issuers to
substitute the account-opening table for the table required by Sec.
226.5a would not undercut consumers' ability to compare the terms of
two credit card accounts where one issuer provides the account-opening
table and the other issuer provides the table required by Sec. 226.5a,
[[Page 5278]]
because the two tables are substantially similar.
Clear and conspicuous standard. Section 226.5(a) requires that
disclosures made under subpart B (including disclosures required by
Sec. 226.5a) must be clear and conspicuous. Currently, comment
5a(a)(2)-1 provides guidance on the clear and conspicuous standard for
the Sec. 226.5a disclosures. In the June 2007 Proposal, the Board
proposed to provide guidance on applying the clear and conspicuous
standard to the Sec. 226.5a disclosures in comment 5(a)(1)-1. Thus,
guidance currently in comment 5a(a)(2)-1 would have been deleted as
unnecessary. The Board proposed to add comment 5a-3 to cross reference
the clear and conspicuous guidance in comment 5(a)(1)-1. The final rule
deletes current comment 5a(a)(2)-1 and adds comment 5a-3 as proposed.
5a(a)(1) Definition of Solicitation
Firm offers of credit. The term ``solicitation'' is defined in
Sec. 226.5a(a)(1) of Regulation Z to mean ``an offer by the card
issuer to open a credit or charge card account that does not require
the consumer to complete an application.'' 15 U.S.C. 1637(c). Board
staff has received questions about whether card issuers making ``firm
offers of credit'' as defined in the Fair Credit Reporting Act (FCRA)
are considered to be making solicitations for purposes of Sec. 226.5a.
15 U.S.C. 1681 et seq. In June 2007, the Board proposed to amend the
definition of ``solicitation'' in Sec. 226.5a(a)(1) to clarify that
such ``firm offers of credit'' for credit cards are solicitations for
purposes of Sec. 226.5a. The final rule adopts the amendment to Sec.
226.5a(a)(1) as proposed. Because consumers who receive ``firm offers
of credit'' have been preapproved to receive a credit card and may be
turned down for credit only under limited circumstances, the Board
believes that these preapproved offers are of the type intended to be
captured as a ``solicitation,'' even though consumers are asked to
provide some additional information in connection with accepting the
offer.
Invitations to apply. In the June 2007 Proposal, the Board also
proposed to add comment 5a(a)(1)-1 to distinguish solicitations from
``invitations to apply,'' which are not covered by Sec. 226.5a. An
``invitation to apply'' occurs when a card issuer contacts a consumer
who has not been preapproved for a card account about opening an
account (whether by direct mail, telephone, or other means) and invites
the consumer to complete an application, but the contact itself does
not include an application. The Board adopts comment 5a(a)(1)-1 as
proposed. The Board believes that these ``invitations to apply'' do not
meet the definition of ``solicitation'' because the consumer must still
submit an application in order to obtain the offered card. Thus,
comment 5a(a)(1)-1 clarifies that this ``invitation to apply'' is not
covered by Sec. 226.5a unless the contact itself includes (1) an
application form in a direct mailing, electronic communication or
``take-one''; (2) an oral application in a telephone contact initiated
by the card issuer; or (3) an application in an in-person contact
initiated by the card issuer.
5a(a)(2) Form of Disclosures and Tabular Format
Table must be substantially similar to model and sample forms in
Appendix G-10. Currently and under the June 2007 Proposal, Sec.
226.5a(a)(2)(i) provides that when making disclosures that are required
to be disclosed in a table, issuers must use headings, content and
format for the table substantially similar to any of the applicable
tables found in Appendix G-10 to part 226. In response to the June 2007
Proposal, several consumer groups suggested that the Board explicitly
require that the disclosures be made in the order shown on the proposed
model and sample forms in Appendix G-10 to part 226. These consumer
groups also suggested that the Board require issuers to use the
headings for the rows provided in the proposed model and sample form in
Appendix G to part 226, and not allow issuers to use headings that are
``substantially similar'' to the ones in the model and sample forms.
The final rule adopts Sec. 226.5a(a)(2)(i), as proposed. The Board
believes that issuers may need flexibility to change the order of the
disclosures or the headings for the row provided in the table, such as
to accommodate differences in account terms that may be offered on
products and different terminology used by the issuer to describe those
account terms. In addition, as discussed elsewhere in the section-by-
section analysis to Appendix G, the Board is permitting creditors in
some circumstances to combine rows for APRs or fees, when the amount of
the fee or rate is the same for two or more types of transactions. The
Board believes that the ``substantially similar'' standard is
sufficient to ensure uniformity of the tables used by different
issuers.
In response to the June 2007 Proposal, several commenters suggested
changes to the formatting of the proposed model and sample forms in
Appendix G-10 to part 226. These comments are discussed in the section-
by-section analysis to Appendix G.
Fees for late payment, over-the-limit, balance transfers and cash
advances. Currently, Sec. 226.5a(a)(2)(ii) and comment 5a(a)(2)-5,
which implement TILA Section 127(c)(1)(B), provide that card issuers
may disclose late-payment fees, over-the-limit fees, balance transfer
fees, and cash advance fees in the table or outside the table. 15
U.S.C. 1637(c)(1)(B).
In the June 2007 Proposal, the Board proposed to amend Sec.
226.5a(a)(2)(i) to require that these fees be disclosed in the table.
In addition, the Board proposed to delete current Sec.
226.5a(a)(2)(ii) and comment 5a(a)(2)-5, which currently allow issuers
to place the fees outside the table.
The Board adopts Sec. 226.5a(a)(2)(i) and deletes current Sec.
226.5a(a)(2)(ii) and comment 5a(a)(2)-5 as proposed. The final rule
amends Sec. 226.5a(a)(2)(i) to require these fees to be disclosed in
the table, so that consumers can easily identify them. In the consumer
testing conducted for the Board prior to the June 2007 Proposal,
participants consistently identified these fees as among the most
important pieces of information they consider as part of the credit
card offer. With respect to the disclosure of these fees, the Board
tested placement of these fees in the table and immediately below the
table. Participants who were shown forms where the fees were disclosed
below the table tended not to notice these fees compared to
participants who were shown forms where the fees were presented in the
table. These final revisions are adopted in part pursuant to TILA
Section 127(c)(5), which authorizes the Board to add or modify Sec.
226.5a disclosures as necessary to carry out the purposes of TILA. 15
U.S.C. 1637(c)(5).
Highlighting APRs and fee amounts in the table. Section 226.5a
generally requires that certain information about rates and fees
applicable to the card offer be disclosed to the consumer in card
applications and solicitations. This information includes not only the
APRs and fee amounts that will apply, but also explanatory information
that gives context to these figures. The Board seeks to enable
consumers to identify easily the rates and fees disclosed in the table.
Thus, in the June 2007 Proposal, the Board proposed to add Sec.
226.5a(a)(2)(iv) to require that when a tabular format is required,
issuers must disclose in bold text any APRs required to be disclosed,
any discounted initial rate permitted to be disclosed, and most fee
amounts or percentages required to be disclosed.
[[Page 5279]]
The Board also proposed to add comment 5a(a)(2)-5 to explain that
proposed Samples G-10(B) and G-10(C) provide guidance on how to show
the rates and fees described in bold text. In addition, proposed
comment 5a(a)(2)-5 also would have explained that proposed Samples G-
10(B) and G-10(C) provide guidance to issuers on how to disclose the
percentages and fees described above in a clear and conspicuous manner,
by including these percentages and fees generally as the first text in
the applicable rows of the table so that the highlighted rates and fees
generally are aligned vertically. In consumer testing conducted for the
Board prior to the June 2007 Proposal, participants who saw a table
with the APRs and fees in bold and generally before any text in the
table were more likely to identify the APRs and fees quickly and
accurately than participants who saw other forms in which the APRs and
fees were not highlighted in such a fashion.
The final rule adopts Sec. 226.5a(a)(2)(iv) and comment 5a(a)(2)-5
with several technical revisions. Section 226.5a(a)(2)(iv) is amended
to provide that maximum limits on fee amounts disclosed in the table
that do not relate to fees that vary by state must not be disclosed in
bold text. Comment 5a(a)(2)-5 provides guidance on when maximum limits
must be disclosed in bold text. For example, assume an issuer will
charge a cash advance fee of $5 or 3 percent of the cash advance
transaction amount, whichever is greater, but the fee will not exceed
$100. The maximum limit of $100 for the cash advance fee must not be
highlighted in bold text. In contrast, assume that the amount of the
late fee varies by state, and the range of amount of late fees
disclosed is $15-$25. In this case, the maximum limit of $25 on the
late fee amount must be highlighted in bold text. In both cases, the
minimum fee amount (e.g., $5 or $15) must be disclosed in bold text.
Comment 5a(a)(2)-5 also provides guidance on highlighting periodic
fees. Section 226.5a(a)(2)(iv) provides that any periodic fee disclosed
pursuant to Sec. 226.5a(b)(2) that is not an annualized amount must
not be disclosed in bold. For example, if an issuer imposes a $10
monthly maintenance fee for a card account, the issuer must disclose in
the table that there is a $10 monthly maintenance fee, and that the fee
is $120 on an annual basis. In this example, the $10 fee disclosure
would not be disclosed in bold, but the $120 annualized amount must be
disclosed in bold. In addition, if an issuer must disclose any annual
fee in the table, the amount of the annual fee must be disclosed in
bold.
Section 226.5a(a)(2)(iv) is amended to refer to discounted initial
rates as ``introductory'' rates, as that term is defined in Sec.
226.16(g)(2)(ii), for consistency, and to clarify that introductory
rates that are disclosed in the table under new Sec. 226.5a(b)(1)(vii)
must be in bold text. Similarly, rates that apply after a premium
initial rate expires that are disclosed in the table must also be in
bold text.
Electronic applications and solicitations. Section 1304 of the
Bankruptcy Act amends TILA Section 127(c) to require solicitations to
open a card account using the Internet or other interactive computer
service to contain the same disclosures as those made for applications
or solicitations sent by direct mail. Regarding format, the Bankruptcy
Act specifies that disclosures provided using the Internet or other
interactive computer service must be ``readily accessible to consumers
in close proximity'' to the solicitation. 15 U.S.C. 1637(c)(7).
In September 2000, the Board revised Sec. 226.5a, and as part of
these revisions, provided guidance on how card issuers using electronic
disclosures may comply with the Sec. 226.5a requirement that certain
disclosures be ``prominently located'' on or with the application or
solicitation. 65 FR 58903, Oct. 3, 2000. In March 2001, the Board
issued interim final rules containing additional guidance for the
electronic delivery of disclosures under Regulation Z. 66 FR 17329,
Mar. 30, 2001. In November 2007, the Board adopted the November 2007
Final Electronic Disclosure Rule, which withdrew portions of the 2001
interim final rules and issued final rules containing additional
guidance for the electronic delivery of disclosures under Regulation Z.
72 FR 63462, Nov. 9, 2007; 72 FR 71058, Dec. 14, 2007.
The Bankruptcy Act provision applies to solicitations to open a
card account ``using the Internet or other interactive computer
service.'' The term ``Internet'' is defined as the international
computer network of both Federal and non-Federal interoperable packet-
switched data networks. The term ``interactive computer service'' is
defined as any information service, system or access software provider
that provides or enables computer access by multiple users to a
computer server, including specifically a service or system that
provides access to the Internet and such systems operated or services
offered by libraries or educational institutions. 15 U.S.C. 1637(c)(7).
Based on the definitions of ``Internet'' and ``interactive computer
service,'' the Board believes that Congress intended to cover all card
offers that are provided to consumers in electronic form, such as via
e-mail or a Web site.
In addition, although this Bankruptcy Act provision refers to
credit card solicitations (where no application is required), in the
June 2007 Proposal, the Board proposed to apply the Bankruptcy Act
provision relating to electronic offers to both electronic
solicitations and applications pursuant to the Board's authority under
TILA Section 105(a) to make adjustments that are necessary to
effectuate the purposes of TILA. 15 U.S.C. 1601(a), 1604(a).
Specifically, the Board proposed to amend Sec. 226.5a(c) to require
that applications and solicitations that are provided in electronic
form contain the same disclosures as applications and solicitations
sent by direct mail. With respect to both electronic applications and
solicitations, it is important for consumers who are shopping for
credit to receive accurate cost information before submitting an
electronic application or responding to an electronic solicitation. The
final rule adopts this change to Sec. 226.5a(c), as proposed.
With respect to the form of disclosures required under Sec.
226.5a, in the June 2007 Proposal, the Board proposed to amend Sec.
226.5a(a)(2) by adding a new paragraph (v) to provide that if a
consumer accesses an application or solicitation for a credit card in
electronic form, the disclosures required on or with an application or
solicitation for a credit card must be provided to the consumer in
electronic form on or with the application or solicitation. The Board
also proposed to add comment 5a(a)(2)-6 to clarify this point and also
to make clear that if a consumer is provided with a paper application
or solicitation, the required disclosures must be provided in paper
form on or with the application or solicitation (and not, for example,
by including a reference in the paper application or solicitation to
the Web site where the disclosures are located).
In the November 2007 Final Electronic Disclosure Rule, the Board
adopted the proposed changes to Sec. 226.5a(a)(2)(v) and comment
5a(a)(2)-6 with several revisions. 72 FR 63462, Nov. 9, 2007; 72 FR
71058, Dec. 14, 2007. In the November 2007 Final Electronic Disclosure
Rule, the guidance in proposed comment 5a(a)(2)-6 was contained in
comment 5a(a)(2)-9. In this final rule, the guidance in comment
5a(a)(2)-9 added by the November 2007 Final Electronic Disclosure Rule
is moved to comment 5a(a)(2)-6.
[[Page 5280]]
In the June 2007 Proposal, the Board also proposed to revise
existing comment 5a(a)(2)-8 added by the 2001 interim final rule on
electronic disclosures, which states that a consumer must be able to
access the electronic disclosures at the time the application form or
solicitation reply form is made available by electronic communication.
The Board proposed to revise this comment to describe alternative
methods for presenting electronic disclosures. This comment was
intended to provide examples of the methods rather than an exhaustive
list. In the November 2007 Final Electronic Disclosure Rule, the Board
adopted the proposed changes to comment 5a(a)(2)-8 with several
revisions. 72 FR 63462, Nov. 9, 2007; 72 FR 71058, Dec. 14, 2007.
In the June 2007 Proposal, the Board proposed to incorporate the
``close proximity'' standard for electronic applications and
solicitations in Sec. 226.5a(a)(2)(vi)(B), and the guidance regarding
the location of the Sec. 226.5a disclosures in electronic applications
and solicitations in comment 5a(a)(2)-1.ii. This guidance, contained in
proposed comment 5a(a)(2)-1.ii, was consistent with proposed changes to
comment 5a(a)(2)-8, that provides guidance to issuers on providing
access to electronic disclosures at the time the application form or
solicitation reply form is made available in electronic form.
The final rule adopts Sec. 226.5a(a)(2)(vi)(B) and comment
5a(a)(2)-1.ii as proposed, with several revisions. Specifically,
comment 5a(a)(2)-1.ii is revised to be consistent with the revisions to
comment 5a(a)(2)-8 made in the November 2007 Final Electronic
Disclosure Rule. Comment 5a(a)(2)-1.ii provides that if the table
required by Sec. 226.5a is provided electronically, the table must be
provided in close proximity to the application or solicitation. Card
issuers have flexibility in satisfying this requirement. Methods card
issuers could use to satisfy the requirement include, but are not
limited to, the following examples: (1) The disclosures could
automatically appear on the screen when the application or reply form
appears; (2) the disclosures could be located on the same Web page as
the application or reply form (whether or not they appear on the
initial screen), if the application or reply form contains a clear and
conspicuous reference to the location of the disclosures and indicates
that the disclosures contain rate, fee, and other cost information, as
applicable; (3) card issuers could provide a link to the electronic
disclosures on or with the application (or reply form) as long as
consumers cannot bypass the disclosures before submitting the
application or reply form. The link would take the consumer to the
disclosures, but the consumer need not be required to scroll completely
through the disclosures; or (4) the disclosures could be located on the
same Web page as the application or reply form without necessarily
appearing on the initial screen, immediately preceding the button that
the consumer will click to submit the application or reply. Whatever
method is used, a card issuer need not confirm that the consumer has
read the disclosures. Comment 5a(a)(2)-8 is deleted as unnecessary.
As discussed in the June 2007 Proposal, the Board believes that the
``close proximity'' standard is designed to ensure that the disclosures
are easily noticeable to consumers, and this standard is not met when
consumers are only given a link to the disclosures on the Web page
containing the application (or reply form), but not the disclosures
themselves. Thus, the Board retains the requirement that if an
electronic link to the disclosures is used, the consumer must not be
able to bypass the link before submitting an application or a reply
form.
Terminology. Section 226.5a currently requires terminology in
describing the disclosures required by Sec. 226.5a to be consistent
with terminology used in the account-opening disclosures (Sec. 226.6)
and the periodic statement disclosures (Sec. 226.7). TILA and Sec.
226.5a also require that the term ``grace period'' be used to describe
the date by which or the period within which any credit extended for
purchases may be repaid without incurring a finance charge. 15 U.S.C.
1632(c)(2)(C). In the June 2007 Proposal, the Board proposed that all
guidance for terminology requirements for Sec. 226.5a disclosures be
placed in proposed Sec. 226.5(a)(2)(iii). See section-by-section
analysis to Sec. 226.5(a)(2). The Board also proposed to add comment
5a(a)(2)-7 to cross reference the guidance in Sec. 226.5(a)(2). The
Board adopts comment 5a(a)(2)-7 as proposed.
5a(a)(4) Fees That Vary by State
Currently, under Sec. 226.5a, if the amount of a late-payment fee,
over-the-limit fee, cash advance fee or balance transfer fee varies by
state, a card issuer may either disclose in the table (1) the amount of
the fee for all states; or (2) a range of fees and a statement that the
amount of the fee varies by state. See current Sec. 226.5a(a)(5),
renumbered as proposed Sec. 226.5a(a)(4); see also TILA Section
127(f). As discussed below, in the June 2007 Proposal, the Board
proposed to require card issuers to disclose in the table any fee
imposed when a payment is returned. See proposed Sec. 226.5a(b)(12).
The Board proposed to amend new Sec. 226.5a(a)(4) to add returned-
payment fees to the list of fees for which an issuer may disclose a
range of fees.
The final rule adopts proposed Sec. 226.5a(a)(4) with several
modifications. The Board is revising proposed Sec. 226.5a(a)(4) to
provide that card issuers that impose a late-payment fee, over-the-
limit fee, cash advance fee, balance transfer fee or returned-payment
fee where the amount of those fees vary by state may, at the issuer's
option, disclose in the table required by Sec. 226.5a either (1) the
specific fee applicable to the consumer's account, or (2) the range of
the fees, if the disclosure includes a statement that the amount of the
fee varies by state and refers the consumer to a disclosure provided
with the Sec. 226.5a table where the amount of the fee applicable to
the consumer's account is disclosed, for example in a list of fees for
all states. Listing fees for multiple states in the table is not
permissible. For example, a card issuer may not list fees for all
states in the table. Similarly, a card issuer that does business in six
states may not list fees for all six of those states in the table.
(Conforming changes are also made to comment 5a(a)(4)-1.)
As discussed in the section-by-section analysis to Sec.
226.6(b)(1)(iii), the Board is adopting a similar rule for account-
opening disclosures, with one notable exception discussed below. In
general, a creditor must disclose the fee applicable to the consumer's
account; listing all fees for all states in the account-opening summary
table is not permissible. The Board is concerned in each case that an
approach of listing all fees for all states would detract from the
purpose of the table: to provide key information in a simplified way.
One difference between the fee disclosure requirement in Sec.
226.5a(a)(4) and the similar requirement in Sec. 226.6(b)(1)(iii) is
that Sec. 226.6(b)(1)(iii) limits use of the range of fees to point-
of-sale situations while Sec. 226.5a contains no similar limitation.
As discussed further in the section-by-section analysis to Sec.
226.6(b)(1)(iii), for creditors with retail stores in a number of
states, it is not practicable to require fee-specific disclosures to be
provided when an open-end (not home-secured) plan is established in
person in connection with the purchase of goods or services. Thus, the
final rule in Sec. 226.6(b)(1)(iii) provides that creditors imposing
fees such as late-payment fees
[[Page 5281]]
or returned-payment fees that vary by state and providing the
disclosures required by Sec. 226.6(b) in person at the time the open-
end (not home-secured) plan is established in connection with financing
the purchase of goods or services may, at the creditor's option,
disclose in the account-opening table either (1) the specific fee
applicable to the consumer's account, or (2) the range of the fees, if
the disclosure includes a statement that the amount of the fee varies
by state and refers the consumer to the account agreement or other
disclosure provided with the account-opening summary table where the
amount of the fee applicable to the consumer's account is disclosed.
As with the account-opening table, the Board is concerned that
including all fees for all states in the table required by Sec. 226.5a
would detract from the purpose of the table: to provide key information
in a simplified way. Nonetheless, unlike with the account-opening
table, the final rule does not limit the use of the range of fees for
the table required by Sec. 226.5a only to point-of-sale situations.
With respect to the application and solicitation disclosures, there may
be many situations in which it is impractical to provide the fee-
specific disclosures with the application or solicitation, such as when
the application is provided on the Internet or in ``take-one''
materials. For Internet or ``take-one'' applications or solicitations,
a creditor will in most cases not be aware in which state the consumer
resides and, consequently, will not be able to determine the amount of
fees that would be charged to that consumer under applicable state law.
The changes to Sec. 226.5a(a)(4) are adopted in part pursuant to TILA
Section 127(c)(5), which authorizes the Board to add or modify Sec.
226.5a disclosures as necessary to carry out the purposes of TILA. 15
U.S.C. 1637(c)(5).
5a(a)(5) Exceptions
Section 226.5a currently contains several exceptions to the
disclosure requirements. Some of these exceptions are in the regulation
itself, while others are contained in the commentary. For clarity, in
the June 2007 Proposal, the Board proposed to place all exceptions in
new Sec. 226.5a(a)(5). The final rule adopts new Sec. 226.5a(a)(5) as
proposed.
5a(b) Required Disclosures
Section 226.5a(b) specifies the disclosures that are required to be
included on or with certain credit card applications and solicitations.
5a(b)(1) Annual Percentage Rate
Section 226.5a requires card issuers to disclose the rates
applicable to the account, for purchases, cash advances, and balance
transfers. 15 U.S.C. 1637(c)(1)(A)(i)(I).
16-point font for disclosure of purchase APRs. Currently, under
Sec. 226.5a(b)(1), the purchase rate must be disclosed in the table in
at least 18-point font. This font requirement does not apply to (1) a
temporary initial rate for purchases that is lower than the rate that
will apply after the temporary rate expires; or (2) a penalty rate that
will apply upon the occurrence of one or more specified events. In the
June 2007 Proposal, the Board proposed to amend Sec. 226.5a(b)(1) to
reduce the 18-point font requirement to a 16-point font. Commenters
generally did not object to the proposal to reduce the font size for
the purchase APR. Several consumer groups suggested that the Board
explicitly prohibit issuers from disclosing any discounted initial rate
in 16-point font.
The final rule adopts the 16-point font requirement in Sec.
226.5a(b)(1) as proposed, with several revisions as described below.
The purchase rate is one of the most important terms disclosed in the
table, and it is essential that consumers be able to identify that rate
easily. A 16-point font size requirement for the purchase APR appears
to be sufficient to highlight the purchase APR. In consumer testing
conducted for the Board prior to June 2007, versions of the table in
which the purchase rate was the same font as other rates included in
the table were reviewed. In other versions, the purchase rate was in
16-point type while other disclosures were in 10-point type.
Participants tended to notice the purchase rate more often when it was
in a font larger than the font used for other rates. Nonetheless, there
was no evidence from consumer testing that it was necessary to use a
font size of 18-point in order for the purchase APR to be noticeable to
participants. Given that the Board is requiring a minimum of 10-point
type for the disclosure of other terms in the table, based on document
design principles, the Board believes that a 16-point font size for the
purchase APR is effective in highlighting the purchase APR in the
table.
The final rule requires that discounted initial rates for purchases
must be in 16-point font. Section 226.5a(b)(1), as proposed, did not
specifically prohibit disclosing any discounted initial rate in 16-
point font but did not require such formatting. New Sec.
226.5a(b)(1)(vii), discussed below, requires disclosure of the
discounted initial rate in the table for issuers subject to final rules
issued by the Board and other federal banking agencies published
elsewhere in today's Federal Register. As a result, the Board believes
that all rates that could apply to a purchase balance, other than a
penalty rate, should be highlighted in 16-point font. For the same
reasons, Sec. 226.5a(b)(1)(iii) also has been amended to clarify that
both the premium initial rate for purchases and any rate that applies
after the premium initial rate for purchases expires must be disclosed
in 16-point font.
The final rule in Sec. 226.5a(b)(1) has also been revised to refer
to discounted initial rates as ``introductory'' rates, as that term is
defined in Sec. 226.16(g)(2)(ii), for consistency.
Periodic rate. Currently, comment 5a(b)(1)-1 allows card issuers to
disclose the periodic rate in the table in addition to the required
disclosure of the corresponding APR. In the June 2007 Proposal, the
Board proposed to delete comment 5a(b)(1)-1, and thus, prohibit
disclosure of the periodic rate in the table. Based on consumer testing
conducted for the Board prior to June 2007, consumers do not appear to
shop using the periodic rate, nor is it clear that this information is
important to understanding a credit card offer. Allowing the periodic
rate to be disclosed in the table may distract from more important
information in the table, and contribute to ``information overload.''
In an effort to streamline the information that appears in the table,
the Board proposed to prohibit disclosure of the periodic rate in the
table. Commenters generally did not oppose the Board's proposal to
prohibit disclosure of the periodic rate in the table. Thus, the Board
is deleting current comment 5a(b)(1)-1 as proposed. In addition, new
comment 5a(b)(1)-8 is added to state that periodic rates must not be
disclosed in the table. The Board notes that card issuers may disclose
the periodic rate outside of the table. See Sec. 226.5a(a)(2)(ii).
Variable rate information. Section 226.5a(b)(1)(i), which
implements TILA Section 127(c)(1)(A)(i)(II), currently requires for
variable-rate accounts, that the card issuer must disclose the fact
that the rate may vary and how the rate is determined. 15 U.S.C.
1637(c)(1)(A)(i)(II). Under current comment 5a(b)(1)-4, in disclosing
how the applicable rate will be determined, the card issuer is required
to provide the index or formula used and disclose any margin or spread
added to the index or formula in setting the rate. The card issuer may
disclose the margin or
[[Page 5282]]
spread as a range of the highest and lowest margins that may be
applicable to the account. A disclosure of any applicable limitations
on rate increases or decreases may also be included in the table.
1. Index and margins. Currently, the variable rate information is
required to be disclosed separately from the applicable APR, in a row
of the table with the heading ``Variable Rate Information.'' Some card
issuers include the phrase ``variable rate'' with the disclosure of the
applicable APR and include the details about the index and margin under
the ``Variable Rate Information'' heading. In the consumer testing
conducted for the Board prior to the June 2007 Proposal, many
participants who saw the variable rate information as described above
understood that the label ``variable'' meant that a rate could change,
but could not locate information on the tested form regarding how or
why these rates could change. This was true even if the index and
margin information was taken out of the row of the table with the
heading ``Variable Rate Information'' and placed in a footnote to the
phrase ``variable rate.'' Many participants who did find the variable
rate information were confused by the variable-rate margins, often
interpreting them erroneously as the actual rate being charged. In
addition, very few participants indicated that they would use the
margins in shopping for a credit card account.
Accordingly, in the June 2007 Proposal, the Board proposed to amend
Sec. 226.5a(b)(1)(i) to specify that issuers may not disclose the
amount of the index or margins in the table. Specifically, card issuers
would not have been allowed to disclose in the table the current value
of the index (for example, that the prime rate currently is 7.5
percent) or the amount of the margin that is used to calculate the
variable rate. Card issuers would have been allowed to indicate only
that the rate varies and the type of index used to determine the rate
(such as the ``prime rate,'' for example). In describing the type of
index, the issuer would have been precluded from including details
about the index in the table. For example, if the issuer uses a prime
rate, the issuer would have been allowed to describe the rate as tied
to a ``prime rate'' and would not have been allowed to disclose in the
table that the prime rate used is the highest prime rate published in
the Wall Street Journal two business days before the closing date of
the statement for each billing period. See proposed comment 5a(b)(1)-2.
Also, the proposal would have required that the disclosure about a
variable rate (the fact that the rate varies and the type of index used
to determine the rate) must be disclosed with the applicable APRs, so
that consumers can more easily locate this information. See proposed
Model Form G-10(A), Samples G-10(B) and G-10(C). Proposed Samples G-
10(B) and G-10(C) would have provided guidance to issuers on how to
disclose the fact that the applicable rate varies and how it is
determined.
Commenters generally supported the Board's proposal to amend Sec.
226.5a(b)(1)(i) to specify that issuers may not disclose the amount of
the index or margins in the table. Several commenters asked the Board
to clarify that issuers may include the index and margin outside of the
table, given that some consumers are interested in knowing the index
and margin. One commenter suggested that issuers be allowed to disclose
in the table additional information about the index used, such as the
publication source of the index used to calculate the rate (e.g.,.
describing that the prime rate used is the highest prime rate published
in the Wall Street Journal two business days before the closing date of
the statement for each billing period.) One commenter suggested that
issuers be allowed to refer to an index as a ``prime rate'' only if it
is a bank prime loan rate posted by the majority of the top 25 U.S.
chartered commercial banks, as published by the Board.
The final rule amends Sec. 226.5a(b)(1)(i) as proposed to specify
that issuers may not disclose the amount of the index or margins in the
table. Section 226.5a(b)(1)(i) is not amended to allow issuers to
disclose in the table additional information about the index used, such
as the publication source of the index. See comment 5a(b)(1)-2. The
Board is concerned that allowing such information in the table could
contribute to ``information overload'' for consumers, and may distract
from more important information in the table. The Board notes that
additional information about the variable rate, such as the amount of
the index and margins and the publication source of the index used to
calculate the rate, may be included outside of the table. See Sec.
226.5a(a)(2)(ii).
In addition, the Board did not amend the rule to provide that
issuers only be allowed to refer to an index as a ``prime rate'' if it
is a bank prime loan rate posted by the majority of the top 25 U.S.
chartered commercial banks, as published by the Board. The Board
believes that this rule is unnecessary at this time. Credit card
issuers typically use a prime rate that is published in the Wall Street
Journal, where that published prime rate is based on prime rates
offered by the 30 largest U.S. banks, and is a widely accepted measure
of prime rate.
2. Rate floors and ceilings. Currently, card issuers may disclose
in the table, at their option, any limitations on how high (i.e.,. a
rate ceiling) or low (i.e., a rate floor) a particular rate may go. For
example, assume that the purchase rate on an account could not go below
12 percent or above 24 percent. An issuer would be required to disclose
in the table the current rate offered on the credit card (for example,
18 percent), but could also disclose in the table that the rate would
not go below 12 percent and above 24 percent. See current comment
5a(b)(1)-4. In the June 2007 Proposal, the Board proposed to revise the
commentary to prohibit the disclosure of the rate floors and ceilings
in the table.
Several consumer group commenters suggested that the Board require
floors and ceilings to be disclosed in the table because such
information has a significant effect on consumers' economic risk.
Several industry commenters suggested that the Board permit (but not
require) issuers to include the floors and ceiling of the variable rate
in the table so that consumers are aware of the potential variations in
the rate. Section 226.5a(b)(1)(i) is revised to prohibit explicitly the
disclosure of the rate floors and ceilings in the table, as proposed.
See also comment 5a(b)(1)-2. Based on consumer testing conducted for
the Board prior to June 2007 and in March 2008, consumers do not appear
to shop based on these rate floors and ceilings, and allowing them to
be disclosed in the table may distract from more important information
in the table, and contribute to ``information overload.'' Card issuers
may, however, disclose this information outside of the table. See Sec.
226.5a(a)(2)(ii).
Discounted initial rates. Currently, comment 5a(b)(1)-5 specifies
that if the initial rate is temporary and is lower than the rate that
will apply after the temporary rate expires, a card issuer must
disclose the rate that will otherwise apply to the account. A
discounted initial rate may be provided in the table along with the
rate required to be disclosed if the card issuer also discloses the
time period during which the discounted initial rate will remain in
effect. In the June 2007 Proposal, the Board proposed to move comment
5a(b)(1)-5 to new Sec. 226.5a(b)(1)(ii). The Board also proposed to
add new comment 5a(b)(1)-3 to specify that if a card issuer discloses
the discounted
[[Page 5283]]
initial rate and expiration date in the table, the issuer is deemed to
comply with the standard to provide this information clearly and
conspicuously if the issuer uses the format specified in proposed
Samples G-10(B) and G-10(C).
In addition, under TILA Sections 127(c)(6)(A) and 127(c)(7), as
added by Sections 1303(a) and 1304 of the Bankruptcy Act, the term
``introductory'' must be used in immediate proximity to each listing of
a discounted initial rate in a direct mail or electronic application or
solicitation; or promotional materials accompanying such application or
solicitation. In the June 2007 Proposal, the Board proposed to expand
the requirement to other applications or solicitations where a table
under Sec. 226.5a is given, to promote the informed use of credit by
consumers, pursuant to the Board's authority under TILA Section 105(a)
to make adjustments that are necessary to effectuate the purposes of
TILA. 15 U.S.C. 1604(a). Thus, the Board proposed to add new Sec.
226.5a(b)(1)(ii) to specify that if an issuer provides a discounted
initial rate in the table along with the rate required to be disclosed,
the card issuer must use the term ``introductory'' in immediate
proximity to the listing of the initial discounted rate. Because
``intro'' is a commonly understood abbreviation of the term
``introductory,'' and consumer testing indicates that consumers
understand this term, the Board proposed to allow creditors to use
``intro'' as an alternative to the requirement to use the term
``introductory'' and proposed to clarify this approach in new Sec.
226.5a(b)(1)(ii). Also, to give card issuers guidance on the meaning of
``immediate proximity,'' the Board proposed to provide a safe harbor
for card issuers that place the word ``introductory'' or ``intro''
within the same phrase as each listing of the discounted initial rate.
This guidance was set forth in proposed comment 5a(b)(1)-3.
The Board adopts new Sec. 226.5a(b)(1)(ii) and comment 5a(b)(1)-3,
as proposed, with several modifications. Discounted initial rates are
referred to as ``introductory'' rates, as that term is defined in Sec.
226.16(g)(2)(ii), for consistency. In addition, as discussed below with
respect to disclosing penalty rates, an issuer is required to disclose
directly beneath the table the circumstances under which any discounted
initial rate may be revoked and the rate that will apply after the
discounted initial rate is revoked, if the issuer discloses the
discounted initial rate in the table or in any written or electronic
promotional materials accompanying a direct mail, electronic or take-
one application or solicitation. See Sec. 226.5a(b)(1)(iv)(B).
Comment 5a(b)(1)-3 has been amended to provide additional
clarifications on discounted initial rates. Comment 5a(b)(1)-3.ii. has
been added to clarify that an issuer's reservation of the right to
change a rate after account opening, subject to the requirements of
Sec. 226.9(c), does not by itself make that rate an introductory rate,
even if the issuer subsequently increases the rate after providing a
change-in-terms notice. The comment notes, however, that issuers
subject to the final rules issued by the Board and other federal
banking agencies published elsewhere in today's Federal Register are
subject to limitations on such rate increases. In addition, comment
5a(b)(1)-3.iii. has been added to clarify that if more than one
introductory rate may apply to a particular balance in succeeding
periods, the term ``introductory'' need only be used to describe the
first introductory rate.
Section 226.5a(b)(1)(ii) in the final rule has been revised, and a
new Sec. 226.5a(b)(1)(vii) has been added as discussed below, to
provide that certain issuers must disclose any introductory rate
applicable to the account in the table. Creditors that are subject to
the final rules issued by the Board and other federal banking agencies
published elsewhere in today's Federal Register are required to state
at account opening the annual percentage rates that will apply to each
category of transactions on a consumer credit card account, and
generally may not increase those rates, except as expressly permitted
pursuant to those rules. This requirement is intended, among other
things, to promote fairness in the pricing of consumer credit card
accounts by enabling consumers to rely on the rates disclosed at
account opening for at least the first year that an account is open.
Consistent with those final rules, for such issuers, the Board
believes that disclosure of introductory rates should be as prominent
as other rates disclosed in the tabular summary given at account
opening. Therefore, as discussed in the section-by-section analysis to
Sec. 226.6(b)(2)(i), the Board is requiring that a creditor subject to
those rules must disclose any introductory rate in the account-opening
table provided pursuant to Sec. 226.6.
For consistency, the Board also is requiring in the final rule that
such issuers also disclose any introductory rate in the table provided
with applications and solicitations. The Board believes that this will
promote consistency throughout the life of an account and will enable
consumers to better compare the terms that the consumer receives at
account opening with the terms that were offered. Thus, Sec.
226.5a(b)(1)(vii) has been added to the final rule to clarify that an
issuer subject to 12 CFR 227.24 or similar law must disclose in the
tabular disclosures given pursuant to Sec. 226.5a any introductory
rate that will apply to a consumer's account. The Board believes that
it is important that any issuer required to disclose an introductory
rate applicable to a consumer's account highlights that introductory
rate or rates by disclosing it in the Sec. 226.5a table.
Similarly, and for the same reasons stated above, Sec.
226.5a(b)(1)(vii) also requires that card issuers subject to the final
rules issued by the Board and other federal banking agencies published
elsewhere in today's Federal Register disclose in the table any rate
that will apply after a premium initial rate (as described in Sec.
226.5a(b)(1)(iii)) expires. A conforming change has been made to Sec.
226.5a(b)(1)(iii). Consistent with comment 5a(b)(1)-3.ii., discussed
above, a new comment 5a(b)(1)-4 has been added to the final rule to
clarify that an issuer's reservation of the right to change rates after
account-opening does not by itself make an initial rate a premium
initial rate, even if the issuer subsequently decreases the rate. The
comment notes, however, that issuers subject to the final rules issued
by the Board and other federal banking agencies published elsewhere in
today's Federal Register may be subject to limitations on rate
decreases.
Penalty rates. Currently, comment 5a(b)(1)-7 requires that if a
rate may increase upon the occurrence of one or more specific events,
such as a late payment or an extension of credit that exceeds the
credit limit, the card issuer must disclose the increased penalty rate
that may apply and the specific event or events that may result in the
increased rate. If a tabular format is required, the issuer must
disclose the penalty rate in the table under the heading ``Other
APRs,'' along with any balance transfer or cash advance rates.
Currently, the specific event or events must be described outside
the table with a reference (an asterisk or other means) included with
the penalty APR in the table to direct the consumer to the additional
information. At its option, the issuer may include outside the table an
explanation of the period for which the increased rate will remain in
effect, such as ``until you make three timely payments.'' The issuer
need not disclose an increased rate that is imposed if credit
privileges are permanently terminated.
[[Page 5284]]
In the consumer testing conducted for the Board prior to June 2007,
when reviewing forms in which the specific events that trigger the
penalty rate were disclosed outside the table, many participants did
not readily notice the penalty rate triggers when they initially read
through the document or when asked follow-up questions. In addition,
many participants did not readily notice the penalty rate when it was
included in the ``Other APRs'' row along with other rates. The GAO also
found that consumers had difficulty identifying the default rate and
circumstances that would trigger rate increases. See GAO Report on
Credit Card Rates and Fees, at page 49. In the testing conducted for
the Board prior to June 2007, when the penalty rate was placed in a
separate row in the table, participants tended to notice the rate more
often. Moreover, participants tended to notice the specific events that
trigger the penalty rate more often when these events were included
with the penalty rate in a single row in the table. For example, two
types of forms related to placement of the events that could trigger
the penalty rate were tested--several versions showed the penalty rate
in one row of the table and the description of the events that could
trigger the penalty rate in another row of the table. Several other
versions showed the penalty rate and the triggering events in the same
row. Participants who saw the versions of the table with the penalty
rate in a separate row from the description of the triggering events
tended to skip over the row that specified the triggering events when
reading the table. In contrast, participants who saw the versions of
the table in which the penalty rate and the triggering events were in
the same row tended to notice the triggering events when they reviewed
the table.
As a result of this testing, in the June 2007 Proposal, the Board
proposed to add Sec. 226.5a(b)(1)(iv) and amend new comment 5a(b)(1)-4
(previously comment 5a(b)(1)-7) to require card issuers to briefly
disclose in the table the specific event or events that may result in
the imposition of a penalty rate. In addition, the Board proposed that
the penalty rate and the specific events that cause the penalty rate to
be imposed must be disclosed in the same row of the table. See proposed
Model Form G-10(A). In describing the specific event or events that may
result in an increased rate, the Board proposed to amend new comment
5a(b)(1)-4 to provide that the descriptions of the triggering events in
the table should be brief. For example, if an issuer may increase a
rate to the penalty rate because the consumer does not make the minimum
payment by 5 p.m., Eastern time, on its payment due date, the proposal
would have indicated that the issuer should describe this circumstance
in the table as ``make a late payment.'' Proposed Samples G-10(B) and
G-10(C) would have provided additional guidance on the level of detail
that issuers should use in describing the specific events can trigger
the penalty rate.
The Board also proposed to specify in new Sec. 226.5a(b)(1)(iv)
that in disclosing a penalty rate, a card issuer also must specify the
balances to which the increased rate will apply. This proposal was
based on the Board's understanding that, currently, card issuers
typically apply the increased rate to all balances on the account. The
Board believed that this information would help consumers better
understand the consequences of triggering the penalty rate.
In addition, the Board proposed to specify in new Sec.
226.5a(b)(1)(iv) that in disclosing the penalty rate, a card issuer
must describe how long the increased rate will apply. The Board
proposed to amend proposed comment 5a(b)(1)-4 to provide that in
describing how long the increased rate will remain in effect, the
description should be brief, and referred issuers to Samples G-10(B)
and G-10(C) for guidance on the level of detail that issuer should use
to describe how long the increased rate will remain in effect. Also,
proposed comment 5a(b)(1)-4 would have provided that if a card issuer
reserves the right to apply the increased rate indefinitely, that fact
should be stated. The Board stated its belief that this information may
help consumers better understand the consequences of triggering the
penalty rate.
Also, the Board proposed to add language to new Sec.
226.5a(b)(1)(iv) to specify that in disclosing a penalty rate, card
issuers must include a brief description of the circumstances under
which any discounted initial rates may be revoked and the rate that
will apply after the discounted initial rate is revoked. Sections
1303(a) and 1304 of the Bankruptcy Act require that for a direct mail
or electronic credit card application or solicitation, a clear and
conspicuous description of the circumstances that may result in
revocation of a discounted initial rate offered with the card and the
rate that will apply after the discounted initial rate is revoked must
be disclosed in a prominent location on or with the application or
solicitation. 15 U.S.C. 1637(c)(6)(C). The Board proposed that this
information be disclosed in the table along with other penalty rate
information for all applications and solicitations where a table under
Sec. 226.5a is given, to promote the informed use of credit by
consumers, pursuant to the Board's authority under TILA Section 105(a)
to make adjustments that are necessary to effectuate the purposes of
TILA. 15 U.S.C. 1604(a).
In response to the June 2007 Proposal, some consumer group
commenters requested that the Board delete the statement that the card
issuer need not disclose the increased rate that would be imposed if
credit privileges are permanently terminated. They viewed this
provision as inconsistent with the Board's other efforts to ensure that
consumers are aware of penalty rates. They believed card issuers should
be required to disclose this information in the table if the rate is
different than the penalty rate that otherwise applies.
In the May 2008 Proposal, the Board proposed to delete the current
provision that an issuer need not disclose in the table an increased
rate that would be imposed if credit privileges are permanently
terminated. Most consumer groups and industry commenters supported this
aspect of the proposal.
The final rule adopts new Sec. 226.5a(b)(1)(iv) and comment
5a(b)(1)-5 (proposed as comment 5a(b)(1)-4) as proposed in the May 2008
Proposal with several revisions. Section 226.5a(b)(1)(iv)(A) sets forth
the disclosures that are required when rates that are not introductory
rates may be increased as a penalty for one or more events specified in
the account agreement. The final rule specifies that for rates that are
not introductory rates, if a rate may increase as a penalty for one or
more events specified in the account agreement, such as a late payment
or an extension of credit that exceeds the credit limit, the card
issuer must disclose the increased rate that would apply, a brief
description of the event or events that may result in the increased
rate, and a brief description of how long the increased rate will
remain in effect. Samples G-10(B) and G-10(C) (in the row labeled
``Penalty APR and When it Applies'') provide guidance to card issuers
on how to meet the requirements in Sec. 226.5a(b)(1)(iv)(A) and
accompanying comment 5a(b)(1)-5. An issuer may use phrasing similar to
either Sample G-10(B) or G-10(C) to disclose how long the increased
rate will remain in effect, modified as appropriate to accurately
reflect the terms offered by that issuer.
The proposed requirement that issuers must disclose a description
of the types of balances to which the
[[Page 5285]]
increased penalty rate will apply is not included in the final rule.
When the Board proposed this requirement in June 2007, most issuers
typically applied the increased penalty rate to all balances on the
account. Nonetheless, under final rules issued by the Board and other
federal banking agencies published elsewhere in today's Federal
Register, most credit card issuers are precluded from applying an
increased rate to existing balances, except in limited
circumstances.\15\ In particular, most issuers may not increase the
interest rate on existing credit card balances to the penalty rate
unless the consumer is more than 30 days late on the account. Because
most issuers are restricted from applying the increased penalty rate to
existing balances, except in limited circumstances, the Board is
withdrawing the proposed requirement to disclose in the table a
description of the types of balances to which the increased penalty
rate will apply. Requiring issuers to explain in the table the types of
balances to which the increased penalty rate will apply--such as
disclosing that the increased penalty rate will apply to new
transactions, except if the consumer is more than 30 days late on the
account, then the increased penalty rate will apply to all balances--
could lead to ``information overload'' for consumers. The Board notes
if a penalty rate is triggered on an account, the issuer must provide
the consumer with a notice under Sec. 226.9(g) prior to the imposition
of the penalty rate, and this notice must include an explanation of the
balances to which the increased penalty rate would apply.
---------------------------------------------------------------------------
\15\ The final rules published elsewhere in today's Federal
Register do not apply to all issuers, such as state-chartered credit
unions that are not subject to the National Credit Union
Administration's final rules.
---------------------------------------------------------------------------
Similarly, issuers that apply penalty pricing only to some balances
on the account, specifically issuers subject to the final rules issued
by the Board and other federal banking agencies published elsewhere in
today's Federal Register may not distinguish, in the disclosures
required by Sec. 226.5a(b)(1)(iv), between the events that may result
in an increased rate for one type of balances and the events that may
result in an increased rate for other types of balances. Such issuers
may provide a consolidated list of the event or events that may result
in an increased rate for any balance.
The Board has amended comment 5a(b)(1)-5.i. (proposed as comment
5a(b)(1)-4) to provide specific guidance to issuers that are subject to
the final rules issued by the Board and other federal banking agencies
published elsewhere in today's Federal Register. Such an issuer may
have penalty rate triggers that apply to new transactions that differ
from the penalty rate triggers applicable to outstanding balances. For
example, an issuer might apply the penalty rate to new transactions,
subject to the notice requirements in Sec. 226.9(g), based on a
consumer making a payment three days late, but may increase the rate
applicable to outstanding balances only if the consumer pays more than
30 days late. Comment 5a(b)(1)-5.i., as adopted, includes guidance
stating that if an issuer may increase a rate that applies to a
particular balance because the account is more than 30 days late, the
issuer should describe this circumstance in the table as ``make a late
payment.'' The comment has also been amended to clarify that the issuer
may not distinguish between the events that may result in an increased
rate for existing balances and the events that may result in an
increased rate for new transactions.
In addition, as proposed in May 2008, the final rule deletes the
current provision that an issuer need not disclose an increased rate
that would be imposed if credit privileges were permanently
terminated.\16\ Thus, to the extent an issuer is charging an increased
rate different from the penalty rate when credit privileges are
permanently terminated, this different rate must be disclosed along
with the penalty rate. The Board agrees with consumer group commenters
that requiring the disclosure of the rate when credit privileges are
permanently terminated is consistent with the Board's efforts to ensure
that consumers are aware of the potential for increased rates.
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\16\ The Board notes that final rules published elsewhere in
today's Federal Register would generally prohibit increases in rates
applicable to outstanding balances, even if credit privileges have
been terminated. However, if the consumer's account is 30 days late,
those rules would permit a creditor to impose a rate increase on
such balances.
---------------------------------------------------------------------------
A commenter in response to the May 2008 Proposal asked for
clarification of the interplay between the requirement to disclose an
increased rate when credit privileges are permanently terminated and
the restriction on issuers' ability to apply increased rates to
existing balances, proposed by the Board and other federal banking
agencies. See 73 FR 28904, May 19, 2008. As discussed above, under
final rules issued by the Board and other federal banking agencies
published elsewhere in today's Federal Register, most credit card
issuers are precluded from applying an increased rate to existing
balances, unless an exception applies, such as if the account is more
than 30 days late. Nonetheless, for issuers subject to these
restrictions, there still are cases where an issuer could impose on
existing balances an increased rate when credit privileges are
permanently terminated, for example when the account is more than 30
days late.
Section 226.5a(b)(1)(iv)(B) sets forth the disclosures that are
required when discounted initial rates may be increased as a penalty
for one or more events specified in the account agreement. (In Sec.
226.5a(b)(1)(iv)(B), discounted initial rates are referred to as
``introductory'' rates, as that term is defined in Sec.
226.16(g)(2)(ii), for consistency.) Specifically, Sec.
226.5a(b)(1)(iv)(B) of the final rule states that an issuer is required
to disclose directly beneath the table the circumstances under which
any discounted initial rate may be revoked and the rate that will apply
after the discounted initial rate is revoked only if the issuer
discloses the discounted initial rate in the table, or in any written
or electronic promotional materials accompanying a direct mail,
electronic or take-one application or solicitation. As revised, this
provision is consistent with the Bankruptcy Act requirement that a
credit card application or solicitation must clearly and conspicuously
disclose in a prominent location on or with the application or
solicitation a general description of the circumstances that may result
in revocation of a discounted initial rate offered with the card.
Therefore, to the extent that an issuer is promoting the discounted
initial rate in the disclosure table provided with the application or
solicitation or in the promotional materials accompanying the
application or solicitation, the issuer must also disclose directly
beneath the table the circumstances that may result in revocation of
the discounted initial rate, and the rate that will apply after the
discounted initial rate is revoked. Requiring issuers to disclose that
information directly beneath the table will help consumers better
understand the terms under which the discounted initial rate is being
offered on the account.
The final rule requires that the circumstances under which a
discounted initial rate may be revoked be disclosed directly beneath
the table, rather than in the table. Credit card issuers subject to the
final rules issued by the Board and other federal banking agencies
published elsewhere in today's Federal Register will be prohibited from
increasing an introductory rate unless the consumer's account becomes
more
[[Page 5286]]
than 30 days late. Accordingly, for most issuers subject to Sec.
226.5a, the disclosure provided under this paragraph will be identical,
because an introductory rate may be increased only if the account
becomes more than 30 days late. As a result, the Board does not believe
that most consumers will use the information about the revocation of a
discounted initial rate in shopping for a credit card, since it will
not vary from product to product. Therefore, while this information
should be disclosed clearly and conspicuously with the table, the Board
believes it should not be included in the table, where it may
contribute to ``information overload'' and detract from the disclosure
of other terms that may be of more use to consumers in shopping for
credit.
Comment 5a(b)(1)-5 (proposed as comment 5a(b)(1)-4) is restructured
to be consistent with new Sec. 226.5a(b)(1)(iv). In addition, comment
5a(b)(1)-5.ii. is revised to clarify that the information about
revocation of a discounted initial rate and the rate that will apply
after revocation must be provided even if the rate that will apply
after the discounted initial rate is revoked is the rate that would
have applied at the end of the promotional period, and not a higher
``penalty rate.'' Also, comment 5a(b)(1)-5.ii. clarifies that in
describing the rate that will apply after revocation of the discounted
initial rate, if the rate that will apply after revocation of the
discounted initial rate is already disclosed in the table, the issuer
is not required to repeat the rate, but may refer to that rate in a
clear and conspicuous manner. For example, if the rate that will apply
after revocation of a discounted initial rate is the standard rate that
applies to that type of transaction (such as a purchase or balance
transfer transaction), and the standard rates are labeled in the table
as ``standard APRs,'' the issuer may refer to the ``standard APR'' when
describing the rate that will apply after revocation of a discounted
initial rate.
In addition, comment 5a(b)(1)-5.ii. is revised to specify that the
description of the circumstances in which a discounted initial rate
could be revoked should be brief. For example, if an issuer may
increase a discounted initial rate because the consumer does not make
the minimum payment within 30 days of the due date, the issuer should
describe this circumstance directly beneath the table as ``make a late
payment.'' In addition, if the circumstances in which a discounted
initial rate could be revoked are already listed elsewhere in the
table, the issuer is not required to repeat the circumstances again,
but may refer to those circumstances in a clear and conspicuous manner.
For example, if the circumstances in which an initial discounted rate
could be revoked are the same as the event or events that may trigger a
``penalty rate'' as described in Sec. 226.5a(b)(1)(iv)(A), the issuer
may refer to the actions listed in the Penalty APR row, in describing
the circumstances in which the introductory rate could be revoked.
Sample G-10(C) sets forth a disclosure labeled ``Loss of Introductory
APR'' directly below the table to provide guidance to card issuers on
how to meet the requirements in Sec. 226.5a(b)(1)(iv)(B) and
accompanying comment 5a(b)(1)-5.
Comment 5a(b)(1)-5.iii. also has been included in the final rule to
expressly note that issuers subject to the final rules issued by the
Board and other federal banking agencies published elsewhere in today's
Federal Register are prohibited by those rules from increasing or
revoking an introductory rate prior to its expiration, unless the
account is more than 30 days late. The comment gives guidance on how
such an issuer should comply with Sec. 226.5a(b)(1)(iv)(B).
Rates that depend on consumers' creditworthiness. Credit card
issuers often engage in risk-based pricing such that the rates offered
on a credit card will depend on later determinations of a consumer's
creditworthiness. For example, an issuer may use information collected
in a consumer's application or solicitation reply form (e.g., income
information) or obtained through a credit report from a consumer
reporting agency to determine the rate for which a consumer qualifies.
Issuers that use risk-based pricing may not be able to disclose the
specific rate that would apply to a consumer, because issuers may not
have sufficient information about a consumer's creditworthiness at the
time the application is given or made available to the consumer.
In the June 2007 Proposal, the Board proposed to add Sec.
226.5(b)(1)(v) and comment 5a(b)(1)-5 to address the circumstances in
which an issuer is not required to state a single specific rate being
offered at the time disclosures are given because the rate will depend
on a later determination of the consumer's creditworthiness. In this
situation, issuers would have been required to disclose the possible
rates that might apply, and a statement that the rate for which the
consumer may qualify at account opening depends on the consumer's
creditworthiness. Under the proposal, a card issuer would have been
allowed to disclose the possible rates as either specific rates or a
range of rates. For example, if there are three possible rates that may
apply (e.g., 9.99, 12.99 or 17.99 percent), an issuer would have been
allowed to disclose specific rates (9.99, 12.99 or 17.99 percent) or a
range of rates (9.99 to 17.99 percent). Proposed Samples G-10(B) and G-
10(C) would have provided guidance for issuers on how to meet these
requirements. In addition, the Board solicited comment on whether card
issuers should alternatively be permitted to list only the highest
possible rate that may apply instead of a range of rates (e.g., up to
17.99 percent).
In response to the June 2007 Proposal, several consumer group
commenters suggested that the Board should not allow issuers to
disclose a range of possible rates. Instead, issuers should be required
to disclose the actual APR that the issuer is offering the consumer,
because otherwise, consumers do not know the rate for which they are
applying. Industry commenters generally supported the proposal
clarifying that issuers may disclose the specific rates or range of
possible rates, with an explanation that the rate obtained by the
consumer is based on the consumer's creditworthiness. Several
commenters suggested that the Board also allow issuers to disclose the
highest APR that may apply instead of a range of rates, because they
believed that this approach might be less confusing to consumers than
seeing a range of rates. For example, a consumer may focus on the
lowest rate in a range and be surprised when the final rate is higher
than this lowest rate. Also, if the highest rate was the only rate
disclosed, a consumer would not be upset by obtaining a lower rate than
the rate initially disclosed. Other commenters indicated that
disclosing only the highest APR should not be allowed, because
consumers may believe this would be the APR that applied to them even
though the highest APR may apply only to a small group of consumers
solicited.
In addition, one commenter indicated that for some issuers,
especially in the private label market, the actual rate for which a
consumer qualifies may be determined using multiple factors, including
the consumer's creditworthiness, whether the consumer is contemplating
a purchase with the retailer named on the private label card, and other
factors.
The Board adopts Sec. 226.5a(b)(1)(v) and comment 5a(b)(1)-6
(proposed as comment 5a(b)(1)-5) with several revisions. Consistent
with the proposal, Sec. 226.5a(b)(1)(v) specifies that if a rate
cannot be determined at the time disclosures are given because the rate
[[Page 5287]]
depends at least in part on a later determination of the consumer's
creditworthiness, the card issuer must disclose the specific rates or
the range of rates that could apply and a statement that the rate for
which the consumer may qualify at account opening will depend on the
consumer's creditworthiness, and other factors if applicable.
Generally, issuers are not allowed to disclose only the lowest rate,
the median rate or the highest rate that could apply. See comment
5a(b)(1)-6 (proposed as comment 5a(b)(1)-5). The Board believes that
requiring card issuers to disclose all the possible rates (as either
specific rates, or as a range of rates) provides more useful
information to consumers than allowing issuers to disclose only the
lowest, median or highest APR. If a consumer sees a range or several
specific rates, the consumer may be better able to understand the
possible rates that may apply to the account.
Nonetheless, if the rate is a penalty rate, the card issuer at its
option may disclose the highest rate that could apply, instead of
disclosing the specific rates or the range of rates that could apply.
See Sec. 226.5a(b)(1)(v). With respect to penalty rates, issuers may
set a highest rate for the penalty rate (such as 28 percent) but may
either decide not to increase a consumer's rates based on a violation
of a penalty rate trigger or may impose a penalty rate that is less
than that highest rate, depending on factors at the time the penalty
rate is imposed. It would be difficult for the issuer to disclose a
range of possible rates for the penalty rate that is meaningful because
the issuer might decide not to increase a consumer's rates based on a
violation of a penalty rate trigger. In the penalty rate context, a
range of possible penalty rates would likely be more confusing to
consumers than only disclosing the highest penalty rate.
Comment 5a(b)(1)-6 (proposed as comment 5a(b)(1)-5) also is revised
to clarify that Sec. 226.5a(b)(1)(v) applies even if other factors are
used in combination with a consumer's creditworthiness to determine the
rate for which a consumer may qualify at account opening. For example,
Sec. 226.5a(b)(1)(v) would apply if the issuer considers the type of
purchase the consumer is making at the time the consumer opens the
account, in combination with the consumer's creditworthiness, to
determine the rate for which the consumer may qualify at account
opening. If other factors are considered, the issuer must amend the
statement about creditworthiness, to indicate that the rate for which
the consumer may qualify at account opening will depend on the
consumer's creditworthiness and other factors. Nonetheless, if a
consumer's creditworthiness is not one of the factors that will
determine the rate for which the consumer may qualify at account
opening (for example, if the rate is based solely on the type of
purchase that the consumer is making at the time the consumer opens the
account, or is based solely on whether the consumer has other banking
relationships with the card issuer), Sec. 226.5a(b)(1)(v) does not
apply.
The Board is not requiring an issuer to provide the actual rate
that the issuer is offering the consumer if that rate is not known. As
explained above, issuers that use risk-based pricing may not be able to
disclose the specific rate that would apply to a consumer because
issuers may not have sufficient information about a consumer's
creditworthiness at the time the application is given.
Proposed Samples G-10(B) and G-10(C) would have provided guidance
for issuers on how to meet the requirements to provide the specific
rates or the range of rates that could apply and a statement that the
rate for which the consumer may qualify at account opening will depend
on the consumer's creditworthiness. Specifically, proposed Samples G-
10(B) and G-10(C) would have provided that issuers may meet these
requirements by providing the specific rates or the range of rates and
stating that the rate for which the consumer qualifies would be ``based
on your creditworthiness.'' As discussed above, in response to the June
2007 Proposal, one commenter indicated that for some issuers,
especially in the private label market, the actual rate for which a
consumer qualifies may be determined using multiple factors, including
the consumer's creditworthiness, whether the consumer is contemplating
a purchase with the retailer named on the private label card and other
factors. Samples G-10(B) and G-10(C) as adopted contain the phrase
``based on your creditworthiness,'' but pursuant to Sec.
226.5a(b)(1)(v) discussed above, a creditor that considers other
factors in addition to a consumer's creditworthiness in determining the
APR applicable to a consumer's account would use language such as
``based on your creditworthiness and other factors.''
Transactions with both rate and fee. When a consumer initiates a
balance transfer or cash advance, card issuers typically charge
consumers both interest on the outstanding balance of the transaction
and a fee to complete the transaction. It is important that consumers
understand when both a rate and a fee apply to specific transactions.
In the June 2007 Proposal, the Board proposed to add a new Sec.
226.5a(b)(1)(vi) to require that if both a rate and fee apply to a
balance transfer or cash advance transaction, a card issuer must
disclose that a fee also applies when disclosing the rate, and provide
a cross reference to the fee. In consumer testing conducted for the
Board prior to the June 2007 Proposal, some participants were more
aware that an interest rate applies to cash advances and balance
transfers than they were aware of the fee component, so the Board
believed that a cross reference between the rate and the fee may help
those consumers notice both the rate and the fee components.
In response to the June 2007 Proposal, several industry commenters
suggested that the cross reference be eliminated, as unnecessary and
leading to ``information overload.'' In addition, one industry
commenter suggested that the Board also require a cross reference from
the purchase APR to any transaction fee on purchases. One industry
commenter suggested that issuers be allowed to modify the cross
reference to state when the cash advance fee or balance transfer fee
will not apply, such as ``Cash advance fees will apply to cash advances
except for convenience checks and fund transfers to other accounts with
us.'' In addition, one industry commenter asked the Board for
clarification on whether a 0 percent APR required the cross reference
between the rate and the fee.
In quantitative consumer testing conducted for the Board after the
May 2008 Proposal, the Board investigated whether the presence of a
cross reference from the balance transfer APR to the balance transfer
fee improved consumers' awareness of and ability to identify the
balance transfer fee. The results of the testing indicate that there
was no statistically significant improvement in consumers' ability to
identify the balance transfer fee if the cross reference was present.
Given the results of the consumer testing and concerns about
``information overload,'' the Board has withdrawn proposed Sec.
226.5a(b)(1)(vi). Proposed comment 5a(b)(1)-6, which would have given
guidance on how to present a cross reference between a rate and fee,
also is withdrawn.
APRs that vary by state. Currently, Sec. 226.5a(b) requires card
issuers to disclose the rates applicable to the account, for purchases,
cash advances, and balance transfers. For disclosures required to be
provided with credit card applications and solicitations, if the rate
[[Page 5288]]
varies by state, card issuers must disclose in the table the rates for
all states. Specifically, comment 5a(a)(2)-2 currently provides, in
relevant part, that if rates or other terms vary by state, card issuers
may list the states and the various disclosures in a single table or in
separate tables.
The Board is concerned that such an approach of disclosing the
rates for all states in the table (or having a table for each state)
would detract from the purpose of the table: To provide key information
in a simplified way. Thus, consistent with the reasons discussed in the
section-by-section analysis to Sec. 226.5a(a)(4) with respect to fees
that vary by state, the final rule adds Sec. 226.5a(b)(1)(vi) to
provide that card issuers imposing APRs that vary by state may, at the
issuer's option, disclose in the table required by Sec. 226.5a either
(1) the specific APR applicable to the consumer's account, or (2) the
range of APRs, if the disclosure includes a statement that the APR
varies by state and refers the consumer to a disclosure provided with
the Sec. 226.5a table where the APR applicable to the consumer's
account is disclosed, for example in a list of APRs for all states.
Listing APRs for multiple states in the table (or having a table for
each state) is not permissible. In addition, as discussed above,
comment 5a(a)(2)-2 currently provides, in relevant part, that if rates
or other terms vary by state, card issuers may list the states and the
various disclosures in a single table or in a separate table. Because
under the final rule, an issuer would no longer be allowed to list fees
or rates for multiple states in the table (or have a table for each
state), this provision in comment 5a(a)(2)-2 is deleted as obsolete.
These changes to Sec. 226.5a and comment 5a(a)(2)-2 are adopted in
part pursuant to TILA Section 127(c)(5), which authorizes the Board to
add or modify Sec. 226.5a disclosures as necessary to carry out the
purposes of TILA. 15 U.S.C. 1637(c)(5).
Rate based on another rate on the account. In response to the June
2007 Proposal, one commenter asked the Board to clarify how a rate
should be disclosed if that rate is based on another rate on the
account. For example, assume that a penalty rate as described in Sec.
226.5a(b)(1)(iv)(A) is determined by adding 5 percentage points to the
current purchase rate, which is 10 percent. The Board adopts new
comment 5a(b)(1)-7 to clarify how such a rate should be disclosed.
Pursuant to comment 5a(b)(1)-7, a card issuer, in this example, must
disclose 15 percent as the current penalty rate. If the purchase rate
is a variable rate, then the penalty rate also is a variable rate. In
that case, the card issuer also must disclose the fact that the penalty
rate may vary and how the rate is determined, such as ``This APR may
vary with the market based on the Prime Rate.'' In describing the
penalty rate, the issuer may not disclose in the table the amount of
the margin or spread added to the current purchase rate to determine
the penalty rate, such as describing, in this example, that the penalty
rate is determined by adding 5 percentage points to the purchase rate.
Typical APR. Several consumer groups have indicated that the
current disclosure requirements in Sec. 226.5a allow card issuers to
promote low APRs, that include interest but not fees, while charging
high penalty fees and penalty rates when consumers, for example, pay
late or exceed the credit limit. As a result, these consumer groups
suggested that the Board require credit card issuers to disclose in the
table a ``typical rate'' that would include fees and charges that
consumers pay for a particular open-end credit product. This rate would
be calculated as the average effective rate disclosed on periodic
statements over the last three years for customers with the same or
similar credit card product. These consumer groups believe that this
``typical rate'' would reflect the real rate that consumers pay for the
credit card product.
In the June 2007 Proposal, the Board did not propose that card
issuers disclose the ``typical rate'' as part of the Sec. 226.5a
disclosures because the Board did not believe that the proposed typical
APR would be helpful to consumers that seek credit cards. There are
many different ways consumers may use their credit cards, such as the
features they use, what fees they incur, and whether a balance is
carried from month to month. For example, some consumers use their
cards only for purchases, always pay off the bill in full, and never
incur fees. Other consumers may use their cards for purchases, balance
transfers or cash advances, but never incur late-payment fees, over-
the-limit fees or other penalty fees. Still others may incur penalty
fees and penalty rates. A ``typical rate,'' however, would be based on
average fees and average balances that may not be typical for many
consumers. Moreover, such a rate may confuse consumers about the actual
rate that may apply to their account.
In response to the June 2007 Proposal, several consumers groups
again suggested that the Board reconsider the issue of disclosing a
``typical rate'' in the table required by Sec. 226.5a. The Board
continues to believe that the proposed typical APR would not be helpful
to consumers that seek credit cards for the reasons stated above. Thus,
a requirement to disclose a ``typical rate'' is not included in the
final rule.
5a(b)(2) Fees for Issuance or Availability
Section 226.5a(b)(2), which implements TILA Section
127(c)(1)(A)(ii)(I), requires card issuers to disclose any annual or
other periodic fee, expressed as an annualized amount, that is imposed
for the issuance or availability of a credit card, including any fee
based on account activity or inactivity. 15 U.S.C.
1637(c)(1)(A)(ii)(I). In 1989, the Board used its authority under TILA
Section 127(c)(5) to require that issuers also disclose non-periodic
fees related to opening the account, such as one-time membership or
participation fees. 15 U.S.C. 1637(c)(5); 54 FR 13855, Apr. 6, 1989.
Fees for issuance or availability of credit card products targeted
to subprime borrowers. Often, subprime credit cards will have
substantial fees related to the issuance and availability of credit.
For example, these cards may impose an annual fee and a monthly
maintenance fee for the card. In addition, these cards may impose
multiple one-time fees when the consumer opens the card account, such
as an application fee and a program fee. The Board believes that these
fees should be clearly explained to consumers at the time of the offer
so that consumers better understand when these fees will be imposed.
In the June 2007 Proposal, the Board proposed to amend Sec.
226.5a(b)(2) to require additional information about periodic fees. 15
U.S.C. 1637(c)(5). Currently, issuers are required to disclose only the
annualized amount of the fee. The Board proposed to amend Sec.
226.5a(b)(2) to require issuers also to disclose the amount of the
periodic fee, and how frequently it will be imposed. For example, if an
issuer imposes a $10 monthly maintenance fee for a card account, the
issuer must disclose in the table that there is a $10 monthly
maintenance fee, and that the fee is $120 on an annual basis.
In addition, the Board proposed to amend Sec. 226.5a(b)(2) to
require additional information about non-periodic fees related to
opening the account. Currently, issuers are required to disclose the
amount of the non-periodic fee, but not that it is a one-time fee. The
Board proposed to amend Sec. 226.5a(b)(2) to require card issuers to
disclose the amount of the fee and that it is a one-time fee. The final
rule adopts Sec. 226.5a(b)(2) as proposed. The Board believes that
this additional information
[[Page 5289]]
will allow consumers to better understand set-up and maintenance fees
that are often imposed in connection with subprime credit cards. For
example, the changes will provide consumers with additional information
about how often the fees will be imposed by identifying which fees are
one-time fees, which fees are periodic fees (such as monthly fees), and
which fees are annual fees.
In addition, application fees that are charged regardless of
whether the consumer receives credit currently are not considered fees
as imposed for the issuance or availability of a credit card, and thus
are not disclosed in the table. See current comment 5a(b)(2)-3 and
Sec. 226.4(c)(1). The Board proposed to delete the exception for these
application fees and require that they be disclosed in the table as
fees imposed for the issuance or availability of a credit card. Comment
5a(b)(2)-3 is adopted as proposed with stylistic changes. The Board
believes that consumers should be aware of these fees when they are
shopping for a credit card.
Currently, and under the June 2007 and May 2008 Proposals, comment
5a(b)(2)-2 provides that fees for optional services in addition to
basic membership privileges in a credit or charge card account (for
example, travel insurance or card-registration services) shall not be
disclosed in the table if the basic account may be opened without
paying such fees. The Board is aware that some subprime cards may
charge a fee for an additional card on the account, beyond the first
card on the account. For example, if there were two primary cardholders
listed on the account, only one card on the account would be issued,
and the cardholders would be charged a fee for another card if the
cardholders request an additional card, so that each cardholder would
have his or her own card. The Board is amending comment 5a(b)(2)-2 to
clarify that issuing a card to each primary cardholder (not authorized
users) is considered a basic membership privilege and fees for
additional cards, beyond the first card on the account, must be
disclosed as a fee for issuance or availability. Thus, a fee to obtain
an additional card on the account beyond the first card (so that each
primary cardholder would have his or her own card) must be disclosed in
the table as a fee for issuance or availability under Sec.
226.5a(b)(2). This fee must be disclosed even if the fee is optional in
that the fee is charged only if the cardholder requests one or more
additional cards.
5a(b)(3) Fixed Finance Charge; Minimum Interest Charge
Currently, Sec. 226.5a(b)(3), which implements TILA Section
127(c)(1)(A)(ii)(II), requires that card issuers must disclose any
minimum or fixed finance charge that could be imposed during a billing
cycle. Card issuers typically impose a minimum charge (e.g., $0.50) in
lieu of interest in those months where a consumer would otherwise incur
an interest charge that is less than the minimum charge (a so-called
``minimum interest charge'').
In the June 2007 Proposal, the Board proposed to retain the minimum
finance charge disclosure in the table but refer to the charge as a
``minimum interest charge'' or ``minimum charge'' in the table, as
discussed in the section-by-section analysis to Appendix G. Although
minimum charges currently may be small, the Board was concerned that
card issuers may increase these charges in the future. Also, the Board
noted that it was aware of at least one credit card product for which
no APR is charged, but each month a fixed charge is imposed based on
the outstanding balance (for example, $6 charge per $1,000 balance). If
the minimum finance charge disclosure were eliminated from the table,
card issuers that offer this type of pricing would no longer be
required to disclose the fixed charge in the table and consumers would
not receive important information about the cost of the credit card.
The Board also did not propose a de minimis minimum finance charge
threshold. The Board was concerned that this approach could undercut
the uniformity of the table, and could be misleading to consumers. The
Board also proposed to amend Sec. 226.5a(b)(3) to require card issuers
to disclose in the table a brief description of the minimum finance
charge, to give consumers context for when this charge will be imposed.
See also proposed comment 5a(b)(3)-1.
In response to the June 2007 Proposal, several industry commenters
recommended that the Board delete this disclosure from the table unless
the minimum finance charge is over a certain nominal amount. They
indicated that in most cases, the minimum finance charge is so small as
to be irrelevant to consumers. They believed that it should only be in
the table if the minimum finance charge is a significant amount.
Consumer groups agreed with the Board's proposal to require the
disclosure of the minimum finance charge in all cases and not to allow
issuers to exclude the minimum finance charge from the table if the
charge was under a certain specific amount.
In consumer testing conducted by the Board in March 2008,
participants were asked to compare disclosure tables for two credit
card accounts and decide which account they would choose. In one of the
disclosure tables, a small minimum finance charge, labeled as a
``minimum interest charge,'' was disclosed. In the other disclosure
table, no minimum finance charge was disclosed. None of the
participants indicated that the small minimum finance charge on one
card but not on the other would impact their decision to choose one
card over the other.
Based on this consumer testing, the Board proposed in May 2008 to
revise proposed Sec. 226.5a(b)(3) to provide that an issuer must
disclose in the table any minimum or fixed finance charge in excess of
$1.00 that could be imposed during a billing cycle and a brief
description of the charge, pursuant to the Board's authority under TILA
Section 127(c)(5) which authorizes the Board to add or modify Sec.
226.5a disclosures as necessary to carry out the purposes of TILA. 15
U.S.C. 1637(c)(5). The proposed rule would have continued to require
disclosure in the table if any minimum or fixed finance charge was over
this de minimis amount to ensure that consumers are aware of larger
minimum or fixed finance charges that might impact them. Under the
proposal, the $1.00 amount would have been adjusted to the next whole
dollar amount when the sum of annual percentage changes in the Consumer
Price Index in effect on June 1 of previous years equals or exceeds
$1.00. See proposed comment 5a(b)(3)-2. This approach in adjusting the
dollar amount that triggers the disclosure of a minimum or fixed
finance charge is similar to TILA's rules for adjusting a dollar amount
of fees that trigger additional protections for certain home-secured
loans. TILA Section 103(aa), 15 U.S.C. 1602(aa). Under the proposal, at
the issuer's option, the issuer would have been allowed to disclose in
the table any minimum or fixed finance charge below the threshold. This
flexibility was intended to facilitate compliance when adjustments are
made to the dollar threshold. For example, if an issuer has disclosed a
$1.50 minimum finance charge in its application and solicitation table
at the time the threshold is increased to $2.00, the issuer could
continue to use forms with the minimum finance charge disclosed, even
though the issuer would no longer be required to do so.
In response to the May 2008 Proposal, industry commenters generally
supported this aspect of the proposal. One industry commenter suggested
a
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$5.00 threshold, because with the proposed $1.00 threshold, when
operational costs are considered, for most banks it will be simpler to
disclose any and all minimum or fixed finance charges. Another industry
commenter suggested eliminating the minimum or fixed finance charge
disclosure altogether, and adding a disclosure for cards that charge a
monthly fee in lieu of the APR. In addition, one industry commenter
suggested that the Board eliminate the minimum or fixed finance charge
disclosure and monitor if issuers change their minimum or fixed finance
charge calculations as a result. Consumer group commenters generally
opposed the proposal because issuers would no longer be required to
disclose an important cost to consumers (especially subprime consumers,
where the fee might be significant in relation to the small initial
available credit on subprime cards).
The minimum interest charge was also tested in the Board's
qualitative consumer testing. In the two rounds of consumer testing
conducted by the Board after the May 2008 Proposal, participants were
asked to compare disclosure tables for two credit card accounts. In one
of the disclosure tables, a small minimum interest charge was
disclosed. In the other disclosure table, no minimum interest charge
was disclosed. Participants were specifically asked whether the minimum
interest charge would influence which card they would choose. Of the
participants who understood what a minimum interest charge was, almost
all said that the minimum interest charge would not play a significant
role in their decision whether or not to apply for the card that
disclosed the minimum interest charge because of the small amount of
the fee.
The final rule retains the $1.00 threshold, as proposed, in Sec.
226.5a(b)(3) with several modifications. Pursuant to the Board's
authority under TILA Section 127(c)(5), the final rule retains the
$1.00 threshold for minimum interest charges because the Board believes
that when the minimum interest charge is a de minimis amount (i.e.,
$1.00 or less, as adjusted for inflation), disclosure of the minimum
interest charge is not information that consumers will use to shop for
a card. 15 U.S.C. 1637(c)(5). The final rule limits the $1.00 threshold
to apply only to minimum interest charges, which are charges in lieu of
interest in those months where a consumer would otherwise incur an
interest charge that is less than the minimum charge. Fixed finance
charges must be disclosed regardless of whether they are equal to or
less than $1.00. For example, for credit card products described above
where no APR is charged, but each month a fixed charge is imposed based
on the outstanding balance (e.g., $6 charge per $1,000 balance), this
fixed charge must be disclosed regardless of whether the charge is
equal to or less than $1.00. The Board is limiting the $1.00 threshold
to minimum interest charges because the Board believes that minimum
interest charges are imposed infrequently, and most likely are not
imposed month after month on an account, unlike fixed finance charges.
In addition, in a technical edit, the final rule is amended to
specify that the $1.00 amount would be adjusted periodically by the
Board to reflect changes in the Consumer Price Index. The final rule
specifies that the Board shall calculate each year a price level
adjusted minimum interest charge using the Consumer Price Index in
effect on the June 1 of that year. When the cumulative change in the
adjusted minimum value derived from applying the annual Consumer Price
level to the current minimum interest charge threshold has risen by a
whole dollar, the minimum interest charge will be increased by $1.00.
Comments 5a(b)(3)-1 and -2 are also adopted with technical
modifications.
5a(b)(4) Transaction Charges
Section 226.5a(b)(4), which implements TILA Section
127(c)(1)(A)(ii)(III), requires that card issuers disclose any
transaction charge imposed on purchases. In the June 2007 Proposal, the
Board proposed to amend Sec. 226.5a(b)(4) to explicitly exclude from
the table fees charged for transactions in a foreign currency or that
take place in a foreign country. In an effort to streamline the
contents of the table, the Board proposed to highlight only those fees
that may be important for a significant number of consumers. In
consumer testing for the Board prior to the June 2007 Proposal,
participants did not mention foreign transaction fees as important fees
they use to shop. In addition, there are few consumers who may pay
these fees with any frequency. Thus, in the June 2007 Proposal, the
Board proposed to except foreign transaction fees from disclosure of
transaction fees in an application or solicitation, but to include such
fees in the proposed account-opening summary table to ensure that
interested consumers can learn of the fees before using the card. See
proposed Sec. 226.6(b)(4).
In response to the June 2007 Proposal, some consumer group
commenters recommended that the Board mandate disclosure of foreign
transaction fees in the table required under Sec. 226.5a. They
questioned the utility of the Board requiring foreign transaction fees
in the account-opening table required under Sec. 226.6, but
prohibiting those fees to be disclosed in the table under Sec. 226.5a.
They believed that consumers as well as the industry would be better
served by eliminating the few differences between the disclosures
required at the two stages. In addition, one industry commenter
recommended that the table required under Sec. 226.5a include foreign
transaction fees. This commenter believed that the foreign transaction
fee is relevant to any consumer who travels in other countries, and the
ability to choose a credit card based on the presence of the fee is
important. In addition, the commenter noted that the large amount of
press attention that the issue has received suggests that the presence
or absence of the fee is now of interest to a significant number of
consumers.
In the May 2008 Proposal, the Board proposed to require that
foreign transaction fees imposed by the card issuer must be disclosed
in the table required under Sec. 226.5a. Specifically, the Board
proposed to withdraw proposed Sec. 226.5a(b)(4)(ii), which would have
precluded a card issuer from disclosing a foreign transaction fee in
the table required by Sec. 226.5a. In addition, the Board proposed to
add comment 5a(b)(4)-2 to indicate that foreign transaction fees
charged by the card issuer are considered transaction charges for the
use of a card for purchases, and thus must be disclosed in the table
required under Sec. 226.5a.
In the May 2008 Proposal, the Board noted its concern about the
inconsistency in requiring foreign transaction fees in the account-
opening table required by Sec. 226.6, but prohibiting that fee in the
table required by Sec. 226.5a. In the June 2007 Proposal, the Board
proposed that issuers may substitute the account-opening table for the
table required by Sec. 226.5a. See proposed comment 5a-2. Under the
June 2007 Proposal, circumstances could have arisen where one issuer
substitutes the account-opening table for the table required under
Sec. 226.5a (and thus is required to disclose the foreign transaction
fee) but another issuer provides the table required under Sec. 226.5a
(and thus is prohibited from disclosing the foreign transaction fee).
If a consumer was comparing the disclosures for these two offers, it
may appear to the consumer that the issuer providing the account-
opening table charges a foreign transaction fee and the issuer
providing the table required under Sec. 226.5a does not, even though
[[Page 5291]]
the second issuer may charge the same or a higher foreign transaction
fee than the first issuer. Thus, to promote uniformity, the Board
proposed in May 2008 to require issuers to disclose the foreign
transaction fee in both the account-opening table required by Sec.
226.6 and the table required by Sec. 226.5a. See proposed comment
5a(b)(4)-2. The Board also proposed that foreign transaction fees would
be disclosed in the table required by Sec. 226.5a similar to how those
fees are disclosed in the proposed account-opening tables published in
the June 2007 Proposal. See proposed Model Forms and Samples G-17(A),
(B) and (C).
In response to the May 2008 Proposal, most consumer group and
industry commenters supported the Board's proposal to require issuers
to disclose foreign transaction fees in the table required by Sec.
226.5a. Nonetheless, some industry commenters opposed the proposal
because they believed that consumers would not shop on these fees. One
industry commenter indicated that disclosing the foreign transaction
fee in the table only in connection with purchases may be misleading to
consumers as some issuers also charge this fee on cash advances in
foreign currencies or in foreign countries. This commenter noted that
in the June 2007 Proposal, the Board identified this fee in proposed
Sec. 226.5a(b)(4)(ii) as ``a fee imposed by the issuer for
transactions made in a foreign currency or that take place in a foreign
country.'' This commenter encouraged the Board to adopt similar
``transaction'' language in the final rule for Sec. 226.5a(b)(4).
Comment 5a(b)(4)-2 is adopted as proposed in the May 2008 Proposal
with several modifications. As discussed above, the final rule requires
issuers to disclose foreign transaction fees in the table required by
Sec. 226.5a, to be consistent with the requirement to disclose that
fee in the account-opening table required by Sec. 226.6. In addition,
foreign transaction fees could be relevant to consumers who travel in
other countries or conduct transactions in foreign currencies, and the
ability to choose a credit card based on the presence of the fee may be
important to those consumers.
The Board notes that Sec. 226.5a(b)(4) requires issuers to
disclose any transaction charge imposed by the card issuer for the use
of the card for purchases. Thus, comment 5a(b)(4)-2 clarifies that a
transaction charge imposed by the card issuer for the use of the card
for purchases includes any fee imposed by the issuer for purchases in a
foreign currency or that take place outside the United States or with a
foreign merchant. As noted by one commenter on the May 2008 Proposal,
some issuers also charge a foreign transaction fee on cash advances in
foreign currencies or in foreign countries. Issuers that charge a
foreign transaction fee on cash advances in foreign currencies or in
foreign countries are required to disclose that fee under Sec.
226.5a(b)(8), which requires the issuer to disclose in the table any
fee imposed for an extension of credit in the form of cash or its
equivalent. Comment 5a(b)(8)-2 is added to clarify that cash advance
fees include any charge imposed by the card issuer for cash advances in
a foreign currency or that take place in a foreign country. In
addition, both comments 5a(b)(4)-2 and 5a(b)(8)-2 clarify that if an
issuer charges the same foreign transaction fee for purchases and cash
advances in a foreign currency or in a foreign country, the issuer may
disclose this foreign transaction fee as shown in Samples G-10(B) and
G-10(C). Otherwise, the issuer will need to revise the foreign
transaction fee language shown in Samples G-10(B) and G-10(C) to
disclose clearly and conspicuously the amount of the foreign
transaction fee that applies to purchases and the amount of the foreign
transaction fee that applies to cash advances. Moreover, both comments
5a(b)(4)-2 and 5a(b)(8)-2 include a cross reference to comment 4(a)-4
for guidance on when a foreign transaction fee is considered charged by
the card issuer.
5a(b)(5) Grace Period
Currently, Sec. 226.5a(b)(5), which implements TILA Section
127(c)(A)(iii)(I), requires that card issuers disclose in the Sec.
226.5a table the date by which or the period within which any credit
extended for purchases may be repaid without incurring a finance
charge. Section 226.5a(a)(2)(iii), which implements TILA Section
122(c)(2)(C), requires credit card applications and solicitations under
Sec. 226.5a to use the term ``grace period'' to describe the date by
which or the period within which any credit extended for purchases may
be repaid without incurring a finance charge. 15 U.S.C. 1632(c)(2)(C).
In the June 2007 Proposal, the Board proposed new Sec.
226.5(a)(2)(iii) to extend this requirement to use the term ``grace
period'' to all references to such a term for the disclosures required
to be in the form of a table, such as the account-opening table.
In response to the June 2007 Proposal, one industry commenter
recommended that the Board no longer mandate the use of the term
``grace period'' in the table. Although TILA specifically requires use
of the term ``grace period'' in the Sec. 226.5a table, this commenter
urged the Board to use its exception authority to choose a term that is
more understandable to consumers. This commenter pointed out that its
research as well as that conducted by the Board and the GAO had
demonstrated that the term is confusing as a descriptor of the
interest-free period between the purchase and the due date for
customers who pay their balances in full. This commenter suggested that
the Board revise the disclosure of the grace period in the table to use
the heading ``interest-free period'' instead of ``grace period.''
In the May 2008 Proposal, the Board proposed to use its exemption
authority to delete the requirement to use the term ``grace period'' in
the table required by Sec. 226.5a. 15 U.S.C. 1604(a) and (f) and
1637(c)(5). As the Board discussed in the June 2007 Proposal, consumer
testing conducted for the Board prior to the June 2007 Proposal
indicated that some participants misunderstood the term ``grace
period'' to mean the time after the payment due date that an issuer may
give the consumer to pay the bill without charging a late-payment fee.
The GAO in its Report on Credit Card Rates and Fees found similar
misunderstandings by consumers in its consumer testing. See page 50 of
GAO Report. Furthermore, many participants in the GAO testing
incorrectly indicated that the grace period was the period of time
promotional interest rates applied. Nonetheless, in consumer testing
conducted for the Board prior to the June 2007 Proposal, the Board
found that participants tended to understand the term ``grace period''
more clearly when additional context was added to the language of the
grace period disclosure, such as describing that if the consumer paid
the bill in full each month, the consumer would have some period of
time (e.g., 25 days) to pay the new purchase balance in full to avoid
interest. Thus, the Board proposed to retain the term ``grace period.''
As discussed above, in response to the June 2007 Proposal, one
commenter performed its own testing with consumers on the grace period
disclosure proposed by the Board. This commenter found that the term
``grace period'' was still confusing to the participants in its
testing, even with the additional context given in the grace period
disclosure proposed by the Board. The commenter found that consumers
understood the term ``interest-free period'' to more accurately
describe the interest-free period between the purchase and the due date
[[Page 5292]]
for customers who pay their balances in full.
In consumer testing conducted by the Board prior to the June 2007
Proposal, the Board tested the phrase ``interest-free period.'' The
Board found that some consumers believed the phase ``interest-free
period'' referred to the period of time that a zero percent
introductory rate would be in effect, instead of the grace period.
Subsequently, in consumer testing conducted by the Board in March 2008,
the Board tested disclosure tables for a credit card solicitation that
used the phrase ``How to Avoid Paying Interest on Purchases'' as the
heading for the row containing the information on the grace period.
Participants in this testing generally seemed to understand this phrase
to describe the grace period. In addition, in the March 2008 consumer
testing, the Board also tested the phrase ``Paying Interest'' in the
context of a disclosure relating to a check that accesses a credit card
account, where a grace period was not offered on this access check.
Specifically, the phrase ``Paying Interest'' was used as the heading
for the row containing information that no grace period was offered on
the access check. Participants seemed to understand this phrase to mean
that no grace period was being offered on the use of the access check.
Thus, in the May 2008 Proposal the Board proposed to revise proposed
Sec. 226.5a(b)(5) to require that issuers use the phrase ``How to
Avoid Paying Interest on Purchases,'' or a substantially similar
phrase, as the heading for the row describing the grace period. If no
grace period on purchases is offered, when an issuer is disclosing this
fact in the table, the issuer would have been required to use the
phrase ``Paying Interest,'' or a substantially similar phrase, as the
heading for the row describing that no grace period is offered.
Comments on this aspect of the May 2008 Proposal were mixed. Some
consumer group and industry commenters supported the new headings. Some
of these commenters suggested that the new headings be mandated, that
is, the Board should not allow ``substantially similar'' phrases to be
used. Other industry and consumer group commenters suggested that the
Board retain the use of the term ``grace period'' because they claimed
that consumers generally understand the ``grace period'' phrase. In
addition, other industry commenters suggested that the Board mandate
one row heading (regardless of whether there is a grace period or not)
and that heading should be ``interest-free period.'' These commenters
believed that the phrase ``interest-free period'' would help consumers
better understand the ``grace period'' concept generally and would
reinforce for consumers that they pay interest from the date of the
transaction for transactions other than purchases.
In one of the rounds of consumer testing conducted by the Board
after the May 2008 Proposal, the following three headings were tested
for describing the ``grace period'' concept: ``How to Avoid Paying
Interest on Purchases,'' ``Grace Period'' and ``Interest-free Period.''
Participants in this round of testing were asked which of the three
headings most clearly communicates the information contained in that
row of the table. Most of the participants selected the heading ``How
to Avoid Paying Interest on Purchases.'' A few of the participants
selected the heading ``Interest-Free Period.'' None of the participants
selected ``Grace Period'' as the best heading. A few participants
commented that the term ``grace period'' was misleading because some
people might think of a ``grace period'' as a period of time after the
due date that a consumer could pay without being considered late. In
addition, the Board believes that the heading ``How to Avoid Paying
Interest on Purchases'' communicates in plain language the concept of
the ``grace period,'' without requiring consumers to understand a
specific phrase like ``grace period'' or ``interest-free period'' to
represent that concept.
In addition, in the consumer testing conducted after the May 2008
Proposal, the Board continued to test the phrase ``Paying Interest'' as
a disclosure heading in the context of a check that accesses a credit
card account, where no grace period was offered on this access check.
When asked whether there was any way to avoid paying interest on
transactions made with the access check, most participants in these
rounds of testing understood the ``Paying Interest'' phrase to mean
that no grace period was being offered on the use of the access check.
Thus, the final rule in Sec. 226.5a(b)(5) adopts the new headings as
proposed in May 2008, pursuant to the Board's authority in TILA Section
105(a) to provide exceptions necessary or proper to effectuate the
purposes of TILA. 15 U.S.C. 1604(a).
Although the heading of the row will change depending on whether or
not a grace period for all purchases is offered on the account, the
Board does not believe that different headings will significantly
undercut a consumer's ability to compare terms of credit card accounts.
Most issuers offer a grace period on all purchases; thus, most issuers
will use the term ``How to Avoid Paying Interest on Purchases.''
Nonetheless, in those cases where a consumer is reviewing the tables
for two credit card offers--one which has a row with the heading ``How
to Avoid Paying Interest on Purchases'' and one with a row ``Paying
Interest''--the Board believes that consumers will recognize that the
information in those two rows relate to the same concept of when
consumers will pay interest on the account.
As discussed above, some commenters suggested that the new headings
be mandated to promote uniformity of the table, that is, the Board
should not allow ``substantially similar'' phrases to be used. The
Board agrees that consistent headings are important to enable consumers
to better compare grace periods for different offers. Section
226.5a(b)(5) specifies that in disclosing a grace period that applies
to all types of purchases in the table, the phrase ``How to Avoid
Paying Interest on Purchases'' must be used as the heading for the row
describing the grace period. If a grace period is not offered on all
types of purchases or is not offered on any purchases, in describing
this fact in the table, the phrase ``Paying Interest'' must be used as
the heading for the row describing this fact.
As discussed above, Sec. 226.5a(b)(5) currently requires that card
issuers disclose in the Sec. 226.5a table the date by which or the
period within which any credit extended for purchases may be repaid
without incurring a finance charge. Comment 5a(b)(5)-1 provides that a
card issuer may, but need not, refer to the beginning or ending point
of any grace period and briefly state any conditions on the
applicability of the grace period. For example, the grace period
disclosure might read ``30 days'' or ``30 days from the date of the
periodic statement (provided you have paid your previous balance in
full by the due date).''
In the June 2007 Proposal, the Board proposed to amend Sec.
226.5a(b)(5) to require card issuers to disclose briefly any conditions
on the applicability of the grace period. The Board also proposed to
amend comment 5a(b)(5)-1 to provide guidance for how issuers may meet
the requirements in proposed Sec. 226.5a(b)(5). Specifically, proposed
comment 5a(b)(5)-1 would have provided that an issuer that conditions
the grace period on the consumer paying his or her balance in full by
the due date each month, or on the consumer paying the previous balance
in full by the due date the prior month will be deemed to meet
requirements to disclose conditions on the applicability of the grace
period by providing the
[[Continued on page 5294]]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
]
[[pp. 5294-5343]] Truth in Lending
[[Continued from page 5293]]
[[Page 5293]]
following disclosure: ``If you pay your entire balance in full each
month, you have [at least] ---- days after the close of each period to
pay your balance on purchases without being charged interest.''
In response to the June 2007 Proposal, several commenters suggested
that the Board revise the model language provided in proposed comment
5a(b)(5)-1 to describe the grace period. One commenter suggested the
following language: ``Your due date is [at least] 25 days after your
bill is totaled each month. If you don't pay your bill in full by your
due date, you will be charged interest on the remaining balance.''
Other commenters also recommended that the Board revise the disclosure
of the grace period to make clearer that the consumer must pay the
total balance in full each month by the due date to avoid paying
interest on purchases. In addition, some consumer groups commented that
if the issuer does not provide a grace period, the Board should mandate
specific language that draws the consumer's attention to this fact.
Two industry commenters to the June 2007 Proposal noted that the
``grace period'' description in proposed sample forms was conditioned
on ``if you pay your entire balance in full each month.'' One commenter
suggested deleting the phrase as unnecessary; another asked the Board
to provide flexibility in the description for creditors that offer a
grace period on purchases if the purchase (not the entire) balance is
paid in full.
In the March 2008 consumer testing, the Board tested the following
language to describe a grace period: ``Your due date is [at least] ----
days after the close of each billing cycle. We will not charge you
interest on purchases if you pay your entire balance (excluding
promotional balances) by the due date each month.'' Participants that
read this language appeared to understand it correctly. That is, they
understood that they could avoid paying interest on purchases is they
paid their bill by the due date each month. Thus, in May 2008, the
Board proposed to amend comment 5a(b)(5)-1 to provide this language as
guidance to issuers on how to disclose a grace period. The Board noted
that currently issuers typically require consumers to pay their entire
balance in full each month to qualify for a grace period on purchases.
However, in May 2008, the Board and other federal banking agencies
proposed to prohibit most issuers from requiring consumers to pay off
promotional balances in order to receive any grace period offered on
non-promotional purchases. See 73 FR 28904, May 19, 2008. Thus,
consistent with this proposed prohibition, the language in proposed
comment 5a(b)(5)-1 would have indicated that the entire balance
(excluding promotional balances) must be paid each month to avoid
interest charges on purchases.
Also, in the March 2008 consumer testing, the Board tested language
to describe that no grace period was being offered. Specifically, in
the context of testing a disclosure related to an access check for
which a grace period was not offered, the Board tested the following
language: ``We will begin charging interest on these check transactions
on the transaction date.'' Most participants that read this language
understood they could not avoid paying interest on this check
transaction, and therefore, that no grace period was being offered on
this check transaction. Thus, in May 2008, the Board proposed to add
comment 5a(b)(5)-2 to provide guidance on how to disclose the fact that
no grace period on purchases is offered on the account. Specifically,
proposed comment 5a(b)(5)-2 would have provided that issuers may use
the following language to describe that no grace period on purchases is
offered, as applicable: ``We will begin charging interest on purchases
on the transaction date.''
In response to the May 2008 Proposal, several industry commenters
urged the Board to provide flexibility for card issuers to amend the
``grace period'' language to allow for a more accurate description of
the grace period as may be appropriate or necessary. For example, these
commenters indicated that this flexibility is needed since promotional
balances may be described with more particularity (or using different
terminology) on billing statements and elsewhere, and also since there
may be circumstances in which the grace period could be conditioned on
additional factors, aside from payment of a balance in full. In
addition, several industry commenters noted that if the interagency
proposal to prohibit most issuers from treating a payment as late
unless consumers have been provided a reasonable amount of time to make
that payment is adopted, issuers may have two due dates each month--one
for the grace period end date and one for when payments will be
considered late. Issuers would need flexibility to amend the grace
period language to reference clearly the grace period end date. Also,
several consumer group commenters suggested that the Board not adopt
the proposed model language when a grace period is not offered on
purchases, namely ``We will begin charging interest on purchases on the
transaction date.'' These commenters suggested instead that the Board
mandate the following language: ``No grace period.''
In consumer testing conducted by the Board after the May 2008
Proposal, the Board tested the following language describing the grace
period: ``Your due date is [at least] ---- days after the close of each
billing cycle. We will not charge you interest on purchases if you pay
your entire outstanding balance (excluding promotional balances) by the
due date each month.'' When asked whether there was any way not to pay
interest on purchase, most participants noticed the language describing
the grace period and appeared generally to understand that they could
avoid paying interest on purchases by paying their balance in full each
month. Nonetheless, most participants did not understand the phrase
``(excluding promotional balances).'' In the context of testing a
disclosure related to an access check for which a grace period was not
offered, the Board tested the following language: ``We will begin
charging interest on these check transactions on the transaction
date.'' When asked where there was any way to avoid paying interest on
these check transactions, most participants saw the above language and
understood that there was no grace period for these check transactions.
Based on this testing, the Board adopts in comment 5a(b)(5)-1 the
model language proposed in May 2008 for describing a grace period that
is offered on all types of purchases, with one modification.
Specifically, the phrase ``(excluding promotional balances)'' is
deleted from the model language. Thus, the model language is revised to
read: ``Your due date is [at least] ---- days after the close of each
billing cycle. We will not charge you interest on purchases if you pay
your entire balance by the due date each month.'' As discussed in
supplemental information to final rules issued by the Board and other
federal banking agencies published elsewhere in today's Federal
Register, the Board and the other federal banking agencies have
withdrawn the proposal that would have prohibited most issuers from
requiring consumers to pay off promotional balances in order to receive
any grace period offered on non-promotional purchases. Thus, the phrase
``(excluding promotional balances)'' is deleted as unnecessary. In
addition, other technical edits have been made to comment 5a(b)(5)-1.
The final rule adopts in comment 5a(b)(5)-2 the following model
language proposed in May 2008 to describe that no grace period on any
purchases is
[[Page 5294]]
offered, as applicable: ``We will begin charging interest on purchases
on the transaction date.'' Comment 5a(b)(5)-3 is added to clarify that
if an issuer provides a grace period on some types of purchases but no
grace period on others, the issuer, as appropriate, may combine and
revise the model language in comments 5a(b)(5)-1 and -2 to describe to
which types of purchases a grace period applies and to which types of
purchases no grace period is offered.
The Board's language in 5a(b)(5)-1 for describing a grace period on
all purchases, and in 5a(b)(5)-2 for describing that no grace period
exists on any purchases is not mandatory. This model language is meant
as a safe harbor for issuers. Credit card issuers may amend this
language as necessary or appropriate to describe accurately the grace
period (or lack of grace period) offered on purchases on the account.
5a(b)(6) Balance Computation Method
TILA Section 127(c)(1)(A)(iv) requires the Board to name not more
than five of the most common balance computation methods used by credit
card issuers to calculate the balance for purchases on which finance
charges are computed. 15 U.S.C. 1637(c)(1)(A)(iv). If issuers use one
of the balance computation methods named by the Board, Sec.
226.5a(b)(6) requires that issuers must disclose the name of that
balance computation method in the table as part of the disclosures
required by Sec. 226.5a, but issuers are not required to provide a
description of the balance computation method. If the issuer uses a
balance computation method that is not named by the Board, however, the
issuer must disclose a detailed explanation of the balance computation
method. See current Sec. 226.5a(b)(6); Sec. 226.5a(a)(2)(i). In the
June 2007 Proposal, the Board proposed to retain a brief reference to
the balance computation method, but move the disclosure from the table
to directly below the table. See proposed Sec. 226.5a(a)(2)(iii).
Commenters generally supported the proposal. Many consumers urged
the Board to ban the use of a computation method commonly called ``two-
cycle'' as unfair. A federal banking agency urged the Board to require
``cautionary disclosures'' where technical explanations were
insufficient, such as a for a description of two-cycle billing. Two
commenters suggested expanding the list of commonly-used methods in
Sec. 226.5a(g) to include the daily balance method. One industry
commenter suggested eliminating the requirement to provide the name of
the balance computation method, and requiring a toll-free telephone
number or an optional reference to the creditor's Web site instead.
Currently, the Board in Sec. 226.5a(g) has named four balance
computation methods: (1) Average daily balance (including new
purchases) or (excluding new purchases); (2) two-cycle average daily
balance (including new purchases) or (excluding new purchases); (3)
adjusted balance; and (4) previous balance. In the June 2007 Proposal,
the Board proposed to retain these four balance computation methods.
In May 2008, the Board and other federal banking agencies proposed
to prohibit most issuers from using a balance computation method
commonly referred to as the ``two-cycle'' balance method. See 73 FR
28904, May 19, 2008. Nonetheless, in the May 2008 Regulation Z
Proposal, the Board did not propose deleting the two-cycle average
daily balance method from the list in Sec. 226.5(g) because the
prohibition would not have applied to all issuers, such as state-
chartered credit unions that would not have been subject to the
National Credit Union Administration's proposed rules.
In response to the May 2008 Proposal, several consumer groups
suggested that the Board consider requiring issuers that use the two-
cycle method to disclose that ``this method is the most expensive
balance computation method and is prohibited for most credit card
issuers,'' assuming that the banking agencies' proposed rules
prohibiting most issuers from using the ``two cycle'' method goes
forward. In addition, these consumer groups continued to advocate use
of an ``Energy Star'' approach in describing the balance calculation
methods, where each balance computation method would be rated on how
expensive it is, and that rating would be disclosed.
The Board is adopting the requirement to disclose the name of the
balance computation method used by the creditor beneath the table, as
proposed. In consumer testing conducted for the Board prior to the June
2007 Proposal, virtually no participants understood the two balance
computation methods used by most card issuers--the average daily
balance method and the two-cycle average daily balance method--when
those methods were just described by name. The GAO found similar
results in its consumer testing. See GAO Report on Credit Card Rates
and Fees, at pages 50-51. In the consumer testing conducted for the
Board prior to the June 2007 Proposal, a version of the table was used
which attempted to explain briefly that the ``two-cycle average daily
balance method'' would be more expensive than the ``average daily
balance method'' for those consumers that sometimes pay their bill in
full and sometimes do not. Participants' answers suggested they did not
understand this disclosure. They appeared to need more information
about how balances are calculated.
In consumer testing conducted for the Board in March 2008, a
version of the table was used which attempted to explain in more detail
the ``average daily balance method'' and the ``two-cycle average daily
balance method'' and the situation in which the two-cycle method
results in higher interest charges--namely, in those months where a
consumer paid his or her entire outstanding balance in full in one
billing cycle but then does not pay the entire balance in full the
following cycle. While participants that saw the table understood that
under two-cycle billing, interest would be charged on balances during
both the current and previous billing cycles, most participants did not
understand that they would only be charged interest in the previous
billing cycle if they had paid the outstanding balance in full for the
previous cycle but not for the current cycle. Thus, most participants
did not understand that two-cycle billing would not lead to higher
interest charges than the ``average daily balance method'' if a
consumer never paid in full.
TILA Section 122(c)(2) states that for certain disclosures set
forth in Section TILA 127(c)(1)(A), including the balance computation
method, the Board shall require that the disclosure of such
information, to the extent the Board determines to be practicable and
appropriate, be in the form of a table. 15 U.S.C. 1632(c)(2). The Board
believes that it is no longer appropriate to continue to require
issuers to disclose the balance computation method in the table,
because the name of the balance computation method used by issuers does
not appear to be meaningful to consumers and may distract from more
important information contained in the table. Thus, the final rule
retains a brief reference to the balance computation method, but moves
the disclosure from the table to directly below the table. See Sec.
226.5a(a)(2)(iii).
The final rule continues to require that issuers disclose the name
of the balance computation method beneath the table because this
disclosure is required by TILA Section 127(c)(1)(A)(iv). Consumers and
others will have access to information about the balance calculation
method used on the credit card account if they find it useful. Under
final rules issued by the Board and other federal banking agencies
published elsewhere in today's
[[Page 5295]]
Federal Register, most credit card issuers are prohibited from using
the ``two cycle'' balance computation method. Nonetheless, this final
rule retains the ``two-cycle'' disclosure because not all issuers are
covered by the final rules published elsewhere in today's Federal
Register which preclude use of the two-cycle balance computation
method.
The Board is not requiring issuers that are permitted to and choose
to use the two-cycle method to disclose that ``this method is the most
expensive balance computation method and is prohibited for most credit
card issuers.'' As discussed above, a statement that the two-cycle
method is the most expensive balance computation method would be
accurate only for those consumers who sometimes pay their bill in full
and sometime do not. For consumers that never pay their bill in full,
or always pay their bill in full, the interest paid under the two-cycle
method is the same as paid under the one-cycle average daily balance
method. For the same reasons, the Board is not requiring an ``Energy
Star'' approach in describing the balance calculation methods, which
would require each balance computation method to be rated on how
expensive it is, and require that rating to be disclosed. Whether one
balance computation method is more expensive than another would depend
on how a consumer uses his or her account.
5a(b)(8) Cash Advance Fee
Currently, comment 5a(b)(8)-1 provides that a card issuer must
disclose only those fees it imposes for a cash advance that are finance
charges under Sec. 226.4. For example, a charge for a cash advance at
an ATM would be disclosed under Sec. 226.5a(b)(8) unless a similar
charge is imposed for ATM transactions not involving an extension of
credit. In the June 2007 Proposal, the Board proposed to provide that
all transaction fees on credit cards would be considered finance
charges. Thus, the Board proposed to delete the current guidance
discussed in comment 5a(b)(8)-1 as obsolete. As discussed in the
section-by-section analysis to Sec. 226.4, the final rule adopts the
proposal that all transaction fees imposed by a card issuer on a
cardholder are considered finance charges. Thus, the Board also deletes
current comment 5a(b)(8)-1 as proposed.
A new comment 5a(b)(8)-1 is added to refer issuers to Samples G-
10(B) and G-10(C) for guidance on how to disclose clearly and
conspicuously the cash advance fee. In addition, as discussed in the
section-by-section analysis to Sec. 226.5a(b)(4), new comment
5a(b)(8)-2 is added to clarify that cash advance fees includes any
charge imposed by the card issuer for cash advances in a foreign
currency or that take place outside the United States or with a foreign
merchant. In addition, comment 5a(b)(8)-2 clarifies that if an issuer
charges the same foreign transaction fee for purchases and cash
advances in a foreign currency or that take place outside the United
States or with a foreign merchant, the issuer may disclose this foreign
transaction fee as shown in Samples G-10(B) and (C). Otherwise, the
issuer will need to revise the foreign transaction fee shown in Samples
G-10(B) and (C) to disclose clearly and conspicuously the amount of the
foreign transaction fee that applies to purchases and the amount of the
foreign transaction fee that applies to cash advances. Moreover,
comment 5a(b)(8)-2 provides a cross reference to comment 4(a)-4 for
guidance on when a foreign transaction fee is considered charged by the
card issuer.
In addition, consistent with the account-opening disclosures
required in Sec. 226.6, comment 5a(b)(8)-3 is added to clarify that
any charge imposed on a cardholder by an institution other than the
card issuer for the use of the other institution's ATM in a shared or
interchange system is not a cash advance fee that must be disclosed in
the table pursuant to Sec. 226.5a(b)(8).
5a(b)(12) Returned-Payment Fee
Currently, Sec. 226.5a does not require a card issuer to disclose
a fee imposed when a payment is returned. In the June 2007 Proposal,
the Board proposed to add Sec. 226.5a(b)(12) to require issuers to
disclose this fee in the table. Typically, card issuers will impose a
fee and a penalty rate if a cardholder's payment is returned. As
discussed above, the final rule adopts the Board's proposal to require
card issuers to disclose in the table the reasons that a penalty rate
may be imposed. See Sec. 226.5a(b)(1)(iv). The final rule also
requires card issuers to disclose the returned-payment fee, pursuant to
the Board's authority under TILA Section 127(c)(5), so that consumers
are told both consequences of returned payments. 15 U.S.C. 1637(c)(5).
In addition, returned-payment fees are similar to late-payment fees in
that returned-payment fees also can relate to a consumer not paying on
time; if the only payment made by a consumer during a given billing
cycle is returned, the return of the payment also could result in the
consumer being deemed to have paid late. Late-payment fees are
disclosed in the table and the Board believes that consumers also
should be aware of returned-payment fees when shopping for a credit
card. See section-by-section analysis to Sec. 226.5a(a)(2).
Cross References to Penalty Rate
Card issuers often impose both a fee and penalty rate for the same
behavior--such as a consumer paying late, exceeding the credit limit,
or having a payment returned. In consumer testing conducted for the
Board prior to the June 2007 Proposal, participants tended to associate
paying penalty fees with certain behaviors (such as paying late or
going over the credit limit), but they did not tend to associate rate
increases with these same behaviors. By linking the penalty fees with
the penalty rate, participants more easily understood that if they
engage in certain behaviors, such as paying late, their rates may
increase in addition to incurring a fee. Thus, in the June 2007
Proposal, the Board proposed to add Sec. 226.5a(b)(13) to provide that
if a card issuer may impose a penalty rate for any of the reasons that
a penalty fee would be imposed (such as a late payment, going over the
credit limit, or a returned payment), the issuer in disclosing the fee
also must disclose that the penalty rate may apply, and must provide a
cross reference to the penalty rate. Proposed Samples G-10(B) and G-
10(C) would have provided guidance on how to provide these disclosures.
In response to the June 2007 Proposal, several industry commenters
suggested that the cross reference be eliminated, as unnecessary and
leading to ``information overload.'' In addition, one commenter
suggested that the cross reference not be required if one late payment
cannot cause the APR to increase. Alternatively, this commenter
suggested that the conditions be disclosed with the cross reference,
for example, ``If two consecutive payments are late, your APRs may also
be increased; see Penalty APR section above.''
In quantitative consumer testing conducted for the Board after the
May 2008 Proposal, the Board investigated whether the presence of a
cross reference from a penalty fee, specifically the over-the-limit
fee, to the penalty APR improved consumers' awareness of the fact that
a penalty rate could be applied to their accounts if they went over the
credit limit. The results of the testing indicate that there was no
statistically significant improvement in consumers' awareness that
going over the limit could trigger penalty pricing when a cross
reference was included. Because the testing suggests that cross-
references from penalty fees to the
[[Page 5296]]
penalty rate disclosure does not improve consumer understanding of the
circumstances in which penalty pricing can be applied to their
accounts, and due to concerns about ``information overload,'' proposed
Sec. 226.5a(b)(13) and comment 5a(b)(13)-1 have been withdrawn from
the final rule. Thus, the final rule does not require cross-references
from penalty fees to penalty rates in the Sec. 226.5a table.
5a(b)(13) Required Insurance, Debt Cancellation or Debt Suspension
Coverage
Credit card issuers often offer optional insurance or debt
cancellation or suspension coverage with the credit card. Under the
current rules, costs associated with the insurance or debt cancellation
or suspension coverage are not considered ``finance charges'' if the
coverage is optional, the issuer provides certain disclosures to the
consumer about the coverage, and the issuer obtains an affirmative
written request for coverage after the consumer has received the
required disclosures. Card issuers frequently provide the disclosures
discussed above on the application form with a space to sign or initial
an affirmative written request for the coverage. Currently, issuers are
not required to provide any information about the insurance or debt
cancellation or suspension coverage in the table that contains the
Sec. 226.5a disclosures.
In the event that a card issuer requires the insurance or debt
cancellation or debt suspension coverage (to the extent permitted by
state or other applicable law), the Board proposed new Sec.
226.5a(b)(14) in the June 2007 Proposal to require that the issuer
disclose any fee for this coverage in the table. In addition, proposed
Sec. 226.5a(b)(14) would have required that the card issuer also
disclose a cross reference to where the consumer may find more
information about the insurance or debt cancellation or debt suspension
coverage, if additional information is included on or with the
application or solicitation. Proposed Sample G-10(B) would have
provided guidance on how to provide the fee information and the cross
reference in the table. The final rule adopts new Sec. 226.5a(b)(13)
(renumbered from Sec. 226.5a(b)(14)) as proposed. If insurance or debt
cancellation or suspension coverage is required in order to obtain a
credit card, the Board believes that fees required for this coverage
should be highlighted in the table so that consumers are aware of these
fees when considering an offer, because they will be required to pay
the fee for this coverage every month in order to have the credit card.
5a(b)(14) Available Credit
Subprime credit cards often have substantial fees assessed when the
account is opened. Those fees will be billed to the consumer as part of
the first statement, and will substantially reduce the amount of credit
that the consumer initially has available with which to make purchases
or other transactions on the account. For example, for cards where a
consumer is given a minimum credit line of $250, after the start-up
fees have been billed to the account, the consumer may have less than
$100 of available credit with which to make purchases or other
transactions in the first month. In addition, consumers will pay
interest on these fees until they are paid in full.
The federal banking agencies have received a number of complaints
from consumers with respect to cards of this type. Complainants often
claim that they were not aware of how little available credit they
would have after all the fees were assessed. Thus, in the June 2007
Proposal, the Board proposed to add Sec. 226.5a(b)(16) to inform
consumers about the impact of these fees on their initial available
credit. Specifically, proposed Sec. 226.5a(b)(16) would have provided
that if (1) a card issuer imposes required fees for the issuance or
availability of credit, or a security deposit, that will be charged
against the card when the account is opened, and (2) the total of those
fees and/or security deposit equal 25 percent or more of the minimum
credit limit applicable to the card, a card issuer must disclose in the
table an example of the amount of the available credit that a consumer
would have remaining after these fees or security deposit are debited
to the account, assuming that the consumer receives the minimum credit
limit offered on the relevant account. In determining whether the 25
percent threshold test is met, the issuer would have been required to
consider only fees for issuance or availability of credit, or a
security deposit, that are required. If certain fees for issuance or
availability are optional, these fees would not have been required to
be considered in determining whether the disclosure must be given.
Nonetheless, if the 25 percent threshold test is met in connection with
the required fees or security deposit, the issuer would have been
required to disclose two figures--the available credit after excluding
any optional fees from the amounts debited to the account, and the
available credit after including any optional fees in the amounts
debited to the account.
In addition, the Board proposed comment 5a(b)(16)-1 to clarify that
in calculating the amount of available credit that must be disclosed in
the table, an issuer must consider all fees for the issuance or
availability of credit described in Sec. 226.5a(b)(2), and any
security deposit, that will be imposed and charged to the account when
the account is opened, such as one-time issuance and set-up fees. For
example, in calculating the available credit, issuers would have been
required to consider the first year's annual fee and the first month's
maintenance fee (if applicable) if they are charged to the account
immediately at account opening. Proposed Sample G-10(C) would have
provided guidance to issuers on how to provide this disclosure. (See
proposed comment 5a(b)(16)-2).
As described above, a card issuer would have been required to
consider only required fees for issuance or availability of credit, or
a security deposit, that will be charged against the card when the
account is opened in determining whether the 25 percent threshold test
is met. A card issuer would not have been required to consider other
kinds of fees, such as late fees or over-the-limit fees when evaluating
whether the 25 percent threshold test is met. The Board solicited
comment on whether there are other fees (other than fees required for
issuance or availability of credit) that are typically imposed on these
types of accounts when the account is opened, and should be included in
determining whether the 25 percent threshold test is met.
In response to the June 2007 Proposal, several commenters suggested
start-up fees should be banned in some instances. Several consumer
groups and one member of Congress suggested that start-up fees that
equal 25 percent or more of the available credit line be banned.
Another consumer group suggested that start-up fees exceeding 5 percent
of the available credit line be banned. In addition, several consumer
groups suggested that the Board should prohibit security deposits from
being charged to the account as an unfair practice.
Assuming the Board did not ban start-up fees, several consumer
groups suggested that the threshold for the available credit disclosure
be lowered to 5 percent instead of 25 percent. In contrast, several
industry commenters suggested that the threshold be lowered to 10
percent or 15 percent. In addition, while some commenters supported the
Board's proposal to consider only required start-up fees (and not
optional
[[Page 5297]]
fees) in deciding whether the 25 percent threshold is met, some
consumer groups suggested that the threshold test be based on required
and optional fees. Several consumer groups also recommended that the
language of the available credit disclosure be shortened and a
percentage be disclosed, as follows: ``AVAILABLE CREDIT: The fees
charged when you open this account will be $25 (or $40 with an
additional card), which is 10% (or 16% with an additional card) of the
minimum credit limit of $250. If you receive a $250 credit limit, you
will have $225 in available credit (or $210 with an additional card).''
These consumer groups also suggested that the available credit
disclosure be required in advertisements as well, especially in the
solicitation letter for direct mail and Internet applications and
solicitations.
In May 2008, the Board and other federal banking agencies proposed
to address concerns regarding subprime credit cards by prohibiting
institutions from financing security deposits and fees for credit
availability (such as account-opening fees or membership fees) if those
charges would exceed 50 percent of the credit limit during the first
twelve months and from collecting at account opening fees that are in
excess of 25 percent of the credit limit in effect on the consumer's
account when opened. See 73 FR 28904, May 19, 2008. In the
supplementary information to the May 2008 Regulation Z Proposal, the
Board indicated that if such an approach is adopted as proposed,
appropriate revisions would be made to ensure consistency among the
regulatory requirements and to facilitate compliance when the Board
adopted revisions to the Regulation Z rules for open-end (not home-
secured) credit.
In response to the May 2008 Regulation Z Proposal, several
commenters again suggested that the threshold for the available credit
disclosure be reduced to 5 percent or 10 percent. Another consumer
group commenter suggested that the Board always require the available
credit disclosure if there are start-up fees on the account, including
annual fees. In addition, several consumer group commenters reiterated
their comments on the June 2007 Proposal that the threshold test for
when the available credit disclosure must be given should be based on
required and optional fees.
Under final rules issued by the Board and other federal banking
agencies published elsewhere in today's Federal Register, most credit
card issuers are precluded from financing security deposits and fees
for credit availability if those charges would exceed 50 percent of the
credit limit during the first six months and from collecting at account
opening, fees that are in excess of 25 percent of the credit line in
effect on the consumer's account when opened. Notwithstanding these
substantive provisions, the Board believes that for subprime cards, a
disclosure of available credit is needed in the table to inform
consumers about the impact of start-up fees on the initial available
credit.
The final rule adopts Sec. 226.5a(b)(16) with several
modifications, and renumbers the provision as Sec. 226.5a(b)(14).
Specifically, the final rule amends the proposal to provide that fees
or security deposits that are not charged to the account are not
subject to the disclosure requirements in Sec. 226.5a(b)(14). In
addition, comment 5a(b)(14)-1 (proposed as comment 5a(b)(16)-1) is
revised from the proposal to clarify that in calculating the amount of
the available credit including optional fees, if optional fees could be
charged multiple times, the issuer shall assume that the optional fee
is only imposed once. For example, if an issuer charges a fee for each
additional card issued on the account, the issuer in calculating the
amount of the available credit including optional fees must assume that
the cardholder requests only one additional card. Also, comment
5a(b)(14)-1 is revised to specify that in disclosing the available
credit, an issuer must round down the available credit amount to the
nearest whole dollar.
The final rule also differs from the proposal in that it contains a
15 percent threshold for when the credit availability disclosure must
be given, namely, when required fees for issuance or availability of
credit, or a security deposit, that will be charged against the card
when the account is opened equal 15 percent or more of the minimum
credit limit applicable to the card. The Board lowered the threshold to
15 percent to address commenters' concerns that a lower threshold would
better inform consumers about offers of credit where large portions of
the available credit on a new account are taken up by fees before the
consumer has the opportunity to use the account. The Board has not
lowered the threshold to 5 percent or 10 percent as suggested by some
other commenters. The Board believes that a 15 percent threshold will
ensure that consumers will receive the disclosure in connection with
subprime credit card products, but that the disclosure will generally
not be required in connection with a prime credit card account, for
which credit limits are higher and less fees are charged when the
account is opened. The Board believes that the disclosure is most
useful to consumers when a substantial portion of the minimum credit
line is not available because required start-up fees (or a required
security deposit) are charged to the account. The available credit
disclosure may not be as meaningful to consumers, when those consumers
are receiving 90 to 95 percent of the minimum credit line in available
credit at account opening.
In addition, the Board retained in the final rule that the
available credit disclosure must be given if required start-up fees (or
a required security deposit) charged against the account at account-
opening equal 15 percent or more of the minimum credit line. Optional
start-up fees are not considered when determining whether the 15
percent threshold is met. Nonetheless, if the 15 percent threshold is
met in connection with the required fees or security deposit, the
issuer must disclose two figures--the available credit after excluding
any optional fees from the amounts debited to the account, and the
available credit after including any optional fees in the amounts
debited to the account (assuming that each optional fee is only charged
once). The Board believes that it is appropriate not to consider
optional fees when determining whether the 15 percent threshold is
initially met because consumers are not required to incur these fees to
obtain the credit card account. Consistent with the proposal, the final
rule also requires an issuer to consider only fees for the issuance or
availability of credit when determining whether the 15 percent
threshold is met; other types of fees such as late-payment fees or
over-the-limit fees are not required to be considered.
Moreover, the final rule does not adopt the language for the
available credit disclosure suggested by several consumer groups. The
Board believes that including percentages in the disclosure, as
suggested by those consumer groups, would be confusing to consumers.
The final rule also does not require that issuers provide the available
credit disclosure in the solicitation letter for direct mail and
Internet applications and solicitations, as suggested by several
consumer group commenters. In consumer testing conducted by the Board,
participants generally noticed and understood the available credit
disclosure in the table required by Sec. 226.5a. Thus, the Board does
not believe that repeating that disclosure in the solicitation letter
for direct mail and Internet applications and solicitations is needed.
Sample
[[Page 5298]]
G-10(C) sets forth an example of how the available credit disclosure
may be made.
5a(b)(15) Web Site Reference
In June 2007, the Board proposed to revise Sec. 226.5a to require
that credit card issuers must disclose in the table a reference to a
Board Web site and a statement that consumers can find on this Web site
educational materials on shopping for and using credit card accounts.
See proposed Sec. 226.5a(b)(17). Such materials would expand those
already available on choosing a credit card at the Board's Web
site.\17\ The Board recognized that some consumers may need general
education about how credit cards work and an explanation of typical
account terms that apply to credit cards. In the consumer testing
conducted for the Board, participants showed a wide range of
understanding about how credit cards work generally, with some
participants showing a firm understanding of terms that relate to
credit card accounts, while others had difficulty expressing basic
financial concepts, such as how the interest rate differs from a one-
time fee. The Board's current Web site explains some basic financial
concepts--such as what an APR is--as well as terms that typically apply
to credit card accounts. Through the Web site, the Board may continue
to expand the explanation of other credit card terms, such as grace
periods, that may be difficult to explain concisely in the disclosures
given with applications and solicitations.
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\17\ The materials can be found at http://
www.federalreserve.gov/pubs/shop/default.htm.
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In response to the June 2007 Proposal, several industry commenters
questioned whether consumers would use the Web site resource, and
suggested that the Board either not require the Web site disclosure or
place the disclosure outside of the table to avoid ``information
overload.'' Consumer groups generally supported placing the Web site
disclosure in the table, and requested that the Board provide an
alternative information source for those consumers who lack Internet
access, such as a toll-free telephone number at which consumers can
obtain a free copy of similar information.
The final rule adopts Sec. 226.5a(b)(15) (proposed as Sec.
226.5a(b)(17)). As part of consumer testing, participants were asked
whether they would use a Board Web site to obtain additional
information about credit cards generally. Some participants indicated
they might use the Web site, while others indicated that it was
unlikely they would use such a Web site. Although it is hard to predict
from the results of the testing how many consumers might use the
Board's Web site, and recognizing that not all consumers have access to
the Internet, the Board believes that this Web site may be helpful to
some consumers as they shop for a credit card and manage their account
once they obtain a credit card. Thus, the final rule requires a
reference to a Board Web site to be included in the table because this
is a cost-effective way to provide consumers with additional
information on credit cards. The Board is not requiring creditors to
also disclose a toll-free telephone number at which consumers can
obtain a free copy of similar information from the Board. The Board
anticipates that consumers are not likely to use a toll-free telephone
number to request educational materials in these instances because they
will not want to delay applying for a credit card until the materials
are delivered. Thus, such a requirement would not significantly benefit
consumers on the whole.
Payment Allocation and Other Suggested Disclosures Under Sec.
226.5a(b)
Payment allocation. Currently, many credit card issuers allocate
payments in excess of the minimum payment first to balances that are
subject to the lowest APR. For example, if a cardholder made purchases
using a credit card account and then initiated a balance transfer, the
card issuer might allocate a payment (less than the amount of the
balances) to the transferred balance portion of the account if that
balance was subject to a lower APR than the purchases. Card issuers
often will offer a discounted initial rate on balance transfers (such
as 0 percent for an introductory period) with a credit card
solicitation, but not offer the same discounted rate for purchases. In
addition, the Board is aware of at least one issuer that offers the
same discounted initial rate for balance transfers and purchases for a
specified period of time, where the discounted rate for balance
transfers (but not the discounted rate for purchases) may be extended
until the balance transfer is paid off if the consumer makes a certain
number of purchases each billing cycle. At the same time, issuers
typically offer a grace period for purchases if a consumer pays his or
her bill in full each month. Card issuers, however, do not typically
offer a grace period on balance transfers or cash advances. Thus, on
the offers described above, a consumer cannot take advantage of both
the grace period on purchases and the discounted rate on balance
transfers. The only way for a consumer to avoid paying interest on
purchases--and thus have the benefit of the grace period--is to pay off
the entire balance, including the balance transfer subject to the
discounted rate.
In the consumer testing conducted for the Board prior to the June
2007 Proposal, many participants did not understand how payments would
be allocated and that they could not take advantage of the grace period
on purchases and the discounted rate on balance transfers at the same
time. Model forms were tested that included a disclosure attempting to
explain this to consumers. Nonetheless, testing showed that a
significant percentage of participants still did not fully understand
how payment allocation can affect their interest charges, even after
reading the disclosure tested. In the supplementary information
accompanying the June 2007 Proposal, the Board indicated its plans to
conduct further testing of the disclosure to determine whether the
disclosure could be improved to more effectively communicate to
consumers how payment allocation can affect their interest charges.
In the June 2007 Proposal, the Board proposed to add Sec.
226.5a(b)(15) to require card issuers to explain payment allocation to
consumers. Specifically, the Board proposed that issuers explain how
payment allocation would affect consumers, if an initial discounted
rate were offered on balance transfers or cash advances but not
purchases. The Board proposed that issuers must disclose to consumers
(1) that the initial discounted rate applies only to balance transfers
or cash advances, as applicable, and not to purchases; (2) that
payments will be allocated to the balance transfer or cash advance
balance, as applicable, before being allocated to any purchase balance
during the time the discounted initial rate is in effect; and (3) that
the consumer will incur interest on the purchase balance until the
entire balance is paid, including the transferred balance or cash
advance balance, as applicable.
In response to the June 2007 Proposal, several commenters
recommended the Board test a simplified payment allocation disclosure
that covers cases other than low rate balance transfers offered with a
credit card. In consumer testing conducted for the Board in March 2008,
the Board tested the following payment allocation disclosure:
``Payments may be applied to balances with lower APRs first. If you
have balances at higher APRs, you may pay more in interest because
these balances cannot be paid off until all lower-APR balances are paid
in full
[[Page 5299]]
(including balance transfers you make at the introductory rate).'' Some
participants understood from prior experience that issuers typically
will apply payments to lower APR balances first and the fact that this
method causes them to incur higher interest charges. For those
participants that did not know about payment allocation methods from
prior experience, the disclosure tested was not effective in explaining
payment allocation to them.
In May 2008, the Board and other federal banking agencies proposed
substantive provisions on how issuers may allocate payments. 73 FR
28904, May 19, 2008. Specifically, under that proposal, when different
annual percentage rates apply to different balances, most issuers would
have been required to allocate amounts paid in excess of the minimum
payment using one of three specified methods or a method that is no
less beneficial to consumers. Furthermore, when an account has a
discounted promotional rate balance or a balance on which interest is
deferred, most issuers would have been required to give consumers the
full benefit of that discounted rate or deferred interest plan by
allocating amounts in excess of the minimum payment first to balances
on which the rate is not discounted or interest is not deferred
(except, in the case of a deferred interest plan, for the last two
billing cycles during which interest is deferred). Most issuers also
would have been prohibited from denying consumers a grace period on
non-promotional purchases (if one is offered) solely because they have
not paid off a balance at a promotional rate or a balance on which
interest is deferred.
In the supplementary information to the May 2008 Regulation Z
Proposal, the Board indicated it would withdraw the proposal to require
a card issuer to explain payment allocation to consumers in the table,
if the substantive provisions on payment allocation proposed by the
Board and other federal banking agencies in May 2008 were adopted.
In response to the May 2008 Regulation Z Proposal, several consumer
group commenters suggested that the Board retain a payment allocation
disclosure, even if the substantive provisions on payment allocation
were adopted. Specifically, these commenters suggested that the Board
require issuers to disclose which of the three proposed payment
allocation methods they will use when there is no promotional rate on
the account. Also, these commenters indicated that issuers should be
required to disclose how they apply the minimum payment. These
commenters suggested that the payment allocation disclosures could
appear outside the table required by Sec. 226.5a. Furthermore, these
commenters suggested that some consumers might understand these
disclosures and use them. In addition, these commenters indicated that
disclosure of the payment allocation method would allow consumer groups
to know which method an issuer is using and the consumer groups could
rate the methods, to help consumers understand which card is better for
the consumer.
In consumer testing conducted for the Board after May 2008,
different versions of disclosures explaining payment allocation were
tested, including language adapted from current credit card
disclosures. Before participants were shown any disclosures explaining
payment allocation, they were asked a series of questions designed to
determine whether they had prior knowledge of payment allocation
methods. This portion of the testing consisted of showing a
hypothetical example to participants and asking them, based on their
prior experience, (i) how they believed the card issuer would allocate
the payment and (ii) how the participant would want the payment
allocated. Participants were then shown language explaining how a
hypothetical card issuer would allocate payments. Each disclosure that
was used in testing indicated that the issuer would apply payments to
balances with lower APRs before balances with higher APRs. Consumers
were then shown the same hypothetical example and asked the same series
of questions. More information about the specific disclosures tested
and the results of the testing are available in the December 2008 Macro
Report on Quantitative Testing.
Most participants who answered both questions correctly before
being shown the disclosure, suggesting that they had prior knowledge of
payment allocation, answered the questions correctly after reviewing
the disclosure. Some of these participants, however, gave incorrect
responses to questions that they had answered correctly before
reviewing the disclosures, suggesting that the disclosure was
detrimental to these participants' understanding of payment allocation
practices. Only a small percentage of consumers who did not understand
payment allocation prior to reviewing the disclosure, gave the correct
responses after reviewing the disclosure. None of the versions of the
disclosure that were tested performed significantly better than any of
the others.
The final rule does not require a disclosure regarding payment
allocation in the table. As described above, the consumer testing
conducted on behalf of the Board suggests that disclosures of payment
allocation practices have only a minor positive impact on consumer
comprehension. In addition, the Board and other federal banking
agencies are substantively addressing payment allocation practices in
rules published elsewhere in today's Federal Register. Specifically,
the Board and other federal banking agencies are requiring issuers to
allocate amounts paid in excess of the minimum payment using one of two
specified methods. These substantive rules regarding payment allocation
would permit issuers to use payment allocation methods that may be more
complicated to disclose than the relatively simple example used in
consumer testing, i.e., application of payments to balances with lower
APRs before balances with higher APRs. Consequently, the Board does not
believe that disclosure requirements would be helpful as a supplement
to the substantive rules. Finally, even if consumers were able to
understand payment allocation disclosures, it is unclear whether they
would be able to evaluate whether one payment allocation method is
better than another at the time they are shopping for a credit card
because which payment allocation method is the most beneficial to a
given consumer would depend on how that consumer uses the account.
Additional disclosures. In response to the June 2007 Proposal,
several commenters suggested that the Board require in the table
information about the minimum payment formula, credit limit, any
security interest, reasons terms on the account may change, and all
fees imposed on the account.
1. Minimum payment formula. In response to the June 2007 Proposal,
several consumer groups urged the Board to require issuers to disclose
in the table the minimum payment formula. They believed that this would
allow consumers to understand what portion of principal balance
repayment is being included in the minimum payment. Several industry
commenters supported the Board's proposal not to require the minimum
payment formula in the table. The final rule does not require the
minimum payment formula in the table. In the consumer testing conducted
for the Board, participants did not tend to mention the minimum payment
formula as one of the terms on which they shop for a card. In addition,
minimum payment formulas used by card issuers can be complicated and
[[Page 5300]]
would be hard to describe concisely in the table.
2. Credit limit. Card issuers often state a credit limit in a cover
letter sent with an application or solicitation. Frequently, this
credit limit is not disclosed as a specific amount but, instead, is
stated as an ``up to'' amount, indicating the maximum credit limit for
which a consumer may qualify. The actual credit limit for which a
consumer qualifies depends on the consumer's creditworthiness and other
factors such as income, which is evaluated after the consumer submits
the application or solicitation. As explained in the supplementary
information to the June 2007 Proposal, the Board did not propose to
include the credit limit in the table. As explained above, in most
cases, the credit limit for which a consumer qualifies depends on the
consumer's creditworthiness, which is fully evaluated after the
consumer submits the application or solicitation. In addition, in
consumer testing conducted for the Board prior to the June 2007
Proposal, participants were not generally confused by the ``up to''
credit limit. Most participants understood that the ``up to'' amount on
the solicitation letter was a maximum amount, rather than the amount
the issuer was promising them. Almost all participants tested
understood that the credit limit for which they would qualify depended
on their creditworthiness, such as credit history.
In response to the June 2007 Proposal, several consumer group
commenters suggested that the Board require issuers to disclose the
credit limit in the table required by Sec. 226.5a. Several consumer
groups suggested that the Board include the credit limit in the table
because it is a key factor for many consumers in shopping for a credit
card. These groups also suggested that the Board require issuers to
state a specific credit limit, and not an ``up to'' amount. One
industry commenter also suggested that the Board require issuers to
disclose in the table the range of credit limits that are being
offered. This commenter pointed out that currently credit card issuers
generally have a range of credit limits in mind when marketing a card,
and while the range is often disclosed in the marketing materials, the
maximum and minimum credit lines are not necessarily found in the same
place in the marketing materials or disclosed with the same prominence.
In May 2008, the Board and other federal banking agencies proposed
that financial institutions that make ``firm offers of credit'' as
defined in the FCRA and that advertise multiple APRs or ``up to''
credit limits would be required to disclose in the solicitation the
factors that determine whether a consumer will qualify for the lowest
APR and highest credit limit advertised. See 73 FR 28904, May 19, 2008.
As discussed elsewhere in today's Federal Register, the Board and other
federal banking agencies have not adopted a requirement that creditors
disclose in the solicitation the factors that determine whether a
consumer will qualify for the lowest APR and highest credit limit
advertised.
Similarly, the Board has not included in the final rule a
requirement that issuers disclose the credit limit in either the table
required by Sec. 226.5a or the solicitation. The Board's consumer
testing indicates that consumers generally understand from prior
experience that their credit limits will depend on their credit
histories. Thus, the final rule does not require a disclosure of the
credit limit in the Sec. 226.5a table or the solicitation.
3. Security interest. In response to the June 2007 Proposal,
several consumer group commenters suggested that any required security
interest should be disclosed in the table. These commenters suggest
that if a security interest is required, the disclosure in the table
should describe it briefly, such as ``in items purchased with card'' or
``required $200 deposit.'' These commenters indicated that a security
deposit is a very important consideration in credit shopping,
especially for low-income consumers. In addition, they stated that many
credit cards issued by merchants are secured by the goods that the
consumer purchases, but consumers are often unaware of the security
interest.
The final rule does not require issuers to disclose in the table
any required security interest. Credit card-issuing merchants may
include in their account agreements a security interest in the goods
that are purchased with the card. Any such security interest must be
disclosed at account-opening pursuant to Sec. 226.6(b)(5), as
discussed below. It is not apparent that consumers would shop on
whether a retail card has this type of security interest. Requiring or
allowing this type of security interest to be disclosed in the table
may distract from important information in the table, and contribute to
``information overload.'' Thus, in an effort to streamline the
information that may appear in the table, the final rule does not
include this disclosure in the table.
With respect to security deposits, if a consumer is required to pay
a security deposit prior to obtaining a credit card and that security
deposit is not charged to the account but is paid by the consumer from
separate funds, a card issuer must necessarily disclose to the consumer
that a security deposit is required, so that the consumer knows to
submit the deposit in order to obtain the card. A security deposit in
these instances is likely to be sufficiently highlighted in the
materials accompanying the application or solicitation, and does need
to appear in the table. Nonetheless, the Board recognizes that a
security deposit may need to be highlighted when the deposit is not
paid from separate funds but is charged to the account when the account
is opened, particularly when the security deposit may significantly
decrease consumers' available credit when the account is opened. Thus,
as described above, the final rule provides that if (1) a card
agreement requires payment of a fee for issuance or availability of
credit, or a security deposit, (2) the fee or security deposit will be
charged to the account when it is opened, and (3) the total of those
fees and security deposit equal 15 percent or more of the minimum
credit limit offered with the card, the card issuer must disclose in
the table an example of the amount of the available credit that a
consumer would have remaining after these fees or security deposit are
debited to the account, assuming that the consumer receives the minimum
credit limit offered on the card.
4. Reasons terms may change. In response to the June 2007 Proposal,
several commenters suggested that the Board should require in the table
a disclosure of the reasons issuers may change terms on the account.
Typically, a credit card issuer will reserve the right to change terms
on the account at any time for any reason. These commenters believed
that a disclosure of the issuer's ability to change terms for any
reason at any time would alert consumers to the practice at the outset
of the relationship and could promote competition among issuers
regarding use of the practice.
The Board is not requiring in the table a disclosure of the reasons
issuers may change terms on the account. In consumer testing conducted
by the Board in March 2008, participants were asked to compare two
credit card offers where the offers contained different account terms,
such as APRs and fees. In addition, one of these offers included a
disclosure in the table that the card issuer could change APRs ``at any
time for any reason,'' while the other offer did not include this
disclosure. While about half of the participants indicated they
considered it a positive factor that one of the offers did not include
a disclosure that APRs could change at any time for any reason, this
fact did not
[[Page 5301]]
ultimately impact which offer they chose.
Thus, it does not appear consumers would shop for a credit card
based on this disclosure, and allowing this disclosure in the table may
distract from more important information in the table, and contribute
to ``information overload.'' Nonetheless, the Board believes that it is
important for consumers to be properly informed when terms on their
accounts are changing, and the final rule contains provisions relating
to change-in-terms notices and penalty rate notices that are designed
to achieve this goal. See section-by-section analysis to Sec. 226.9(c)
and (g). In addition, the Board and other federal banking agencies have
issued final rules published elsewhere in today's Federal Register that
generally prohibit the application of increased rates to existing
balances. The Board believes that the substantive protection provided
by these rules mitigates the impact of many rate increases, and
decreases the need for an up-front disclosure of the issuer's
reservation of the right to change terms.
5. Fees. In response to the June 2007 Proposal, several consumer
groups suggested that in addition to the fees that the Board has
proposed to be included in the table, the Board should require that any
fee that a creditor charges to more than 5 percent of its cardholders
be disclosed in the table. In addition, one member of Congress
suggested that issuers be required to disclose in the table fees to pay
by phone or on the Internet.
As described above, under the final rule, issuers will be required
to disclose certain transaction fees and penalty fees, such as cash
advance fees, balance transfer fees, late-payment fees, and over-the-
limit fees, in the table because these fees are frequently paid by
consumers, and consumers in testing and comment letters have indicated
these fees are important for shopping purposes. The Board is not
requiring issuers to disclose other fees in the table, such as fees to
pay by phone or on the Internet, because these fees tend to be imposed
less frequently and are not fees on which consumers tend to shop. In
consumer testing conducted for the Board prior to the June 2007
Proposal, participants tended to mention cash advance fees, balance
transfer fees, late-payment fees, and over-the-limit fees as the most
important fees they would want to know when shopping for a credit card.
In addition, most participants understood that issuers were allowed to
impose additional fees, beyond those disclosed in the table. Thus, the
Board believes it is important to highlight in the table the fees that
most consumers want to know when shopping for a card, rather than
including infrequently-paid fees, to avoid creating ``information
overload'' such that consumers could not easily identify the fees that
are most important to them. In addition, the Board is not imposing a
requirement that issuers disclose in the table any fee that the issuer
charges to more than 5 percent of the cardholders for the card. This
would undercut the uniformity of the table. For example, although most
issuers may charge a certain fee, such as a fee to pay by phone,
requiring issuers to disclose a fee if the issuer charges it to more
than 5 percent of the cardholders for the card, could mean that some
issuers would disclose the fee to pay by phone and some would not, even
though most issuers charge this fee. The Board recognizes that fees can
change over time, and the Board plans to monitor the market and update
the fees required to be disclosed in the table as necessary.
In addition, in response to the June 2007 Proposal, one federal
banking agency suggested that the Board include a disclosure in the
table when an issuer may impose an over-the-limit or other penalty fee
based on circumstances that result solely from the imposition of other
fees or finance charges, or if the contract permits it to impose
penalty fees in consecutive cycles based on a single failure by the
consumer to abide by the terms of the account. The Board is not
requiring this disclosure in the table. The Board believes that
consumers are not likely to consider this information in shopping for a
credit card. Requiring this disclosure in the table may distract from
important information in the table, and contribute to ``information
overload.''
5a(c) Direct Mail and Electronic Applications
5a(c)(1) General
Electronic applications and solicitations. As discussed above, the
Bankruptcy Act amended TILA Section 127(c) to require that
solicitations to open a card account using the Internet or other
interactive computer service must contain the same disclosures as those
made for applications or solicitations sent by direct mail. 15 U.S.C.
1637(c)(7). The interim final rules adopted by the Board in 2001
revised Sec. 226.5a(c) to apply the direct mail rules to electronic
applications and solicitations. In the June 2007 Proposal, the Board
proposed to retain these provisions in Sec. 226.5a(c)(1). (Current
Sec. 226.5a(c) would be revised and renumbered as new Sec.
226.5a(c)(1).) The final rule adopts new Sec. 226.5a(c)(1) as
proposed.
The Bankruptcy Act also requires that the disclosures for
electronic offers must be ``updated regularly to reflect the current
policies, terms, and fee amounts.'' In the June 2007 Proposal, the
Board proposed to revise Sec. 226.5a(c) to implement the ``updated
regularly'' standard in the Bankruptcy Act with regard to the accuracy
of variable rates. As proposed, a new Sec. 226.5a(c)(2) would have
been added to address the accuracy of variable rates in direct mail and
electronic applications and solicitations. This new section would have
required issuers to update variable rates disclosed on mailed
applications and solicitations every 60 days and variable rates
disclosed on applications and solicitations provided in electronic form
every 30 days, and to update other terms when they change. As proposed,
Sec. 226.5a(c)(2) consisted of two subsections.
Section 226.5a(c)(2)(i) would have provided that Sec. 226.5a
disclosures mailed to a consumer must be accurate as of the time the
disclosures are mailed. This section also would have provided that an
accurate variable APR is one that is in effect within 60 days before
mailing. Section 226.5a(c)(2)(ii) would have provided that Sec. 226.5a
disclosures provided in electronic form (except for a variable APR)
must be accurate as of the time they are sent to a consumer's e-mail
address, or as of the time they are viewed by the public on a Web site.
As proposed, this section would have provided that a variable APR is
accurate if it is in effect within 30 days before it is sent, or viewed
by the public. Many of the provisions included in proposed Sec.
226.5a(c)(2) were incorporated from current Sec. 226.5a(b)(1). To
eliminate redundancy, the Board proposed to revise Sec. 226.5a(b)(1)
by deleting Sec. 226.5a(b)(1)(ii), (b)(1)(iii), and comment 5a(c)-1.
In response to the June 2007 Proposal, one commenter suggested that
all variable APR accuracy standards should be simplified to allow for
disclosures to be modified every 60 days. This commenter suggested that
issuers should be able to follow a 60-day standard for accuracy for APR
disclosures no matter how they are delivered to ease the burden of
compliance. This commenter also indicated that issuers often mail a
solicitation for a credit card to a consumer and post the same offer on
a Web site or e-mail it to the consumer. The disclosures for the same
offer could be different, if the rate mailed is 60 days old and the
offer on the Web site is 30
[[Page 5302]]
days old. This commenter also indicated that having to create changes
to the direct mail documents for offers delivered electronically is
inefficient and costly. On the other hand, one consumer group commenter
suggested that all electronic disclosures should be accurate as of the
date when given, including variable rate APRs.
The Board adds Sec. 226.5a(c)(2) and deletes Sec.
226.5a(b)(1)(ii), (b)(1)(iii), and comment 5a(c)-1 as proposed. The
Board believes the 30-day and 60-day accuracy requirements for variable
rates strike an appropriate balance between seeking to ensure consumers
receive updated information and avoiding imposing undue burdens on
creditors. The Board believes it is unnecessary for creditors to
disclose to consumers the exact variable APR in effect on the date the
application or solicitation is accessed by the consumer, because
consumers generally understand that variable rates are subject to
change. Moreover, it would be costly and operationally burdensome for
creditors to comply with a requirement to disclose the exact variable
APR in effect at the time the application or solicitation is accessed.
The obligation to update the other terms when they change ensures that
consumers receive information that is accurate and current, and should
not impose significant burdens on issuers. These terms generally do not
fluctuate with the market like variable rates. In addition, the Board
understands that issuers typically change other terms infrequently,
perhaps once or twice a year.
5a(d) Telephone Applications and Solicitations
5a(d)(1) Oral Disclosure
Section 226.5a(d) specifies rules for providing cost disclosures in
oral applications and solicitations initiated by a card issuer.
Pursuant to TILA Section 127(c)(2), card issuers generally must provide
certain cost disclosures during the oral conversation in which the
application or solicitation is given. Alternatively, an issuer is not
required to give the oral disclosures if the card issuer either does
not impose a fee for the issuance or availability of a credit card (as
described in Sec. 226.5a(b)(2)) or does not impose such a fee unless
the consumer uses the card, provided that the card issuer provides the
disclosures later in a written form. 15 U.S.C. 1637(c)(2).
Consumer-initiated calls. In response to the June 2007 Proposal,
several consumer group commenters suggested that the requirements to
provide oral disclosures in Sec. 226.5a(d)(1) should not be limited to
applications and solicitations initiated by the card issuer. Instead,
the Board should require oral disclosures for all calls resulting in an
application or solicitation for a credit card--even if the consumer
rather than the issuer initiates the telephone call. Consistent with
the statutory requirement in TILA Section 127(c)(2), the final rule in
Sec. 226.5a(d)(1) continues to limit the requirement to provide oral
disclosure to situations where oral applications and solicitations are
initiated by a card issuer. 15 U.S.C. 1637(c)(2).
Written applications. In response to the June 2007 Proposal,
several consumer group commenters suggested that the Board require that
all applications be made in writing. They indicated that while an
issuer could offer the credit card over the phone, the consumer should
be required to sign an application to ensure that he or she actually
applied for the card and not a thief or errant household member. The
final rule does not require all applications for credit cards to be
made in writing. Allowing oral applications and solicitations is
consistent with the statutory provision in TILA Section 127(c)(2). 15
U.S.C. 1637(c)(2).
Available credit disclosure. Currently, under Sec. 226.5a(d)(1),
if the issuer provides the disclosures orally, the issuer must provide
information required to be disclosed under Sec. 226.5a(b)(1) through
(b)(7). This includes information about (1) APRs; (2) fees for issuance
or availability of credit; (3) minimum or fixed finance charges; (4)
transaction charges for purchases; (5) grace period on purchases; (6)
balance computation method; and (7) as applicable, a statement that
charges incurred by use of the charge card are due when the periodic
statement is received.
In the June 2007 Proposal, the Board did not propose to revise
Sec. 226.5a(d)(1). In response to the June 2007 Proposal, some
consumer group commenters urged the Board to revise Sec. 226.5a(d)(1)
to require issuers that are marketing credit cards by telephone to
disclose certain additional information to consumers at the time of the
phone call, such as the cash advance fee, the late-payment fee, the
over-the-limit fee, the balance transfer fee, information about penalty
rates, any fees for required insurance, and the disclosure about
available credit in proposed Sec. 226.5a(b)(16).
In the May 2008 Proposal, the Board proposed to amend Sec.
226.5a(d)(1) to require that if an issuer provides the oral
disclosures, the issuer must also disclose orally, if applicable, the
information about available credit in proposed Sec. 226.5a(b)(16)
pursuant to the Board's authority under TILA Section 127(c)(5) to add
or modify Sec. 226.5a disclosures as necessary to carry out the
purposes of TILA. 15 U.S.C. 1637(c)(5). In response to the May 2008
Proposal, commenters generally supported this aspect of the proposal.
The final rule amends Sec. 226.5a(d)(1), as proposed. Currently,
issuers that provide the oral disclosures must inform consumers about
the fees for issuance and availability of credit that are applicable to
the card. The Board believes that the information about available
credit would complement this disclosure, by disclosing to consumers the
impact of these fees on the available credit.
Other oral disclosures. In response to the June 2007 Proposal,
several consumer groups suggested that issuers should be required to
provide all of the disclosures required by proposed Sec. 226.5a(b)(1)
through (b)(17) orally with respect to an oral application or
solicitation, including cash advance fees, late-payment fees, over-the-
limit fees, balance transfer fees, and fees for required insurance. In
the supplementary information to the May 2008 Proposal, the Board did
not propose to require issuers to provide orally a disclosure of the
fees described above. The Board was concerned that requiring this
information in oral conversations about credit cards would lead to
``information overload'' for consumers. In response to the May 2008
Proposal, consumer groups still believed that consumers should receive
this information when making the decision whether to apply for a card.
They further suggested that the solution to ``information overload''
was to require a written application to be made whenever there is a
telephone credit card application or solicitation. As explained above,
the final rule does not require applications for credit cards to be
made in writing. Allowing oral applications and solicitations is
consistent with the statutory provision in TILA Section 127(c)(2). 15
U.S.C. 1637(c)(2).
5a(d)(2) Alternative Disclosure
Section 226.5a(d) specifies rules for providing cost disclosures in
oral applications and solicitations initiated by a card issuer. Card
issuers generally must provide certain cost disclosures orally during
the conversation in which the application or solicitation is
communicated to the consumer. Alternatively, an issuer is not required
to give the oral disclosures if the card
[[Page 5303]]
issuer either does not impose a fee for the issuance or availability of
a credit card (as described in Sec. 226.5a(b)(2)) or does not impose
such a fee unless the consumer uses the card, provided that the card
issuer provides the disclosures later in a written form. Specifically,
the issuer must provide the disclosures required by Sec. 226.5a(b) in
a tabular format in writing within 30 days after the consumer requests
the card (but in no event later than the delivery of the card), and
disclose the fact that the consumer need not accept the card or pay any
fee disclosed unless the consumer uses the card. In the June 2007
Proposal, the Board proposed to add comment 5a(d)-2 to indicate that an
issuer may disclose in the table that the consumer is not required to
accept the card or pay any fee unless the consumer uses the card.
Account is not approved. In response to the June 2007 Proposal, one
commenter suggested that the Board clarify that the written alternative
disclosures would only be necessary if the application for the account
is approved. The Board notes that current comment 5a(d)-1 indicates
that the oral and alternative written disclosure requirements do not
apply in situations where no card will be issued because, for example,
the consumer indicates that he or she does not want the card, or the
card issuer decides either during the telephone conversation or later
not to issue the card. This comment is retained in the final rule.
Substitution of account-opening table for table required by Sec.
226.5a. In response to the June 2007 Proposal, one commenter suggested
that the Board clarify that the account-opening table may substitute
for the written alternative disclosures set forth in Sec.
226.5a(d)(2). In the June 2007 Proposal, comment 5a-2 provided, in
part, that issuers in complying with Sec. 226.5a(d)(2) may substitute
the account-opening table in lieu of the disclosures required by Sec.
226.5a, if the issuer provides the disclosures required by Sec. 226.6
on or with the application or solicitation. See proposed Sec.
226.6(b)(4). Because the written alternative disclosures are not
provided with the application or solicitation, the Board recognizes
that proposed comment 5a-2 might have led to confusion about whether
the account-opening table described in Sec. 226.6(b)(1) may be
substituted for the written alternative disclosures. In the final rule,
the Board has revised comment 5a-2 to delete the reference to the
alternative written disclosures in Sec. 226.5a(d). Instead, the Board
adds new comment 5a(d)-3 to indicate that issuers may substitute the
account-opening table described in Sec. 226.6(b)(1) in lieu of the
alternative written disclosures described in Sec. 226.5a(d)(2).
Mailing of written alternative disclosures. In response to the June
2007 Proposal, several consumer group commenters suggested that the
Board require issuers to provide the written alternative disclosures in
the mailing that delivers the card, and should impose requirements that
will ensure that the disclosures are prominent. Otherwise, issuers may
make the written alternative disclosures in separate mailings, in an
obscure part of the cover letter with the card, or in other ways that
are designed not to attract consumers' attention. The final rule does
not contain this provision. The Board expects that issuers will
substitute the account-opening table described in Sec. 226.6(b)(1) in
lieu of the written alternative disclosures described in Sec.
226.5a(d)(2). Card issuers typically mail account-opening disclosures
with the card.
Right to reject account. As described above, an issuer is not
required to give the oral disclosures if the card issuer either does
not impose a fee for the issuance or availability of a credit card (as
described in Sec. 226.5a(b)(2)) or does not impose such a fee unless
the consumer uses the card, provided that the card issuer provides the
disclosures later in a written form. 15 U.S.C. 1637(c)(2). In the final
rule, Sec. 226.5a(d)(2) is revised to be consistent with the right to
reject the account given in Sec. 226.5(b)(1)(iv) with respect to
account-opening disclosures. As discussed in the section-by-section
analysis to Sec. 226.5(b)(1)(iv), the final rule amends Sec.
226.5(b)(1)(iv) to provide that creditors may collect or obtain the
consumer's promise to pay a membership fee before the account-opening
disclosures are provided, if the consumer can reject the plan after
receiving the disclosures. In addition, as discussed in the section-by-
section analysis to Sec. 226.6(b)(2)(xiii), the final rule also
requires creditors to disclose in the account-opening table described
in Sec. 226.6(b)(1) the right to reject described in Sec.
226.5(b)(1)(iv) if required fees for the availability or issuance of
credit, or a security deposit, equal 15 percent or more of the actual
credit limit offered on the account at account opening. See Sec.
226.6(b)(2)(xiii).
The Board expects that issuers will provide the account-opening
table described in Sec. 226.6(b)(1) in lieu of the alternative written
disclosures described in Sec. 226.5a(d)(2). The final rule revises
comment 5a(d)-2 to specify that the right to reject the plan referenced
in Sec. 226.5a(d)(2) with respect to the alternative written
disclosures is the same as the right to reject the plan described in
Sec. 226.5(b)(1)(iv) with respect to account-opening disclosures. An
issuer may substitute the account-opening summary table described in
Sec. 226.6(b)(1) in lieu of the written alternative disclosures
specified in Sec. 226.5a(d)(2)(ii). In that case, the disclosure about
the right to reject specified in Sec. 226.5a(d)(2)(ii)(B) must appear
in the table, if the issuer is required to do so pursuant to Sec.
226.6(b)(2)(xiii). Otherwise, the disclosure specified in Sec.
226.5a(d)(2)(ii)(B) may appear either in or outside the table
containing the required credit disclosures.
5a(d)(3) Accuracy
As proposed in June 2007 Proposal, Sec. 226.5a(d)(3) would have
provided guidance on the accuracy of telephone disclosures. Current
comment 5a(b)(1)-3 specifies that for variable-rate disclosures in
telephone applications and solicitations, the card issuer must provide
the rates currently applicable when oral disclosures are provided. For
the alternative disclosures under Sec. 226.5a(d)(2), an accurate
variable APR is one that is: (1) In effect at the time the disclosures
are mailed or delivered; (2) in effect as of a specified date (which
rate is then updated from time to time, for example, each calendar
month); or (3) an estimate in accordance with Sec. 226.5(c). Current
comment 5a(b)(1)-3 was proposed to be moved to Sec. 226.5a(d)(3) under
the June 2007 Proposal, except that the option of estimating a variable
APR would have been eliminated as the least meaningful of the three
options. Proposed Sec. 226.5a(d)(3) also would have specified that if
an issuer discloses a variable APR as of a specified date, the issuer
must update the rate on at least a monthly basis, the frequency with
which variable rates on most credit card products are adjusted. The
Board also proposed to amend Sec. 226.5a(d)(3) to specify that oral
disclosures under Sec. 226.5a(d)(1) must be accurate when given,
consistent with the requirement in Sec. 226.5(c) that disclosures must
reflect the terms of the legal obligation between the parties. For the
alternative disclosures, the proposal would have specified that terms
other than variable APRs must be accurate as of the time they are
mailed or delivered.
In response to the June 2007 Proposal, one commenter indicated that
the accuracy standard for oral disclosures could potentially require an
issuer to update rates on a daily basis. This commenter believed that
this proposed rule would create unnecessary burden
[[Page 5304]]
on creditors and would provide little benefit to consumers since the
rates do not generally vary by much from one day to the next. The Board
understands that issuers typically adjust variable rates for most
credit card products on a monthly basis, so as a practical matter,
issuers will only need to update the oral disclosures on a monthly
basis in order to meet the requirement that oral disclosures be
accurate when given. Section 226.5a(d)(3) is adopted as proposed.
5a(e) Applications and Solicitations Made Available to General Public
TILA Section 127(c)(3) and Sec. 226.5a(e) specify rules for
providing disclosures in applications and solicitations made available
to the general public such as ``take-one'' applications and
applications in catalogs or magazines. 15 U.S.C. 1637(c)(3). These
applications and solicitations must either contain: (1) The disclosures
required for direct mail applications and solicitations, presented in a
table; (2) a narrative that describes how finance charges and other
charges are assessed; or (3) a statement that costs are involved, along
with a toll-free telephone number to call for further information.
Narrative that describes how finance charges and other charges are
assessed. TILA Section 127(c)(3)(D) and Sec. 226.5a(e)(2) allow
issuers to meet the requirements of Sec. 226.5a for take-one
applications and solicitations by giving a narrative description of
certain account-opening disclosures (such as information about how
finance charges and other charges are assessed), a statement that the
consumer should contact the card issuer for any change in the required
information and a toll-free telephone number or a mailing address for
that purpose. 15 U.S.C. 1637(c)(3)(D). Currently, this information does
not need to be in the form of a table, but may be a narrative
description, as is also currently allowed for account-opening
disclosures. In the June 2007 Proposal, the Board proposed to require
that certain account-opening information (such as information about key
rates and fees) must be given in the form of a table. Therefore, the
Board also proposed that card issuers give this same information in a
tabular form in take-one applications and solicitations. Specifically,
the Board proposed to delete Sec. 226.5a(e)(2) and comments 5a(e)(2)-1
and -2 as obsolete. Under the proposal, card issuers that provide cost
disclosures in take-one applications and solicitations would have been
required to provide the disclosures in the form of a table, for which
they could use the account-opening summary table. See Sec.
226.5a(e)(1) and comment 5a-2. As discussed in the section-by-section
analysis to Sec. 226.6(b)(1), the final rule requires creditors to
provide certain account-opening information in the form of a table.
Accordingly, the Board deletes current Sec. 226.5a(e)(2) and current
comments 5a(e)(2)-1 and -2 as proposed, pursuant to the Board's
authority under TILA Section 127(c)(5). 15 U.S.C. 1637(c)(5). Current
Sec. 226.5a(e)(3) and comment 5a(e)(3)-1 are renumbered accordingly.
5a(e)(4) Accuracy
For applications or solicitations that are made available to the
general public, if a creditor chooses to provide the cost disclosures
on the application or solicitation, Sec. 226.5a(b)(1)(ii) currently
requires that any variable APR disclosed must be accurate within 30
days before printing. In the June 2007 Proposal, the Board proposed to
move this provision to Sec. 226.5a(e)(4). In addition, proposed Sec.
226.5a(e)(4) also would have specified that other disclosures must be
accurate as of the date of printing. The final rule adopts Sec.
226.5a(e)(4) and accompanying commentary as proposed.
5a(f) In-Person Applications and Solicitations
Card issuer and person extending credit are not the same. Existing
Sec. 226.5a(f) and its accompanying commentary contain special charge
card rules that address circumstances in which the card issuer and the
person extending credit are not the same person. (These provisions
implement TILA Section 127(c)(4)(D), 15 U.S.C. 1637(c)(4)(D).) The
Board understands that these types of cards are no longer being
offered. Thus, in the June 2007 Proposal, the Board proposed to delete
these provisions and Model Clause G-12 from Regulation Z as obsolete,
recognizing that the statutory provision in TILA Section 127(c)(4)(D)
will remain in effect if these products are offered in the future. The
Board also requested comment on whether these provisions should be
retained in the regulation. Under the June 2007 Proposal, a commentary
provision referencing the statutory provision would have been added to
Sec. 226.5(d), which addresses disclosure requirements for multiple
creditors. See section-by-section analysis to Sec. 226.5(d). The final
rule deletes current Sec. 226.5a(f), accompanying commentary, and
Model Clause G-12 as proposed.
In-person applications and solicitations. In the June 2007
Proposal, the Board proposed a new Sec. 226.5a(f) and accompanying
commentary to address in-person applications and solicitations
initiated by the card issuer. For in-person applications, a card issuer
initiates a conversation with a consumer inviting the consumer to apply
for a card account, and if the consumer responds affirmatively, the
issuer takes application information from the consumer. For example,
in-person applications include instances in which a retail employee, in
the course of processing a sales transaction using the customer's bank
credit card, invites the customer to apply for the retailer's credit
card and the customer submits an application.
For in-person solicitations, a card issuer makes an in-person offer
to a consumer to open an account that does not require an application.
For example, in-person solicitations include instances where a bank
employee offers a preapproved credit card to a consumer who came into
the bank to open a checking account.
Currently, in-person applications in response to an invitation to
apply are exempted from Sec. 226.5a because they are considered
applications initiated by consumers. (See current comments 5a(a)(3)-2
and 5a(e)-2.) On the other hand, in-person solicitations are not
specifically addressed in Sec. 226.5a. Neither in-person applications
nor solicitations are specifically addressed in TILA.
In the June 2007 Proposal, the Board proposed to cover in-person
applications and solicitations under Sec. 226.5a, pursuant to the
Board's authority under TILA Section 105(a) to make adjustments that
are necessary to effectuate the purposes of TILA. 15 U.S.C. 1604(a). In
the June 2007 Proposal, existing comment 5a(a)(3)-2 (which would be
moved to comment 5a(a)(5)-1) and comment 5a(e)-2 would have been
revised to be consistent with Sec. 226.5a(f). No comments were
received on these proposed changes.
Thus, the Board adopts these changes as proposed pursuant to its
TILA Section 105(a) authority. 15 U.S.C. 1604(a). Requiring in-person
applications and solicitations to include credit terms under Sec.
226.5a would help serve TILA's purpose to provide meaningful disclosure
of credit terms so that a consumer will be able to compare more readily
the various credit terms available to him or her, and avoid the
uninformed use of credit. 15 U.S.C. 1601(a). Also, the Board
understands that card issuers routinely provide Sec. 226.5a
disclosures in these circumstances; therefore, any additional
compliance burden would be minimal.
Card issuers must provide the disclosures required by Sec. 226.5a
in the form of a table, and those disclosures
[[Page 5305]]
must be accurate either when given (consistent with the direct mail
rules) or when printed (consistent with one option for the take-one
rules). See Sec. 226.5a(c) and (e)(1). These two alternatives provide
issuers flexibility, while also providing consumers with the
information they need to make informed credit decisions.
5a(g) Balance Computation Methods Defined
TILA Section 127(c)(1)(A)(iv) calls for the Board to name not more
than five of the most common balance computation methods used by credit
card issuers to calculate the balance for purchases on which finance
charges are computed. 15 U.S.C. 1637(c)(1)(A)(iv). If issuers use one
of the balance computation methods named by the Board, the issuer must
disclose that name of the balance computation method as part of the
disclosures required by Sec. 226.5a and is not required to provide a
description of the balance computation method. If the issuer uses a
balance computation method that is not named by the Board, the issuer
must disclose a detailed explanation of the balance computation method.
See current Sec. 226.5a(b)(6). Currently, the Board has named four
balance computation methods: (1) Average daily balance (including new
purchases) or (excluding new purchases); (2) two-cycle average daily
balance (including new purchases) or (excluding new purchases); (3)
adjusted balance; and (4) previous balance. In the June 2007 and May
2008 Proposals, the Board proposed to retain these four balance
computation methods.
In response to the June 2007 Proposal, several industry commenters
suggested that the Board add the ``daily balance method'' to the list
of balance computation methods listed in the regulation. These
commenters indicated that the ``daily balance method'' is one of the
most common balance computation methods used by card issuers.
Currently, comment 5a(g)-1 provides that card issuers using the daily
balance method may disclose it using the name average daily balance
(including new purchases) or average daily balance (excluding new
purchases), as appropriate. Alternatively, such card issuers may
explain the method. The final rule revises Sec. 226.5a(g) to include
daily balance method as one of the balance computation methods named in
the regulation. As a result, card issuers may disclose ``daily balance
method'' as the name of the balance computation method used as part of
the disclosures required by Sec. 226.5a, and are not required to
provide a description of the balance computation method. The Board
deletes current comment 5a(g)-1, which provides that card issuers using
the daily balance method may disclose it using the name average daily
balance (including new purchases) or average daily balance (excluding
new purchases), as appropriate. See also Sec. 226.6(b)(2)(vi) and
Sec. 226.7(b)(5), which allow creditors using balance calculation
methods identified in Sec. 226.5a(g) to provide abbreviated
disclosures at account opening and on periodic statements.
In addition, in response to the May 2008 Proposal, several industry
commenters requested that if the proposal by the Board and other
federal banking agencies to prohibit certain issuers from using the
two-cycle balance computation method was adopted, the Board should
include a cross reference in Sec. 226.5a(g) indicating that some
issuers are not allowed to use the two-cycle balance computation method
described in Sec. 226.5a(g). Under rules issued by the Board and other
federal banking agencies published elsewhere in today's Federal
Register, most credit card issuers are prohibited from using the two-
cycle balance computation method described in Sec. 226.5a(g). Comment
5a(g)-1 is amended to specify that some issuers may be prohibited from
using the two-cycle balance computation method described in Sec.
226.5a(g)(2)(i) and (ii) and to cross reference the rules issued by the
federal banking agencies, as described above.
Section 226.6 Account-Opening Disclosures
TILA Section 127(a), implemented in Sec. 226.6, requires creditors
to provide information about key credit terms before an open-end plan
is opened, such as rates and fees that may be assessed on the account.
Consumers' rights and responsibilities in the case of unauthorized use
or billing disputes are also explained. 15 U.S.C. 1637(a). See also
Model Forms G-2 and G-3 in Appendix G to part 226. For a discussion
about account-opening disclosure rules and format requirements, see the
section-by-section analysis to Sec. 226.6(a) for HELOCs subject to
Sec. 226.5b, and Sec. 226.6(b) for open-end (not home-secured) plans.
6(a) Rules Affecting Home-Equity Plans
Account-opening disclosure and format requirements for HELOCs
subject to Sec. 226.5b were unaffected by the June 2007 Proposal,
consistent with the Board's plan to review Regulation Z's disclosure
rules for home-secured credit in a separate rulemaking. To facilitate
compliance, the substantively unrevised rules applicable only to HELOCs
are grouped together in Sec. 226.6(a), as discussed in this section-
by-section analysis to Sec. 226.6(a). (See redesignation table below.)
Commenters supported the proposed organizational changes to ease
compliance. All disclosure requirements applying exclusively to HELOCs
subject to Sec. 226.5b are set forth in Sec. 226.6(a), as proposed.
Rules relating to the disclosure of finance charges currently in Sec.
226.6(a)(1) through (a)(4) are moved to Sec. 226.6(a)(1)(i) through
(a)(1)(iv); those rules and accompanying official staff interpretations
are substantively unchanged. Rules relating to the disclosure of other
charges are moved from current Sec. 226.6(b) to Sec. 226.6(a)(2), and
specific HELOC-related disclosure requirements are moved from current
Sec. 226.6(e) to Sec. 226.6(a)(3). Rules of general applicability to
open-end credit plans relating to security interests and billing error
disclosure requirements are moved without substantive change from
current Sec. 226.6(c) and (d) (proposed as Sec. 226.6(c)(1) and
(c)(2) in the June 2007 Proposal) to Sec. 226.6(a)(4) and (a)(5), to
ease compliance.
Several technical revisions to commentary provisions described in
the June 2007 Proposal are adopted for clarity and in some cases for
consistency with corresponding comments to Sec. 226.6(b)(4), which
addresses rate disclosures for open-end (not home-secured) plans; these
revisions are not intended to be substantive. See, for example,
comments 6(a)(1)(ii)-1 and 6(b)(4)(i)(B)-1, which address disclosing
ranges of balances. For the reasons set forth in the section-by-section
analysis to Sec. 226.6(b)(3), the Board updates references to ``free-
ride period'' as ``grace period'' in the regulation and commentary to
Sec. 226.6(a), without any intended substantive change.
Also, commentary provisions that currently apply to open-end plans
generally but are inapplicable to HELOCs are not included in the
commentary provisions related to Sec. 226.6(a), as proposed. For
example, guidance in current 6(a)(2)-2 regarding a creditor's general
reservation of the right to change terms is not included in comment
6(a)(1)(ii)-2, because Sec. 226.5b(f)(1) prohibits ``rate-
reservation'' clauses for HELOCs.
Model forms and clauses. Revisions to current forms and a new form
that creditors offering HELOCs may use are adopted as proposed. In
response to comments received on the June 2007 Proposal, the Board
proposed in May 2008 to add a new paragraph to Appendix G-1 (Balance
Computation
[[Page 5306]]
Methods Model Clauses) to part 226 to describe the daily balance
computation method. A new Appendix G-1(A) to part 226 was also proposed
for creditors offering open-end (not home-secured) plans. See section-
by-section analysis to Sec. 226.6(b)(4)(i)(D).
For the reasons set forth in the May 2008 Proposal, the Board is
adopting the revisions to Appendix G-1 to part 226, retitled as Balance
Computation Methods Model Clauses (Home-equity Plans) to ease
compliance, as proposed. Comment App. G-1 is revised to clarify that a
creditor offering HELOCs may use the model clauses in Appendix G-1 or
G-1(A), at the creditor's option.
In addition, for the reasons discussed in the section-by-section
analysis to Sec. Sec. 226.12 and 226.13, model language has been added
to Model Clause G-2 (Liability for Unauthorized Use Model Clause),
Model Form G-3 (Long-form Billing-error Rights Model Form Home-equity
Plans) and Model Form G-4 (Alternative Billing-error Rights Model Form
Home-equity Plans) regarding consumers' use of electronic communication
relating to unauthorized transactions or billing disputes. Like with
Model Clauses G-1 and G-1(A), the Board is adding new forms G-3(A) and
G-4(A) for creditors offering open-end (not home-secured) plans, which
a creditor offering HELOCs may use, at the creditor's option. See
comment app. G-3.
6(b) Rules Affecting Open-end (not Home-secured) Plans
All account-opening disclosure requirements applying to open-end
(not home-secured) plans are set forth in Sec. 226.6(b). The Board is
adopting two significant revisions to account-opening disclosures for
open-end (not home-secured) plans, which are set forth in Sec.
226.6(b), as proposed. The revisions (1) require a tabular summary of
key terms to be provided before an account is opened (see Sec.
226.6(b)(1) and (b)(2)), and (2) reform how and when cost disclosures
must be made (see Sec. 226.6(b)(3) for content, Sec. 226.5(b) and
Sec. 226.9(c) for timing).
In response to comments received on the June 2007 Proposal, Sec.
226.6(b) has been reorganized in the final rule for clarity. Rules
relating to the account-opening tabular summary are set forth in Sec.
226.6(b)(1) and (b)(2) and mirror, to the extent applicable, the
organization and text of disclosure requirements for the tabular
summary required to accompany credit or charge card applications or
solicitations in Sec. 226.5a. General disclosure requirements about
costs imposed as part of the plan are set forth in Sec. 226.6(b)(3),
and additional requirements for disclosing rates are at Sec.
226.6(b)(4). Rules about disclosures for optional credit insurance or
debt cancellation or suspension coverage are set forth at Sec.
226.6(b)(5). Rules of general applicability to open-end credit plans
relating to security interests and billing error disclosure
requirements, also are moved to Sec. 226.6(b)(5) without substantive
change from current Sec. 226.6(c) and (d) (proposed as Sec.
226.6(c)(1) and (c)(2) in the June 2007 Proposal), to ease compliance.
6(b)(1) Format for Open-end (not Home-secured) Plans
As provided by Regulation Z, creditors may, and typically do,
include account-opening disclosures as a part of an account agreement
document that also contains other contract terms and state law
disclosures. The agreement is typically lengthy and in small print. The
June 2007 Proposal would have introduced format requirements for
account-opening disclosures for open-end (not home-secured) plans at
Sec. 226.6(b)(4), based on proposed format and content requirements
for the tabular disclosures provided with direct mail applications for
credit and charge cards under Sec. 226.5a. Proposed forms under G-17
in Appendix G would have illustrated the account-opening tables. The
proposal sought to summarize key information most important to informed
decision-making in a table similar to that required on or with credit
and charge card applications and solicitations. TILA disclosures that
are typically lengthy or complex and less often utilized in determining
how to use an account, such as how variable rates are determined, could
continue to be integrated with the account agreement terms but could
not be placed in the table. Uniformity in the presentation of key
information promotes consumers' ability to compare account terms.
Commenters generally supported format rules that focus on
presenting essential information in a simplified way. Consumer groups
supported the use of a tabular format similar to the summary table
required under Sec. 226.5a, to ease consumers' ability to find
important information in a uniform format, and as a means for consumers
to compare terms that are offered with terms they actually receive. A
state consumer protection body urged the Board to develop a glossary
and, along with some consumer groups, to mandate use of uniform terms
so that creditors use the same term to identify fees.
Industry commenters voiced a number of concerns about the account-
opening summary table. Some suggested the purposes of TILA disclosures
are different at application and account-opening, and a table at
account-opening is redundant since consumers have already made their
credit decisions. Some suggested that other techniques to summarize
information, such as an index or table of contents, should be
permitted. In particular, industry commenters asked for additional
flexibility to disclose risk-based APRs outside the summary table, such
as in a welcome letter or documents accompanying the account agreement,
or on a sales receipt when an open-end plan is established at a retail
store in connection with the purchase of goods or services. Others
believed the information was too simple and could be misleading to
consumers and in any event would quickly become outdated. To combat
out-of-date disclosures, one creditor suggested requiring a ``real
time'' version of account terms on-line, with a paper copy available
upon request.
For the reasons stated in this section-by-section analysis to Sec.
226.6, the Board is adopting the formatting requirements generally as
proposed, with revisions noted below. In response to commenters'
suggestions, the regulatory text (moved from proposed Sec. 226.6(b)(4)
to Sec. 226.6(b)(1) and (b)(2)) more closely tracks the regulatory
text in Sec. 226.5a, to ease compliance.
The Board's revisions to rules affecting open-end (not home-
secured) plans contain a limited number of specific words or phrases
that creditors are required to use. The Board, however, has not adopted
a glossary of terms nor mandated use of terms as defined in such a
glossary, to provide flexibility to creditors. Although the Board is
supportive of creditors that provide real-time account agreements on
their Web sites, the Board believes requiring all creditors to do so
would be overly burdensome at this time, and has not adopted such a
requirement.
Open-end (not home-secured) plans not involving a credit card. The
June 2007 Proposal would have applied the tabular summary requirement
to all open-end credit products, except HELOCs. Such products include
credit card accounts, traditional overdraft credit plans, personal
lines of credit, and revolving plans offered by retailers without a
credit card.
In response to the June 2007 Proposal, some industry commenters
asked the Board to limit any new disclosure rules to credit card
accounts. They acknowledged that credit card accounts typically have
complex terms, and a tabular summary is an effective way to present key
disclosures. In contrast, these commenters noted that other
[[Page 5307]]
open-end (not home-secured) products such as personal lines of credit
or overdraft plans have very few of the cost terms required to be
disclosed. Alternatively, if the Board continued to apply the new
requirements to open-end plans other than HELOCs, commenters asked that
the Board consider publishing model forms to ease compliance.
The Board believes that the benefits to consumers from receiving a
concise and uniform summary of rates and important fees for these other
types of open-end plans outweigh the costs, such as developing the new
disclosures and revising them as needed. In the May 2008 Proposal, the
Board proposed Sample Form 17(D), which would have illustrated
disclosures for an open-end (not home-secured) plan not involving a
credit card, to address commenters' requests for guidance.
Some consumer groups supported the requirement for a summary table
for open-end (not home-secured) plans that are not credit card
accounts. They believe the summary table will help consumers understand
the terms of their credit agreements. An industry commenter also
supported a model form for creditors' use but suggested adding
additional terms to the form such as a fee for returned payment, or
variable-rate disclosures. One industry commenter strongly objected to
the requirement for a summary table. This commenter believes creditors
will incur substantial costs to comply with the requirement and the
commenter was not convinced that a tabular format is the only way
creditors may provide accurate and meaningful disclosures.
For the reasons set forth above, the final rule, pursuant to the
Board's TILA Section 105(a) authority, applies the tabular summary
requirement to all open-end credit products, except HELOCs, as
proposed. Sample Form 17(D) is adopted, with some revisions. The name
of the balance calculation method and billing error summary were
inadvertently omitted in the May 2008 Proposal below the table in the
proposed sample form, and they properly appear in the final form. The
Board notes that Sec. 226.6(b)(2) requires creditors to disclose in
the account-opening table the items in that section, to the extent
applicable. Thus, for example, if a creditor offered an overdraft
protection line of credit with a variable rate, the creditor must
provide the applicable variable-rate disclosures, even though such
disclosures do not appear in Sample Form 17(D).
Comparison to summary table provided with credit card applications.
The summary tables proposed in June 2007 to accompany credit and charge
card applications and solicitations and to be provided at account
opening were similar but not identical. Under the June 2007 Proposal,
at the card issuer's option, a card issuer providing a table that
satisfies the requirements of Sec. 226.6 could satisfy the
requirements of Sec. 226.5a by providing the account-opening table.
In response to the June 2007 Proposal, some commenters urged the
Board to require identical disclosure requirements under Sec. 226.6
and Sec. 226.5a. Others supported greater flexibility. As discussed
below, the disclosure requirements for the two summary tables remain
very similar but are not identical in all respects. The final rule
includes comment 6(b)(1)-1, adopted substantially as proposed as
comment 6(b)(4)-1, which provides guidance on how the summary table for
Sec. 226.5a differs from the table for Sec. 226.6. For clarity, rules
under Sec. 226.5a that do not apply to account-opening disclosures are
specifically noted.
6(b)(1)(iii) Fees that Vary by State
For disclosures required to be provided with credit card
applications and solicitations, if the amount of a fee such as a late-
payment fee or returned-payment fee varies by state, card issuers
currently may disclose a range of fees and a statement that the amount
of the fee varies by state. See Sec. 226.5a(a)(4). In the June 2007
Proposal, the Board noted that a goal of the proposed account-opening
summary table is to provide to a consumer specific key information
about the terms of the account and that permitting creditors to
disclose a range of fees seems not to meet that standard. Thus, the
proposal would have required creditors to disclose the amount of the
fee applicable to the consumer. The Board solicited comment on whether
there are any operational issues presented by the proposal.
One commenter discussed operational issues for creditors that are
licensed to do business under state law and must vary late-payment
fees, for example, according to state law. Although the letter focused
on late-payment fee disclosures on the periodic statement, one
alternative suggested to stating fees applicable to the consumer's
account was to permit such creditors to refer to a disclosure where
fees arranged by applicable states would be identified.
Upon further consideration of the issues related to disclosing fees
in the account-opening table fees that vary by state, the Board is
adopting a rule that requires creditors to disclose specific fees
applicable to the consumer's account in the account-opening table, with
a limited exception. In general, a creditor must disclose the fee
applicable to the consumer's account; listing all fees for multiple
states in the account-opening summary table is not permissible. The
Board is concerned that such an approach would detract from the purpose
of the table: To provide key information in a simplified way.
Currently, creditors licensed to do business under state laws
commonly disclose at account opening as part of the account agreement
or disclosure statement a matrix of fees applicable to residents of
various states. Creditors that provide account-opening disclosures by
mail can more easily generate account-opening summaries with rates and
specific fees that apply to the consumer. However, for creditors with
retail stores in a number of states, it is not practicable to require
fee-specific disclosures to be provided when an open-end (not home-
secured) plan is established in person in connection with the purchase
of goods or services. If the Board were to impose such a requirement,
retail stores may need to keep on hand copies of disclosures for all
states, because consumers from one state can, and commonly do, shop and
obtain credit cards at retail locations in other states. In addition, a
retail store creditor would need to rely on its employees to determine
at the point of sale which state's disclosures should be provided to
each consumer who opens an open-end (not home-secured) plan.
Thus, the final rule provides in Sec. 226.6(b)(1)(iii) that
creditors imposing fees such as late-payment fees or returned-payment
fees that vary by state and providing the disclosures required by Sec.
226.6(b) in person at the time the open-end (not home-secured) plan is
established in connection with financing the purchase of goods or
services may, at the creditor's option, disclose in the account-opening
table either (1) the specific fee applicable to the consumer's account,
or (2) the range of the fees, if the disclosure includes a statement
that the amount of the fee varies by state and refers the consumer to
the account agreement or other disclosure provided with the account-
opening summary table where the amount of the fee applicable to the
consumer's account is disclosed, for example in a list of fees for all
states. Currently, creditors that establish open-end plans at point of
sale provide account-opening disclosures at point of sale before the
first transaction, and commonly provide an additional set of account-
opening disclosures when, for example, a credit card is sent to the
[[Page 5308]]
consumer. The Board believes that this practice would continue and that
the account-opening disclosures provided later, for example with the
credit card, would contain the specific rates and fees applicable to
the consumer's account, as the creditor must provide for consumers who
open accounts other than at the point of sale.
6(b)(2) Required Disclosures for Account-opening Table for Open-end
(not Home-secured) Plans
Fees. Under the June 2007 Proposal, fees to be highlighted in the
account-opening summary were identified in Sec. 226.6(b)(4)(iii). The
proposed list of fees and categories of fees was intended to be
exclusive. The Board noted that it considered these fees, among the
charges that TILA covers, to be the most important fees, at least in
the current marketplace, for consumers to know about before they start
to use an account. The fees identified in proposed Sec.
226.6(b)(4)(iii) included charges that a consumer could incur and which
a creditor likely would not otherwise be able to disclose in advance of
the consumer engaging in the behavior that triggers the cost, such as
fees triggered by a consumer's use of a cash advance check or by a
consumer's late payment. Transaction fees imposed for transactions in a
foreign currency or that take place in a foreign country also would
have been among the fees to be disclosed at account opening.
Industry commenters generally supported the proposal. Some consumer
groups believe it would be a mistake to adopt a static list of fees to
be disclosed in the account-opening table. They stated the credit card
market is dynamic, and a static list would encourage creditors to
establish new fees that would not be disclosed as prominently as those
in the table. These commenters suggested the Board also require
creditors to disclose in the account-opening table any fee that a
creditor charges to more than 5 percent of its cardholders.
The Board is adopting in Sec. 226.6(b)(2) the list of fees
proposed in Sec. 226.4(b)(4)(iii) as the exclusive list of fees and
categories of fees that must be disclosed in the table, although Sec.
226.6(b)(2) has been reorganized to more closely track the requirements
of Sec. 226.5a. Accordingly, the fees required to be disclosed in the
table are those identified in Sec. 226.6(b)(2)(ii) through (b)(2)(iv)
and (b)(2)(vii) through (b)(2)(xii); that is, fees for issuance or
availability of credit, minimum or fixed finance charges, transaction
fees, cash advance fees, late-payment fees, over-the-limit fees,
balance transfer fees, returned-payment fees, and fees for required
insurance, debt cancellation or debt suspension coverage.
The Board intends this list of fees to be exclusive, for two
reasons. An exclusive list eases compliance and reduces the risk of
litigation; creditors have the certainty of knowing that as new
services (and associated fees) develop, fees not required to be
disclosed in the summary table under the final rule need not be
highlighted in the account-opening summary unless and until the Board
requires their disclosure after notice and public comment. And as
discussed in the section-by-section analysis to Sec. 226.5(a)(1) and
(b)(1), charges required to be highlighted in the account-opening table
must be provided in a written and retainable form before the first
transaction and before being increased or newly introduced. Creditors
have more flexibility regarding disclosure of other charges imposed as
part of an open-end (not home-secured) plan.
The exclusive list of fees also benefits consumers. The list
focuses on fees consumer testing conducted for the Board showed to be
most important to consumers. The list is manageable and focuses on key
information rather than attempting to be comprehensive. Since consumers
must be informed of all fees imposed as part of the plan before the
cost is incurred, not all fees need to be included in the account-
opening table provided at account opening.
Payment allocation. Section 226.6(b)(4)(vi) of the June 2007
Proposal would have required creditors to disclose in the account-
opening tabular summary, if applicable, the information regarding how
payments will be allocated if the consumer transfers balances at a low
rate and then makes purchases on the account. The payment allocation
disclosure requirements proposed for the account-opening table mirrored
the proposed requirements in proposed Sec. 226.5a(b)(15) to be
provided in the table given at application or solicitation.
In May 2008, the Board and other federal banking agencies proposed
limitations on how creditors may allocate payments on outstanding
credit card balances. See 73 FR 28904, May 19, 2008. The Board
indicated in the May 2008 Regulation Z Proposal that if the proposed
limitations were adopted, the Board contemplated withdrawing proposed
Sec. 226.6(b)(4)(vi). For the reasons discussed in the section-by-
section analysis to Sec. 226.5a(b), the Board is withdrawing proposed
Sec. 226.6(b)(4)(vi).
6(b)(2)(i) Annual Percentage Rate
Section 226.6(b)(2)(i) (proposed at Sec. 226.6(b)(4)(ii)) sets
forth disclosure requirements for rates that would apply to accounts.
Except as noted below, the disclosure requirements for APRs in the
account-opening table are adopted for the same reasons underlying, and
consistent with, the disclosure requirements adopted for APRs in the
table provided with credit card applications and solicitations. See
section-by-section analysis to Sec. 226.5a(b)(1).
Periodic rates and index and margin values are not permitted to be
disclosed in the table, for the same reasons underlying, and consistent
with, the proposed requirements for the table provided with credit card
applications and solicitations. See comments 5a(b)(1)-2 and -8. The
index and margin must be provided in the credit agreement or other
account-opening disclosures pursuant to Sec. 226.6(b)(4). Creditors
also must continue to disclose periodic rates, as a cost imposed as
part of the plan, before the consumer agrees to pay or becomes
obligated to pay for the charge, and these disclosures could be
provided in the credit agreement or other disclosure, as is likely
currently the case.
The rate disclosures required for the account-opening table differ
from those required for the table provided with credit card
applications and solicitations. For applications and solicitations,
creditors may provide a range of APRs or specific APRs that may apply,
where the APR is based at least in part on a later determination of the
consumer's creditworthiness. At account opening, creditors must
disclose the specific APRs that will apply to the account as proposed,
with a limited exception.
Similar to the discussion in the section-by-section analysis to
Sec. 226.6(b)(1)(iii), the APR that some creditors may charge vary by
state. In general, a creditor must disclose the APR applicable to the
consumer's account. Listing all APRs for multiple states in the
account-opening summary box is not permissible. The Board is concerned
that such an approach would detract from the purpose of the table: to
provide key information in a simplified way. However, for creditors
with retail stores in a number of states, it is not practicable to
require APR-specific disclosures to be provided when an open-end (not
home-secured) plan is established in person in connection with the
purchase of goods or services. Thus, the Board provides in Sec.
226.6(b)(2)(i)(E) that creditors
[[Page 5309]]
imposing APRs that vary by state and providing the disclosures required
by Sec. 226.6(b) in person at the time the open-end (not home-secured)
plan is established in connection with financing the purchase of goods
or services may, at the creditor's option, disclose in the account-
opening table either (1) the specific APR applicable to the consumer's
account, or (2) the range of the APRs, if the disclosure includes a
statement that the APR varies by state and refers the consumer to the
account agreement or other disclosure provided with the account-opening
summary table where the APR applicable to the consumer's account is
disclosed, for example in a list of APRs for all states. Currently,
creditors that establish open-end plans at point of sale provide
account-opening disclosures at point of sale before the first
transaction, and commonly provide an additional set of disclosures
when, for example, a credit card is sent to the consumer. The Board
believes that this practice would continue and that the account-opening
summary provided with the additional set of disclosures would contain
the APRs applicable to the consumer's account, as the creditor must
provide for consumers who open accounts other than at point of sale.
This limited exception does not extend to rates that vary due to
creditors' pricing policies. Creditors that offer risk-based APRs
commonly offer one or two rates, or perhaps three or four, as opposed
to retail creditors that may offer a dozen or more rates, based on
varying state laws. The multiplicity of rates and the training required
for retail sales staff to identify correctly which state law governs
the potential account holder increases these creditors' risk of
inadvertent noncompliance. Creditors that choose to offer risk-based
pricing, however, are better able to manage their potential risk of
noncompliance. The exception is intended to have a limited scope
because the Board believes consumers benefit by knowing, at account-
opening, the actual rates that will apply to their accounts.
Discounted and premium initial rates. Currently, a discounted
initial rate may, but is not required to, be disclosed in the table
accompanying a credit or charge card application or solicitation. Card
issuers that choose to include such a rate must also disclose the time
period during which the discounted initial rate will remain in effect.
See Sec. 226.5a(b)(1)(ii). Creditors, however, must disclose these
terms in account-opening disclosures. The June 2007 Proposal would have
required any initial temporary rate, the circumstances under which that
rate expires, and the rate that will apply after the temporary rate
expires to be disclosed in the account-opening table. See proposed
Sec. 226.6(b)(4)(ii)(B).
The final rule regarding the disclosure of temporary initial rates
differs from the proposal in several ways, two of which are technical.
As discussed above, the text of the disclosure requirements has been
revised to more closely track the regulatory text under Sec. 226.5a.
Therefore, Sec. 226.6(b)(2)(i)(B) and (b)(2)(i)(C), which set forth
disclosure requirements for discounted initial rates and premium
initial rates, replace proposed text in Sec. 226.6(b)(4)(ii)(B)
regarding initial temporary rates and are consistent with Sec.
226.5a(b)(1)(ii) and (b)(1)(iii). For consistency, discounted initial
rates are referred to as ``introductory'' rates as that term in defined
in Sec. 226.16(g)(2)(ii).
Under Sec. 226.6(b)(2)(i)(B) and consistent with Sec. 226.5a,
creditors that offer a temporary discounted initial rate must disclose
in the account-opening table the rate that otherwise would apply after
the temporary rate expires. Also, to be consistent with Sec. 226.5a,
creditors under the final rule may, but generally are not required to
(except as discussed below), disclose discounted initial rates in the
account-opening table. Creditors that choose to include such a rate
must also disclose the time period during which the discounted initial
rate will remain in effect. Under Sec. 226.6(b)(2)(i)(D)(2), if a
creditor discloses discounted initial rates in the account-opening
table, the creditor must also disclose directly beneath the table the
circumstances under which the discounted initial rate may be revoked
and the rate that will apply after revocation.
As discussed in the section-by-section analysis to Sec.
226.5a(b)(1), Sec. 226.6(b)(2)(i) of the final rule has been revised
to provide that issuers subject to the final rules issued by the Board
and other federal banking agencies published elsewhere in today's
Federal Register must disclose any introductory rate applicable to the
account in the table. This requirement is intended to promote
consistency with those final rules, which require issuers to state at
account opening the annual percentage rates that will apply to each
category of transactions on a consumer credit card account. Thus, Sec.
226.6(b)(2)(i)(F) has been added to the final rule to clarify that an
issuer subject to 12 CFR 227.24 or similar law must disclose in the
account-opening table any introductory rate that will apply to a
consumer's account. A conforming change has been made to Sec.
226.6(b)(2)(i)(B).
Similarly, and for the same reasons stated above, Sec.
226.6(b)(2)(i)(F) also requires that card issuers subject to the final
rules issued by the Board and other federal banking agencies published
elsewhere in today's Federal Register disclose in the table any rate
that will apply after a premium initial rate expires. Section
226.6(b)(2)(i)(C) also has been revised for consistency.
If a creditor that is not subject to 12 CFR 227.24 or similar law
does not disclose a discounted initial rate (and thus also does not
disclose the reasons the rate may be revoked and the rate that will
apply after revocation) in the account-opening table, the creditor must
provide these disclosures at any time before the consumer agrees to pay
or becomes obligated to pay for a charge based on the rate, pursuant to
the disclosure timing requirements of Sec. 226.5(b)(1)(ii). Creditors
may provide disclosures of these charges in writing but creditors are
not required to do so; only those charges identified in Sec.
226.6(b)(2) that must appear in the account-opening table must be
provided in writing. The Board expects, however, that for contract law
or other reasons, most creditors as a practical matter will disclose
the discounted initial rate in writing at account-opening. See section-
by-section analysis to Sec. 226.5(a)(1) above.
The Board believes aligning the disclosure requirements for the
account-opening summary table with the requirements for the application
summary table will ease compliance without lessening consumer
protections. Many creditors will continue to disclose discounted
initial rates, including issuers subject to the final rules issued by
the Board and other federal banking agencies published elsewhere in
today's Federal Register, and how an initial rate could be revoked in
the account-opening table or in writing as part of the account-opening
disclosures.
6(b)(2)(iii) Fixed Finance Charge; Minimum Interest Charge
TILA Section 127(a)(3), which is currently implemented in Sec.
226.6(a)(4), requires creditors to disclose in account-opening
disclosures the amount of the finance charge, including any minimum or
fixed amount imposed as a finance charge. 15 U.S.C. 1637(a)(3). In the
June 2007 Proposal, the Board would have required creditors to disclose
in account-opening disclosures the amount of any finance charges in
Sec. 226.6(b)(1)(i)(A), and further required creditors to disclose any
minimum finance charge in the account-opening table in Sec.
226.6(b)(4)(iii)(D). In May 2008, the Board proposed to require
[[Page 5310]]
card issuers to disclose in the table provided with applications or
solicitations minimum or fixed finance charges in excess of $1.00 that
could be imposed during a billing cycle and a brief description of the
charge under the heading ``minimum interest charge'' or ``minimum
charge,'' as discussed in the section-by-section analysis to Appendix
G, for the reasons discussed in the section-by-section analysis to
proposed Sec. 226.5a(b)(3). At the card issuer's option, the card
issuer could disclose in the table any minimum or fixed finance charge
below the threshold. The Board proposed the same disclosure
requirements to apply to the account-opening table for the same
reasons.
For the reasons discussed in the section-by-section analysis to
Sec. 226.5a(b)(3), Sec. 226.6(b)(2)(iii) is revised and new comment
6(b)(2)(iii)-1 is added, consistent with Sec. 226.5a(b)(3). As noted
in the section-by-section analysis to Sec. 226.5a(b)(3), under the
June 2007 Proposal, card issuers may substitute the account-opening
table for the table required by Sec. 226.5a. Conforming the fixed
finance charge and minimum interest charge disclosure requirement for
the two tables promotes consistency and uniformity. Because minimum
interest charges of $1.00 or less would no longer be required to be
disclosed in the account-opening table, these charges could be
disclosed at any time before the consumer agrees to pay or becomes
obligated to pay for the charge, pursuant to the disclosure timing
requirements of Sec. 226.5(b)(1)(ii). Creditors may provide
disclosures of these charges in writing but are not required to do so.
See section-by-section analysis to Sec. 226.5(a)(1) above. The Board
believes creditors will continue to disclose minimum interest charges
of $1.00 or less in writing at account opening, to meet the timing
requirement to disclose the fee before the consumer becomes obligated
for the charge. In addition, creditors that choose to charge more than
$1.00 would be required to include the cost in the account-opening
table. Thus, the Board is adopting Sec. 226.6(b)(2)(iii) (proposed in
May 2008 as Sec. 226.6(b)(4)(iii)(D)) with technical changes described
in the section-by-section analysis to Sec. 226.5a(b)(3).
6(b)(2)(v) Grace Period
Under TILA, creditors providing disclosures with applications and
solicitations must discuss grace periods on purchases; at account
opening, creditors must explain grace periods more generally. 15 U.S.C.
1637(c)(1)(A)(iii); 15 U.S.C. 1637(a)(1). Section 226.6(b)(4)(iv) in
the June 2007 Proposal would have required creditors to state for all
balances on the account, whether or not a period exists in which
consumers may avoid the imposition of finance charges, and if so, the
length of the period.
In May 2008, as discussed in the section-by-section analysis to
Sec. 226.5(a)(2) and to Sec. 226.5a(b)(5), the Board proposed to
revise provisions relating to the description of grace periods. Under
the proposal, Sec. 226.6(b)(4)(iv) would have been revised and comment
6(b)(4)(iv)-1 added, consistent with the proposed revisions to Sec.
226.5a(b)(5) and commentary. The heading ``How to Avoid Paying Interest
[on a particular feature]'' would have been used where a grace period
exists for that feature. The heading ``Paying Interest'' would have
been used if there is no grace period on any feature of the account. A
reference to required use of the phrase ``grace period'' in comment
6(b)(4)-3 of the June 2007 Proposal was proposed to be withdrawn.
Comments received on the proposed text of headings and the results
of consumer testing are discussed in the section-by-section analysis to
Sec. 226.5a(b)(5). For the reasons stated in the section-by-section
analysis to and consistent with Sec. 226.5a(b)(5), the final rule
(moved to Sec. 226.6(b)(2)(v)) requires the heading ``How to Avoid
Paying Interest'' to be used for the row that describes a grace period,
and the heading ``Paying Interest'' to be used for the row that
describes no grace period.
The final rule differs from the proposal in that the heading
``Paying Interest'' must be used for the heading in the account-opening
table if any one feature on the account does not have a grace period.
Comments 6(b)(2)(v)-1 through -3 provide language creditors may use to
describe features that have grace periods and features that do not, and
guidance on complying with Sec. 226.6(b)(2)(v) when some features on
an account have a grace period but others do not. See Samples G-17(B)
and G-17(C).
As stated above under TILA, card issuers must disclose any grace
period for purchases, which most credit cards currently offer, in the
table provided on or with credit card applications or solicitations,
and creditors must disclose at account opening whether or not grace
periods exist for all features of an account. Cash advance and balance
transfer features on credit card accounts typically do not offer grace
periods. Under the final rule, the row heading describing grace periods
in the account-opening table will likely be uniform among creditors,
``Paying Interest.'' The Board recognizes that this row heading may not
be consistent with the row heading describing grace periods for
purchases in the table provided on or with credit card applications and
solicitations. However, the Board does not believe that different
headings will significantly undercut a consumer's ability to compare
the terms of a credit card account to the terms that were offered in
the solicitation. Currently most issuers offer a grace period on all
purchase balances; thus, most issuers will use the term ``How to Avoid
Paying Interest on Purchases'' in the table provided on or with credit
card applications and solicitations. Nonetheless, when a consumer is
reviewing the application and account-opening tables for a credit card
account--the former having a row with the heading ``How to Avoid Paying
Interest on Purchases'' and the latter having a row ``Paying Interest''
because no grace period is offered on balance transfers and cash
advances--the Board believes that consumers will recognize that the
information in those two rows relate to the same concept of when
consumers will pay interest on the account.
6(b)(2)(vi) Balance Computation Methods
TILA requires creditors to explain as part of the account-opening
disclosures the method used to determine the balance to which rates are
applied. 15 U.S.C. 1637(a)(2). In June 2007, the Board proposed Sec.
226.6(b)(4)(ix), which would have required that the name of the balance
computation method used by the creditor be disclosed beneath the table,
along with a statement that an explanation of the method is provided in
the account agreement or disclosure statement. To determine the name of
the balance computation method to be disclosed, the June 2007 Proposal
would have required creditors to refer to Sec. 226.5a(g) for a list of
commonly-used methods; if the method used was not among those
identified, creditors would be required to provide a brief explanation
in place of the name.
Commenters generally supported the proposal. See section-by-section
analysis to Sec. 226.5a(b)(6) regarding the comments received on
proposed disclosures of the name of balance computation method below
the summary table provided on or with credit card applications or
solicitations. Consistent with the reasons discussed in the section-by-
section analysis to Sec. 226.5a(b)(6), the Board adopts Sec.
226.6(b)(2)(vi) (proposed as Sec. 226.6(b)(4)(ix)) to require that the
name of the balance computation method used by a creditor be disclosed
[[Page 5311]]
beneath the table, along with a statement that an explanation of the
method is provided in the account agreement or disclosure statement.
Unlike Sec. 226.5a(b)(6), creditors are required in Sec.
226.6(b)(2)(vi) to disclose the balance computation method used for
each feature on the account. Samples G-17(B) and G-17(C) provide
guidance on how to disclose the balance computation method where the
same method is used for all features on the account.
6(b)(2)(viii) Late-Payment Fee
Under the June 2007 Proposal, creditors were required to disclose
penalty fees such as late-payment fees in the account-opening summary
table. If the APR may increase due to a late payment, the proposal
required creditors to disclose that fact. Cross references were
proposed to aid consumer understanding. See proposed Sec.
226.6(b)(4)(iii)(C).
In response to the proposal, one federal banking agency suggested
that in addition to the amount of the fee, the Board should consider
additional cautionary disclosures to aid in consumer understanding,
such as that late fees imposed on an account may cause the consumer to
exceed the credit limit on the account. To keep the table manageable in
size, the Board is not adopting a requirement to include cautionary
information about the consequences of paying late beyond the
requirement to provide information about penalty rates.
Cross References to Penalty Rate
For the reasons stated in the supplementary information regarding
proposed Sec. 226.5a(b)(13), the Board has withdrawn a requirement in
proposed Sec. 226.6(b)(4)(iii)(C) which provided that if a creditor
may impose a penalty rate for one or more of the circumstances for
which a late-payment fee, over-the-limit fee, or returned-payment fee
is charged, the creditor must disclose the fact that the penalty rate
also may apply and a cross reference to the penalty rate.
6(b)(2)(xii) Required Insurance, Debt Cancellation or Debt Suspension
Coverage
For the reasons discussed in the section-by-section analysis to
Sec. 226.5a(b)(13), as permitted by applicable law, creditors that
require credit insurance, or debt cancellation or debt suspension
coverage, as part of the plan are required to disclose the cost of the
product and a reference to the location where more information about
the product can be found with the account-opening materials, as
applicable. See Sec. 226.6(b)(2)(xii).
6(b)(2)(xiii) Available Credit
The Board proposed in June 2007 a disclosure targeted at subprime
card accounts that assess substantial fees at account opening and leave
consumers with a limited amount of available credi