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From the Examiner’s Desk: Amendments to Regulation Z: Compliance Challenges for Bankers and Examiners This
regular feature focuses on developments that affect the bank examination
function. We welcome ideas for future columns. Readers are encouraged
to e-mail suggestions to SupervisoryJournal@fdic.gov.
Consumer protection
took an important step forward with the enactment of the Credit Card
Accountability Responsibility and Disclosure
Act of 2009 (Credit CARD Act). The Credit CARD Act and the
implementing changes to Regulation Z strengthen protections for consumer
credit
card holders by establishing new disclosure requirements and restricting
potentially abusive practices. Although the Credit CARD Act primarily
focuses on credit cards, some of the consumer protections also
affect
other open-end credit products. This article identifies key changes
affecting bank product offerings and operations and offers the
author’s
suggestions for how examiners may approach the evaluation of a
bank’s
compliance with these new requirements and restrictions.
It is critical that an institution offering open-end credit products
allocates sufficient time and resources to determine the applicability
and impact of the Regulation Z amendments and implement necessary
changes. Coordination across departmental lines, particularly
marketing, compliance,
and information technology, is essential to successful implementation
and compliance. As is the case with any regulation, examiners
will evaluate an institution’s processes for ensuring
effective compliance.
Examiner Takeaway
To create a risk profile and identify potential gaps in compliance,
examiners should look for evidence of a comprehensive, well-developed
plan that involves all levels of management and functional
departments. Plans should include a sensible timeline to ensure
compliance
by the effective dates. As part of this process, examiners
may review these
documents, as well as others:
- Product
reviews identifying the potential impact of the changes;
- Development
plans, particularly if significant changes will
be required;
- Prototype periodic
statements and change-in-terms notices and (particularly for
credit card banks) updated cardholder
agreements
and initial
disclosures;
- Implementation
logs (for activities performed by bank personnel as well as services
performed by third
parties);
- Training records;
and
- Board or other
committee minutes.
Examiners also should evaluate ongoing, post-implementation
monitoring and quality control procedures, including audits
where appropriate.
Monitoring procedures are particularly important in the
case of third-party service provider operations as the institution
retains the legal, reputational,
and regulatory risk and responsibility.
Depending on the impact of the Regulation Z changes on
an institution’s
products and operations, examiners may conduct interviews with senior
management and compliance, information technology, marketing, and
customer service personnel to gain a complete understanding of what
changes were
necessary and how these changes were implemented.
Examiners
also may review specific software application settings/parameters
to assess whether information technology
systems designed
to carry out critical functions, such as balance calculations,
rate changes,
and
fee imposition, were properly updated.1 Reviewing the
settings in conjunction with information contained
within initial
disclosures,
periodic statements,
and any change-in-terms notices helps identify any
breakdowns in compliance.
Bankers and examiners
should carefully review consumer complaints as a source of information
about how the
new open-end credit
requirements were implemented and whether information
was properly communicated
to customers. Complaints may be received by the FDIC,
other supervisory agencies, the bank or a third party
performing services for the
bank.
The Better Business Bureau, State Attorneys General,
and
Web site blogs are additional sources of consumer
complaint information.
Bank management should expect examiners to conduct
transaction testing based on an institution’s
risk profile; recommendations for transaction testing
are included in this article.
Statutory and Regulatory
Background
On May 22, 2009, the Credit CARD Act was signed
into law,2 establishing new protections for credit
card
holders and,
in some instances,
consumers using other types of open-end credit
plans, as well.3
The consumer protections included in the Credit CARD Act take effect over
time. Rules that took effect August 20, 2009, governed the:
- timing
of periodic statements for open-end credit
plans;4 and
- All
creditors offering any type of open-end
credit that features a grace period
must mail or deliver periodic statements
at least 21
days
before the expiration of the grace period.5
- Regardless
of whether there is a grace period, periodic
statements for all credit card accounts
under an open-end (not home-secured)
consumer credit plan must be mailed or delivered at least
21 days before the payment
due date disclosed on the statement.6
- timing
and content of new requirements for advance
notice of interest rate increases and other
significant changes
for credit cards.
The most sweeping set of changes took effect
February 22, 2010.7 Consumer protections
include:
- limits
on interest rate increases on existing balances generally
and during the first year an account is open;
- requirements
to analyze a consumer’s ability to pay, including
special rules for young consumers;
- limits
on marketing to college students;
- restrictions
on fees during the first year an account is open;
- restrictions
on over-limit transactions and fees;
- limits
on payment due dates;
- requirements
for payment allocation;
- required
minimum payment warnings;
- elimination
of double-cycle billing;
- limits
on use of the term “fixed”;
- limits
on fees for making payments other than certain expedited
payments;
- the
establishment of a cut-off time for crediting payments
on payment due
dates;
- time
limits for responding to requests related to settlement
of decedent
cardholder estates;
and
- requirements
for Internet posting of credit card agreements.
The final Credit CARD Act rule, effective August 22, 2010,
will implement the requirement that penalty fees and charges
be reasonable and proportional
in relation to the violation of the account terms. In addition,
credit card issuers must begin reevaluating interest rate
increases implemented on or after January 1, 2009.
Regulation
Z amendments, outside those resulting from the Credit CARD
Act, that will take effect July 1, 2010,8 relate
to disclosures
and format requirements for credit card applications and
solicitations, account
opening disclosures, periodic statements, change-in-terms
notices, and advertisements.
Several
provisions of the Credit CARD Act, such as those relating
to the use of the term “fixed” and crediting of payments, apply
to all open-end credit products. However, others apply only to certain
types of open-end credit. Regulation Z has been amended to include
a new term, credit card account under an open-end (not home-secured)
consumer credit plan. Descriptions of significant changes to Regulation
Z
as a result
of the enactment of the Credit CARD Act follow, and a tabular summary
of Regulation Z amendments and the affected open-end products appears
at the
conclusion of this article.
Unless
otherwise noted, the remainder of this article focuses on
changes effective February 22, 2010, dealing
with credit
card accounts under an open-end (not home-secured)
consumer credit plan and
features
examiner takeaways in response to each change.
Advance
Notice
For all open-end (not home-secured) plans, creditors
must provide a 45-day advance notice before a significant
change in account
terms occurs or when increasing the required minimum
payment.9
Even if the notice is
being provided for an increase in rate following
a delinquency, default, or as a penalty, the notice must
be
provided
at least 45 days before the
effective date of the increase.
Limits on Increases in Annual Percentage Rates (APRs)10
Card issuers are prohibited from increasing the APR
on existing balances except when:
- a
temporary rate of at least six months expires;
- the
increase is due to an increase in the variable
rate controlled by an index outside the
creditor’s control;
- A variable
rate index is not considered outside a lender’s control
if the lender imposes a floor. For example, the card issuer may disclose
that the periodic rate and APR are based on a publicly available index
plus a margin, but the issuer also may state the rate may not be less than
a specified percentage. As the lender established a floor, the rate is
within the lender’s control and, therefore,
does not meet the variable rate exceptions
to increase rates on existing balances. However,
a lender can use a variable rate index
with a ceiling and qualify
for the variable
exception because a variable interest
rate ceiling was determined by the Federal
Reserve Board to be universally beneficial
to consumers.11
- the
minimum payment has not been received within 60 days;12
or
- the
consumer successfully completes, or fails to comply with
the terms of,
a workout arrangement.
For accounts where the interest rate has been
reduced to the statutory maximum pursuant to
the Servicemembers Civil Relief Act, the rate
can be increased (for transactions incurred
before the rate decrease) to the rate
in effect before the period of active duty
once 50 U.S.C. app.
527 no longer applies.13 However, a 45-day
advance notice of the increase is required.
Lenders
must provide notices regarding rate increases on future transactions
at least
45 days before
the effective date.14 Although a card
issuer may apply the higher rate to transactions
occurring more than
14
days after the notice was sent, the issuer
may not apply the higher rate (i.e.,
accrue
interest) until the 45th day. This restriction
applies whether the bank uses the daily balance
or average
daily balance calculation method.
For example, a card issuer mails or delivers
the notice on May 1, indicating the rate
will increase from 15
percent to 18 percent on June
15. For transactions occurring on May 16
and after,
the card issuer can begin accruing interest
at the higher rate on these transactions
starting
on June 15. The creditor cannot apply the
higher rate to days before
June 1515 (see inset box below).
| To
illustrate: Assume the billing cycle starts on the first
day of a month and ends on the last, and the change in
terms notice was mailed or delivered on May 1. A consumer
makes a $50 purchase on May 10 and a $100 purchase on
May 18. Although the May 18 purchase is subject to the
higher rate of 18 percent, the card issuer cannot begin
accruing interest at 18 percent until June 15. Therefore,
the rate applicable to purchases in the May billing cycle
is 15 percent. During the June billing cycle, the 15
percent rate applies to balances from June 1 to June
14. From June 15 (the 45th day after the change in terms
notice) to the end of the billing cycle, the 15 percent
rate applies to the May 10 $50 purchase (as this transaction
was made within 14 days of provision of the notice),
and the 18 percent rate applies to the May 18 $100 purchase
(this transaction occurred more than 14 days after the
provision of the notice and, therefore, is subject to
the rate increase on the 45th day).16 |
Creditors also are prohibited from increasing interest rates during
the first year of a credit card, except under limited circumstances.
Examiner Takeaway
Examiners should review how rate increases are handled
as detailed below:
- Compare
information collected from interviews and review of software
settings with information contained in
disclosures and periodic
statements.
- Review
the timing and content of change-in-terms notices and
compare the effective dates and balances to which
the increases apply
(as
disclosed within the notice) to actual practices displayed
on periodic statements
covering the same time frame.
- Determine
whether any APR increases on existing balances fall within
the exceptions listed at the beginning of this
section. (Review
initial disclosures to determine if the account is variable
and operating
under an index outside the lender’s control.)
Periodic Statements17
Mailing and Delivery
Card issuers must establish reasonable procedures to
ensure periodic statements are mailed or delivered
at least 21 days before the
payment due date, and that payments are not treated as late
if received within
21 days after mailing or delivery of the periodic statement.
The time it takes to generate and mail the periodic statements
should be
added to the
21 days.18
Examiner Takeaway
To determine compliance with the timing requirement,
examiners should compare the card issuer’s performance standards for mailing periodic
statements to both the billing cycle close date and payment due date
shown on periodic statements.
Payment Due Dates
For credit card accounts, the payment due date must now
be the same numerical date, for example, the 4th, and
generally cannot be the same
relative date, such as the second Tuesday. There is an
exception
if the creditor states the payment due date is the last
day of
the month, as this
is consistently identifiable to the consumer, whether
the numerical day is the 28th, 30th, or 31st day.
For all open-end credit plans, if the due date falls
on a date the creditor does not receive or accept payments
by mail,
the
creditor shall
treat the payment as timely if it is received the next
business
day. However, if a creditor accepts or receives payments
by other means (such as electronic
or telephone) on the due date, payments received via
these methods on the business day following the due
date are not required to
be considered timely.
Finally, the payment due date cut-off time cannot be
earlier
than 5 p.m. on the due date, with some exceptions.19
Examiner Takeaway
Examiners are encouraged to review when payments are
received and credited to the account. To determine
that a payment was not incorrectly treated as late,
an examiner may
review
periodic statements where
the payment was made on the business day following
the due date.
Disclosures
Additional periodic statement requirements for credit
cards include, but are not limited to:
- minimum
repayment warnings,
- a
repayment estimate, and
- a
toll-free number for credit counseling services.
Periodic statements now must include information
on how long it would take a consumer to repay
the balance, assuming
no
additional advances,
if the consumer makes only the minimum payment.20
Under most circumstances, periodic statements
also must reflect
a minimum payment estimate
based
on a 36-month repayment schedule and a savings
estimate. If negative or no amortization will
occur, a specific
warning is
required.
Exceptions
to the minimum payment warnings include accounts
where the
previous
two
consecutive billing cycles were paid in full,
had a zero outstanding balance, or had a credit balance;
and situations
where the
minimum payment will
pay-off the outstanding balance shown on
the billing
statement, including charged-off accounts
where the entire
balance
is due immediately.21 These
minimum payment warnings were designed to
prominently display the effects of making only minimum
payments.
Effective
July 1, 2010, use of the term “finance-charge” and
disclosure of an “effective APR” are eliminated for open-end
(not home-secured) consumer credit plans.22 However, creditors now
must disclose the charges imposed, grouped together, in proximity
to the related
transactions, substantially as illustrated in the model
form shown
on page 17.23 Creditors must show the information for the statement
period as well
as calendar year-to-date totals.
Examiner Takeaway
Examiners are encouraged to review documentation
that supports how a bank’s software system calculates the required minimum payment
disclosures. After July 1, 2010, examiners also should verify the
cycle and year-to-date interest and fee calculations. In addition,
examiners may need to review periodic statements and verify the calculations
on a
sample of statements.
Double-Cycle Billing24
Card issuers no longer may use the “double-cycle billing” or “two-cycle
billing” balance calculation method on credit card accounts under
an open-end (not home-secured) consumer credit plan.25 Although variations
exist, this calculation method generally involved assessing interest
on balances for the current billing cycle as well as balances on
days in the
preceding billing cycle, even those portions that were repaid.
In addition, card issuers are prohibited from imposing a finance
charge on any portion of a balance subject to a grace period that is repaid
before the expiration of the grace period. When a balance on a credit card
account is eligible for a grace period and the card issuer receives payment
for some, but not all, of that balance before the grace period expires,
the card issuer may not impose finance charges on the paid portion of the
balance26 (see inset box below).
| To illustrate: Assume an account is eligible for a grace period, and the billing
cycle is from the first day of the month to the last, with payment
due on the 25th of the following month. If the consumer makes purchases
totaling $300 in April and makes a $200 payment by May 25th, the
card issuer may not assess interest during the May billing cycle
on the $200 repaid by the payment due date that was eligible for
a grace period. Before this change was implemented, creditors often
would have imposed finance charges on the entire outstanding balance
during the May billing cycle. |
Examiner Takeaway
Examiners may determine compliance by reviewing the balance calculation
methods in the application and initial disclosures as well as the software
settings. Examiners also should ensure the balances used to assess the
finance charges are not attributable to a prior billing cycle. And finally,
to ensure finance charges were appropriately assessed, examiners may
review a series of periodic statements where the account was subject
to a grace period, and the consumer did not pay the balance in full by
the payment due date.
Fees for Exceeding the Credit Limit27
Over-limit fees may not be imposed for a consumer exceeding
his or her limit on a credit card unless the consumer has been provided
notice and opted-in to the program. A card issuer may approve transactions
that
exceed a cardholder’s credit limit; however, a fee cannot be imposed
unless the consumer has opted-in. In addition, an over-limit fee
may not be imposed more than once in a billing cycle and not for
more than three
consecutive cycles for the same occurrence. Even if a cardholder
has opted-in, a card issuer cannot impose an over-limit fee solely
as a result of the
imposition of a fee or finance charge.
Examiner Takeaway
Examiners may review initial disclosures, applications/solicitations,
and marketing materials to determine the institution’s over-limit
practices. Examiners also should review opt-in procedures and periodic
statements that may reflect an over-limit fee.
Allocation
of Payments28
Card issuers may apply minimum payments on credit card accounts
as outlined in cardholder agreements. However, creditors must
first allocate any amount in excess of the minimum payment
to the balance with
the highest
APR and any remaining portion to the other balances in descending
order based on the applicable APR. Special rules apply to a
deferred interest
or similar program during the last two billing cycles immediately
preceding the expiration of the specified period.
Examiner Takeaway
Examiners are encouraged to review initial disclosures for
any changes regarding payment allocations. Examiners may
review periodic statements
for accounts with balances at different APRs and where payments
exceeded the minimum payment. If deferred interest or similar
plans are offered,
examiners also may review applicable periodic statements,
including the two billing cycles before the expiration of the program,
to determine if
payments in excess of the minimum amount were handled properly.
Limitations on Fees29
The total amount of fees that a consumer may be charged during
the first year after an account is opened may not exceed
25 percent of the credit limit.30 If the card issuer increases
the consumer’s credit
limit during the first year, the consumer cannot be required to pay additional
fees that would otherwise be prohibited. However, if a card issuer decreases
the consumer’s credit limit during the first year, the card
issuer may be required to remove or waive fees that would be in excess
of
25 percent of the reduced credit limit.
Examiner Takeaway
Examiners are encouraged to review applications/solicitations
and initial disclosures for fees that may be charged
during the first year the account is opened. Examiners may review
these documents
along
with
periodic statements to determine what fees may be charged
and how and when the fees are collected.
Card Issuers, Agents, Affinity Relationships
A bank may be involved in extending open-end consumer
credit products directly or through agent relationships.
Banks may participate in a “Rent-a-BIN” relationship
with another party whereby the bank “rents” its right to offer
credit card products and other services under an Association, commonly
VISA® or MasterCard®, to a third party in return for a fee.
Although these arrangements vary, the bank generally remains the
creditor
and card issuer and, therefore, is responsible for complying
with applicable consumer
protection regulations.
Banks also may participate in arrangements where the
bank’s name
is on the credit card, but the card issuer is another entity. Even though
the card issuer may be responsible for compliance with Regulation Z, the
bank should be aware of the potential for third-party risk as highlighted
in the FDIC’s 2008 guidance.31
Examiner Takeaway
In light of the significant changes to Regulation
Z, examiners are encouraged to discuss these arrangements
with bank
personnel, review available
documentation, and consider whether the institution
is appropriately mitigating any risks, including
litigation
and reputation
risk.
Conclusion
Changes to Regulation Z as a result of the enactment
of the Credit CARD Act strengthen consumer protections
and seek
to establish fair and transparent practices for
open-end consumer credit
plans.
These changes,
numerous and wide-ranging, will require careful
scrutiny by bank management, particularly compliance professionals,
and examiners
to ensure effective
implementation.
Denise R. Beiswanger Review
Examiner Washington Office dbeiswanger@fdic.gov
The author acknowledges the valuable assistance
provided by these individuals in the preparation
of this article:
Michael W. Briggs, Supervisory Counsel, Washington
Office
Navid K. Choudhury, Senior Attorney, Washington
Office
Deborah K. Hjelmeland, Supervisory Examiner,
San Francisco Region
Colleen LeRoux, Senior Compliance Examiner,
New York Region
Mira N. Marshall, Chief, Compliance Policy,
Washington Office
Sources
Regulation Z, Truth in Lending, Final Rules,
75 Fed. Reg. 34 (Feb. 22, 2010), http://edocket.access.gpo.gov/2010/pdf/2010-624.pdf.
What You Need to Know: New Credit Card
Rules http://www.federalreserve.gov/consumerinfo/wyntk_creditcardrules.htm.
Kenneth J. Benton, “An Overview of the Regulation Z Rules Implementing
the CARD Act,” Consumer Compliance Outlook,
First Quarter 2010, at http://www.philadelphiafed.org/bank-resources/publications/consumer-compliance-outlook/2010/first-quarter/regulation-z-rules.cfm.
Overview of Changes Effective February 22, 2010
1 Recent IT examination results and Shared Application Software
Review reports also may contain relevant information.
2 Pub. L. 111-24 (May 22, 2009).
3 In January 2009, before enactment of the Credit CARD Act,
the Federal Reserve Board (FRB) issued changes to Regulation Z and Regulation
AA that
were to take effect July 1, 2010. http://edocket.access.gpo.gov/2009/pdf/E8-31185.pdf.
http://edocket.access.gpo.gov/2009/pdf/E8-31186.pdf. Many of the consumer
protection concerns addressed in the January 2009 amendments were then
addressed by the Credit CARD Act, such as the allocation of payments
that exceed the minimum payment amount, time to make payments, increasing
interest
rates, double-cycle billing, and limitations of fees during the first
year an account is open.
4 In November 2009, the Credit CARD
Technical Corrections Act of 2009 (Technical Corrections Act) amended
the Truth in Lending Act (TILA)
to
narrow the application of the new periodic statement requirement (mailing
or delivery 21 days before the payment due date) of Section 163(a)
of TILA to credit card accounts. See FIL-74-2009 – Regulation Z – Open-End
Consumer Credit Changes Notice of Statutory Amendment; Additional Guidance.
http://www.fdic.gov/news/news/financial/2009/fil09074.html.
5 “Grace period” is defined as a period within
which any credit extended may be repaid without incurring a finance charge
due
to a periodic
interest rate. Although the regulation requires that creditors adopt
reasonable procedures to mail or deliver periodic statements for all
open-end plans
before the expiration of the grace period, the Preamble to the February
2010 Final Rule notes that the requirement to mail or deliver a periodic
statement 21 days before the expiration of the grace period is largely
inapplicable to products such as overdraft and home equity lines of
credit as these products do not usually have a grace period.
6 In addition, payments may not be treated as late for any
purpose if received within 21 days after mailing or delivery of the periodic
statement.
See Official Staff Commentary Section 226.5(b)(2)(ii).
7 The comprehensive rule published on that date incorporates
new Credit CARD Act provisions, rules issued in January 2009 (Regulation
Z and Regulation
AA) that were not superseded by the Credit CARD Act, and the Credit
CARD Act provisions that took effect in August 2009. This rule also incorporated
the Technical Corrections Act provisions and amended the August 2009
provisions
regarding the advance notice of interest rate. http://www.federalreserve.gov/newsevents/press/bcreg/20100112a.htm.
8 These Regulation Z amendments are the portions of the January
2009 amendments to Regulation Z and Regulation AA not superseded by the
Credit
CARD Act. They were incorporated in the February 2010 rule with an
effective date of July 1.
9 Refer to Section 226.9(c)(2) for additional information on
significant changes in terms and when a notice is not required.
10 Section 226.55.
11 This applies to all open-end (not home-secured) consumer
credit plans.
12 See Section 226.9(c)(2)(iv)(C) and Section 226.55(b)(4).
Although the card issuer may raise rates and fees on existing and new
transactions,
a 45-day advance notice must be provided. This notice may not be provided
until the triggering event. Therefore, the card issuer cannot increase
the rate based on this delinquency exception for 105 days.
13 See Official Staff Commentary Section 226.55(b)(6).
14 Sections 226.55(b) & 226.9(b), (c) or (g).
15 See Official Staff Commentary Section 226.55(b) – 2.
16 The card issuer is permitted to delay the rate increase
on the applicable new transactions until the next billing cycle without
relinquishing the
right to impose the higher rate on applicable transactions in future
billing cycles.
17 Sections 226.5(b)(2)(ii) & 226.7(b).
18 See the Official Staff Commentary. For example, if the
creditor has established reasonable procedures to generate and mail
periodic statements
within three days of the closing date, the creditor should add the
three days to the 21-day requirement, and payments should not be due
before the 24th day.
19 See Section 226.10.
20 How this information must be illustrated depends on how
many years it will take to pay-off the account. See Section 226.7(b)(12).
21 Section 226.7(b)(12)(v) also outlines an exception related
to charge cards.
22 Section 226.7(a) outlines rules for home-equity plans subject
to Section 226.5b. See footnote 8.
23 See Regulation Z - Appendix G-18(A).
24 Section 226.54.
25 Exceptions to this rule for billing disputes or returned
payments are outlined in Section 226.54(b).
26 See Official Staff Commentary Section 226.54(a)(1) – 5.
27 Section 226.56.
28 Section 226.53.
29 Section 226.52.
30 Fees not subject to the limitation are outlined in Section
226.52(a)(2). Also see the Official Staff Commentary.
31 FIL-44-2008: Third Party Risk: Guidance for Managing Third-Party
Risk at http://www.fdic.gov/news/news/financial/2008/fil08044.html.
Kevin W. Hodson and Todd L. Hendrickson, “Third-Party Arrangements:
Elevating Risk Awareness,” Supervisory Insights, Summer 2007 at
http://www.fdic.gov/regulations/examinations/supervisory/insights/sisum07/sisum07.pdf.
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