PART 227—UNFAIR OR DECEPTIVE ACTS OR PRACTICES
(REGULATION AA)

Subpart A—General Provision

Sec.

§ 227.1  Authority, purpose, and scope.

(a)  Authority. This part is issued by the Board under section 18(f) of the Federal Trade Commission Act, 15 U.S.C. 57a(f) (section 202(a) of the Magnuson-Moss Warranty--Federal Trade Commission Improvement Act, Pub. L. 93--637).

(b)  Purpose. The purpose of this part is to prohibit unfair or deceptive acts or practices in violation of section 5(a)(1) of the Federal Trade Commission Act, 15 U.S.C. 45(a) (1). Subparts B and C define and contain requirements prescribed for the purpose of preventing specific unfair or deceptive acts or practices of banks. The prohibitions in subparts B and C do not limit the Board's or any other agency's authority to enforce the FTC Act with respect to any other unfair or deceptive acts or practices.

(c)  Scope. Subparts B and C apply to banks, including subsidiaries of banks and other entities listed in paragraph (c)(2) of this section. Subparts B and C do not apply to savings associations as defined in 12 U.S.C. 1813(b). Compliance is to be enforced by:

(1)  The Comptroller of the Currency, in the case of national banks and federal branches and federal agencies of foreign banks;

(2)  The Board of Governors of the Federal Reserve Systems, in the case of banks that are members of the Federal Reserve System (other than banks referred to in paragraph (c)(1) of this section), branches and agencies of foreign banks (other than federal branches, federal agencies, and insured state branches of foreign banks), commercial lending companies owned or controlled by foreign banks, and organizations operating under section 25 or 25A of the Federal Reserve Act; and

(3)  The Federal Deposit Insurance Corporation, in the case of banks insured by the Federal Deposit Insurance Corporation (other than banks referred to in paragraphs (c)(1) and (c)(2) of this section), and insured state branches of foreign banks.

§ 227.2  Consumer-complaint procedure.

(a)  Definitions. For purposes of this section, unless the context indicates otherwise, the following definitions apply:

(1)  "Board" means the Board of Governors of the Federal Reserve System.

(2)  "Consumer complaint" means an allegation by or on behalf of an individual, group of individuals, or other entity that a particular act or practice of a State member bank is unfair or deceptive, or in violation of a regulation issued by the Board pursuant to a Federal statute, or in violation of any other act or regulation under which the bank must operate. Unless the context indicates otherwise, "complaint" shall be construed to mean a "consumer complaint" for purposes of this section.

(3)  "State member bank" means a bank that is chartered by a State and is a member of the Federal Reserve System.

(b)  Submission of complaints. (1) Any consumer having a complaint regarding a State member bank is invited to submit it to the Federal Reserve System. The complaint should be submitted in writing, if possible, and should include the following information:

(i)  A description of the act or practice that is thought to be unfair or deceptive, or in violation of existing law or regulation, including all relevant facts;

(ii)  The name and address of the State member bank that is the subject of the complaint; and

(iii)  The name and address of the complainant.

§ 227.11  [Added and Reserved]

§ 227.12 Definitions.

For the purposes of this subpart, the following definitions apply:

(a)  "Consumer" means a natural person who seeks or acquires goods, services, or money for personal, family, or household use other than for the purchase of real property.

(b)(1)  "Cosigner" means a natural person who assumes liability for the obligation of a consumer without receiving goods, services, or money in return for the obligation, or, in the case of an open-end credit obligation, without receiving the contractual right to obtain extensions of credit under the account.

(2)  "Cosigner" includes any person whose signature is requested as a condition to granting credit to a consumer, or as a condition for forbearance on collection of a consumer's obligation that is in default. The term does not include a spouse whose signature is required on a credit obligation to perfect a security interest pursuant to state law.

(c)  "Earnings" means compensation paid or payable to an individual or for the individual's account for personal services rendered or to be rendered by the individual, whether denominated as wages, salary, commission, bonus, or otherwise, including periodic payments pursuant to a pension, retirement, or disability program.

(d)  "Household goods" means clothing, furniture, appliances, linens, china, crockery, kitchenware, and personal affects of the consumer and the consumer's dependents. The term "household goods" does not include:

(1)  Works of art;

(2)  Electronic entertainment equipment (other than one television and one radio);

(3)  Items acquired as antiques; that is, items over one hundred years of age, including such items that have been repaired or renovated without changing their original form or character; and

(4)  Jewelry (other than wedding rings).

(e)  "Obligation" means an agreement between a consumer and a creditor.

(f)  "Person" means an individual, corporation, or other business organization.

[Codified to 12 C.F.R. § 227.12]

§ 227.13  Unfair credit contract provisions.

It is an unfair act or practice for a bank to enter into a consumer credit obligation that contains, or to enforce in a consumer credit obligation purchased by the bank, any of the following provisions:

(a)  Confession of judgment.  A cognovit or confession of judgment (for purposes other than executory process in the State of Louisiana), warrant of attorney, or other waiver of the right of notice and the opportunity to be heard in the event of suit or process thereon.

(b)  Waiver of exemption.  An executory waiver or a limitation of exemption from attachment, execution, or other process on real or personal property held, owned by, or due to the consumer, unless the waiver applies solely to property subject to a security interest executed in connection with the obligation.

(c)  Assignment of wages.  An assignment of wages or other earnings unless:

(1)  The assignment by its terms is revocable at the will of the debtor;

(2)  The assignment is a payroll deduction plan or preauthorized payment plan, commencing at the time of the transaction, in which the consumer authorizes a series of wage deductions as a method of making each payment; or

(3)  The assignment applies only to wages or other earnings already earned at the time of the assignment.

(d)  Security interest in household goods.   A nonpossessory security interest in household goods other than a purchase money security interest.

[Codified to 12 C.F.R. § 227.13]

§ 227.14  Unfair or deceptive practices involving cosigners.

(a)  Prohibited practices.  In connection with the extension of credit to consumers, it is:

(1)  A deceptive act or practice for a bank to misrepresent the nature or extent of cosigner liability to any person; and

(2)  An unfair act or practice for a bank to obligate a cosigner unless the cosigner is informed prior to becoming obligated of the nature of the cosigner's liability.

(b)  Disclosure requirement.  (1) A clear and conspicuous disclosure statement shall be given in writing to the cosigner prior to becoming obligated. The disclosure statement shall be substantially similar to the following statement and shall either be a separate document or included in the documents evidencing the consumer credit obligation.

Notice to Cosigner

You are being asked to guarantee this debt. Think carefully before you do. If the borrower doesn't pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility.

§ 227.15  Unfair late charges.

(a)  In connection with collecting a debt arising out of an extension of credit to a consumer, it is an unfair act or practice for a bank to levy or collect any delinquency charge on a payment, when the only delinquency is attributable to late fees or delinquency charges assessed on earlier installments, and the payment is otherwise a full payment for the applicable period and is paid on its due date or within an applicable grace period.

(b)  For the purposes of this section, "collecting a debt" means any activity, other than the use of judicial process, that is intended to bring about or does bring about repayment of all or part of money due (or alleged to be due) from a consumer.

[Codified to 12 C.F.R. § 227.15]

§ 227.16  State exemptions.

(a)  General rule.  (1) An appropriate state agency may apply to the Board for a determination that:

(i)  There is a state requirement or prohibition in effect that applies to any transaction to which a provision of this subpart applies; and Protection

(ii)  The state requirement or prohibition affords a level of protection to consumers that is substantially equivalent to, or greater than, the protection afforded by this subpart.

(2)  If the Board makes such a determination, the provision of this subpart will not be in effect in that state to the extent specified by the Board in its determination, for as long as the state administers and enforces the state requirement or prohibition effectively.

For purposes of this subpart, the following definitions apply:

(a)  "Annual percentage rate"means the product of multiplying each periodic rate for a balance or transaction on a consumer credit card account by the number of periods in a year. The term "periodic rate" has the same meaning as in 12 CFR 226.2.

(b)  "Consumer" means a natural person to whom credit is extended under a consumer credit card account or a natural person who is a co-obligor or guarantor of a consumer credit card account.

(c)  "Consumer credit care account" means an account provided to a consumer primarily for personal, family, or household purposes under an open-end credit plan that is accessed by a credit card or charge card. The terms "open-end credit," "credit card," and "charge card" have the same meanings as in 12 CFR 226.2. The following are not consumer credit card accounts for purposes of this subpart:

§ 227.22  Unfair acts or practices regarding time to make payment.

(a)  General rule. Except as provided in paragraph (c) of this section, a bank must not treat a payment on a consumer credit card account as late for any purpose unless the consumer has been provided a reasonable amount of time to make the payment.

(b)  Compliance with general rule--(1) Establishing compliance. A bank must be able to establish that it has complied with paragraph (a) of this section.

(2)  Safe harbor. A bank complies with paragraph (a) of this section if it has adopted reasonable procedures designed to ensure that periodic statement specifying the payment due date are mailed or delivered to consumers at least 21 days before the payment due date.

(c)  Exceptions for grace periods. Paragraph (a) of this section does not apply to any time period provided by the bank within which the consumer may repay any portion of the credit extended without incurring an additional finance charge.

§ 227.23  Unfair acts or practices regarding allocation of payments.

When different annual percentage rates apply to different balances on a consumer credit card account, the bank must allocate any amount paid by the consumer in excess of the required minimum periodic payment among the balances using one of the following methods:

(a)  High-to-low method. The amount paid by the consumer in excess of the required minimum periodic payment is allocated first to the balance with the highest annual percentage rate and any remaining portion to the other balances in descending order based on the applicable annual percentage rate.

(b)  Pro rata method. The amount paid by the consumer in excess of the required minimum periodic payment is allocated among the balances in the same proportion as each balance bears to the total balance.

§ 227.24  Unfair acts or practices regarding increases in annual percentage rates.

(a)  General rule. At account opening, a bank must disclose the annual percentage rates that will apply to each category of transactions on the consumer credit card account. A bank must not increase the annual percentage rate for a category of transactions on any consumer credit card account except as provided in paragraph (b) of this section.

(b)  Exceptions. The prohibition in paragraph (a) of this section on increasing annual percentage rates does not apply where an annual percentage rate may be increased pursuant to one of the exceptions in this paragraph.

(1)  Account opening disclosure exception. An annual percentage rate for a category of transactions may be increased to a rate disclosed at account opening upon expiration of a period of time disclosed at account opening.

(2)  Variable rate exception. An annual percentage rate for a category of transactions that varies according to an index that is not under the bank's control and is available to the general public may be increased due to an increase in the index.

(3)  Advance notice exception. An annual percentage rate for a category of transactions may be increased pursuant to a notice under 12 CFR 226.9(c) or (g) for transactions that occur more than seven days after provision of the notice. This exception does not permit an increase in any annual percentage rate during the first year after the account is opened.

§ 227.25  Unfair balance computation method.

(a)  General rule. Except as provided in paragraph (b) of this section, a bank must not impose finance charges on balances on a consumer credit card account based on balances for days in billing cycles that precede the most recent billing cycle as a result of the loss of any time period provided by the bank within which the consumer may repay any portion of the credit extended without incurring a finance charge.

(b)  Exceptions. Paragraph (a) of this section does not apply to:

(1)  Adjustments to finance charges as a result of the resolution of a dispute under 12 CFR 226.12 or 12 CFR 226.13; or

(2)  Adjustments to finance charges as a result of the return of a payment for insufficient funds.

§ 227.26  Unfair charging of security deposits and fees for the issuance or availability of credit to consumer credit card accounts.

(a)  Limitation for first year. During the first year, a bank must not charge to a consumer credit card account security deposits and fees for the issuance or availability of credit that in total constitute a majority of the initial credit limit for the account.

(b)  Limitations for first billing cycle and subsequent billing cycles. (1) First billing cycle. During the first billing cycle, the bank must not charge to a consumer credit card account security deposits and fees for the issuance or availability of credit card that in total constitutes more than 25 percent of the initial credit limit for the account.

(2)  Subsequent billing cycles. Any additional security deposits and fees for the issuance or availability of credit permitted by paragraph (a) of this section must be charged to the account in equal portions in no fewer than the five billing cycles immediately following the first billing cycle.

(c)  Evasion prohibited. A bank must not evade the requirements of this section by providing the consumer with additional credit to fund the payment of security deposits and fees for the issuance or availability of credit that exceed the total amounts permitted by paragraphs (a) and (b) of this section.

(d)  Definitions. For purposes of this section, the following definitions apply:

(1)  "Fees for the issuance or availability of credit" means:

(i)  Any annual or other periodic fee that may be imposed for the issuance or availability of a consumer credit card account, including any fee based on account activity or inactivity; and

Subpart A—General Provisions for Consumer Protection Rules

Section 227.1—Authority, Purpose, and Scope

(c)  Scope

1.  Penalties for noncompliance. Administrative enforcement of the rule for banks may involve actions under section 8 of the Federal Deposit Insurance Act (12 U.S.C. 1818), including cease-and-desist orders requiring that actions be taken to remedy violations and civil money penalties.

2.  Industrial loan companies. Industrial loan companies that are insured by the Federal Deposit Insurance Corporation are covered by the Board's rule.

Subpart C—Consumer Credit Card Account Practices Rule

Section 227.22—Unfair Acts or Practices Regarding Time To Make Payment

22(a)  General Rule

1.  Treating a payment as late for any purpose. Treating a payment as late for any purpose includes increasing the annual percentage rate as a penalty, reporting the consumer as delinquent to a credit reporting agency, or assessing a late fee or any other fee based on the consumer's failure to make a payment within the amount of time provided to make that payment under this section.

2.  Reasonable amount of time to make payment. Whether an amount of time is reasonable for purposes of making a payment is determined from the perspective of the consumer, not the bank. Under § 227.22(b)(2), a bank provides a reasonable amount of time to make a payment if it has adopted reasonable procedures designed to ensure that periodic statements specifying the payment due date are mailed or delivered to consumers at least 21 days before the payment due date.

22(b)  Compliance with General Rule

1.  Reasonable procedures. A bank is not required to determine the specific date on which periodic statements are mailed or delivered to each individual consumer. A bank provides a reasonable amount of time to make a payment if it has adopted reasonable procedures designed to ensure that periodic statements are mailed or delivered to consumers no later than a certain number of days after the closing date of the billing cycle and adds that number of days to the 21-day period in § 227.24(b)(2) when determining the payment due date. For example, if a bank has adopted reasonable procedures designed to ensure that periodic statements are mailed or delivered to consumers no later than three days after the closing date of the billing cycle, the payment due date on the periodic statement must be no less than 24 days after the closing date of the billing cycle.

2.  Payment due date. For purposes of § 227.22(b)(2), "payment due date" means the date by which the bank requires the consumer to make the required minimum periodic payment in order to avoid being treated as late for any purpose, except as provided in § 227.22(c).

3.  Example of alternative method of compliance. Assume that, for a particular type of consumer credit card account, a bank only provides periodic statements electronically and only accepts payments electronically (consistent with applicable law and regulatory guidance). Under these circumstances, the bank could comply with § 227.22(a) even if it does not provide periodic statements 21 days before the payment due date consistent with § 227.22(b)(2).

Section 227.23--Unfair Acts or Practices Regarding Allocation of Payments

1.  No less beneficial to the consumer. A bank may provide a method of repaying the protected balance that is different from the methods listed in § 227.24(c)(1) so long as the method used is no less beneficial to the consumer than one of the listed methods. A method is no less beneficial to the consumer if the method amortizes the protected balance in five years or longer or if the method results in a required minimum periodic payment that is equal to or less than a minimum payment calculated consistent with § 227.24(c)(1)(ii). For example, a bank could increase the percentage of the protected balance included in the required minimum periodic payment from 2% to 5% so long as doing so would not result in amortization of the protected balance in less than five years. Alternatively, a bank could require a consumer to make a minimum payment that amortizes the protected balance in less than five years so long as the payment does not include a percentage of the balance that is more than twice the percentage included in the minimum payment before the effective date of the increased rate. For example, a bank could require the consumer to make a minimum payment that amortizes the protected balance in four years so long as doing so would not more than double the percentage of the balance included in the minimum payment prior to the effective date of the increased rate.

2.  Lower limit for required minimum periodic payment. If the required minimum periodic payment under § 227.24(c)(1)(i) or (c)(1)(ii) is less than the lower dollar limit for minimum payments established in the cardholder agreement before the effective date of the rate increase, the bank may set the minimum payment consistent with that limit. For example, if at account opening the cardholder agreement stated that the required minimum periodic payment would be either the total of fees and interest charges plus 1% of the total amount owed or $20 (whichever is greater), the bank may require the consumer to make a minimum payment of $20 even if doing so would pay off the protected balance in less than five years or constitute more than 2% of the protected balance plus fees and interest charges.

Paragraph 24(c)(1)(i)

1.  Amortization period starting from date on which increased rate becomes effective. Section 227.24(c)(1)(i) provides for an amortization period for the protected balance of no less than five years, starting from the date on which the increased annual percentage rate becomes effective. A bank is not required to recalculate the required minimum periodic payment for the protected balance if, during the amortization period, that balance is reduced as a result of the allocation of amounts paid by the consumer in excess of the minimum payment consistent with § 227.23 or any other practice permitted by these rules and other applicable law.

STAFF GUIDELINES ON THE CREDIT PRACTICES RULE—SUBPART B OF REGULATION AA

Introduction

A:  The new loan will be exempt from the rule as long as the primary purpose of the new loan is in fact the refinancing of the original debt (for example, in order to take advantage of lower interest rates). The amount outstanding on the original loan--which is now being refinanced--must represent substantially the entire amount of the new loan; any additional credit extended as part of the new loan must be incidental to the primary purpose of refinancing.

Q12(a)-10:  Lease transactions.  Are consumer lease transactions covered by the rule?

A:  The rule covers only consumer credit obligations. A lease transaction would be covered by the rule only if the transaction is a credit sale as defined in Regulation Z.

Q12(a)-11:  Trusts.  Are extensions of credit made to a consumer through a trust covered by the rule?

A:  Yes, such extensions of credit are covered by the rule, unless the credit is being extended through a nonprofit trust (as the rule does not apply to nonprofit organizations).

12(b) "Cosigner"

Q12(b)-1:  Cosigner--basic definition. Who is a cosigner under the rule?

A:  Any natural person who assumes liability for the obligation of a consumer (including, for example, a surety, guarantor or other accommodation party), and who does so without receiving goods, services or money in return for the obligation, or, in the case of open-end credit, without receiving the contractual right to obtain extensions of credit on the account, would be considered a cosigner for purposes of the rule.

Q12(b)-1a:  Business entities as cosigners.  If a partnership or a corporation cosigns a consumer credit obligation, is such an entity a cosigner for purposes of the rule? Must the bank provide a cosigner notice?

A:  Where two people visit a bank to apply for a loan and appear to be applying jointly, the rule does not require a bank to conduct a detailed inquiry into the extent to which both persons are "receiving goods, services, or money in return for the obligation." In the great majority of situations, individuals applying together will be co-borrowers and will not be covered by the rule. The cosigner provision would not apply, for example:

•  If two people apply together for a loan to purchase items for their shared use or to be owned jointly.

•  If two people apply jointly for a credit card account and both have the contractual right to draw on the account, even if one of the applicants eventually chooses not to use the account. The cosigner provision would apply, for example:

•  If a consumer applies for a loan with a friend or relative and during the application process it becomes apparent to the loan officer that the purpose of the loan is such that the friend or relative will not receive any benefit from the loan and that the friend or relative is applying with the consumer solely to aid the consumer in obtaining credit (for example, where the proceeds of the loan are to be used to pay the consumer's dental expenses, or to buy furniture for the consumer's home or apartment.)

Q12(b)-4:  Signature to perfect security interest--relationship to Regulation B.  The rule does not consider a spouse, whose signature is required on a credit obligation to perfect a security interest pursuant to state law, to be a cosigner. Does this affect a creditor's obligation under the signature rules of Regulation B (Equal Credit Opportunity, 12 CFR Part 202) which limit the circumstances in which a creditor may require a cosigner?

A:  No, the rule in no way permits a creditor to obtain the signature of a nonapplicant spouse, or any person, in violation of Regulation B. The rule merely addresses whether a bank must give a cosigner notice when a person's signature is required on the credit obligation in order to perfect a security interest; whether a bank is in fact permitted to obtain such a signature, however, is controlled by Regulation B.

Q12(b)-5:  Hypothecating security.  Is a person who hypothecates security for another's obligation a cosigner?

Q13(a)--2:  Language limiting confession of judgment provision.  If a bank uses multi-purpose credit contracts, may the bank include a confession of judgment clause with qualifying language indicating that the clause is not applicable in a consumer purpose loan--such as, "You confess judgment to the extent the law allows," or "This clause applies only in business purpose loans"?

A:  No. Given the public policy purpose of the rule, a bank may not have a confession of judgment clause in a consumer credit contract, even with limiting language. Therefore, when a multi-purpose form is used for a consumer purpose loan, the bank must cross out, blacken in, or otherwise indicate clearly the removal of the prohibited clause from the loan document.

13(b) Waiver of Exemption

Q13(b)--1:  Basic definition.  What is a waiver of exemption clause?

A:  A waiver of exemption clause is a contract provision under which the debtor agrees to waive a property exemption provided by state law. Generally, state property exemptions protect the debtor's home and other necessary items, such as furniture and clothing, from attachment or execution in order to satisfy the judgment debt. Under the rule, a waiver is permitted if it applies solely to property which was given as security in connection with the consumer credit obligation.

Q13(b)--2:  Nonpurchase money transactions.   Does a waiver of a state homestead exemption for a nonpurchase money security interest (such as a second trust or a home equity line of credit) violate the rule if the waiver applies only to the property that is subject to the security interest?

A:  No, the waiver of homestead exemption provision in the rule is not violated in the nonpurchase money security interest situation, as long as the waiver only applies to the property that is in fact securing the transaction.

Q13(b)--3:  Language of contract provision limiting applicability of waiver.  If a bank's consumer credit contracts contain a clause that states "I waive my state property exemption to the extent the law allows," would such a clause be permitted under the rule?

Q16(b)--2:  Deadline for exemption application.  Is there a time by which a state agency must submit its exemption application in order to receive consideration? Must it be submitted by the effective date of the rule?

A:  There is no deadline for submitting an exemption application. Applications can be submitted anytime before or after the effective date of the rule.

Q16(b)--3.  Exemption granted.  What states have been granted an exemption from the Board's rule?

A:  The state of Wisconsin was granted an exemption from all provisions of the Board's rule effective November 20, 1986, for transactions of $25,000 or less. The state of New York was granted an exemption from the cosigner provisions of the Board's rule effective January 21, 1987, for transactions of $25,000 or less. In both Wisconsin and New York, transactions over $25,000 are subject to the Board's rule but compliance with state law is deemed compliance with the federal law. The state of California was granted an exemption from the cosigner provisions of the Board's rule effective August 1, 1988. These exemptions do not apply to federally chartered institutions.

[Source:  50 Fed. Reg. 47037, November 14, 1985, effective January 1, 1986; amended at 51 Fed. Reg. 39647, October 30, 1986, effective November 1, 1986; 53 Fed. Reg. 29226, August 3, 1988, effective August 1, 1988; 74 Fed. Reg. 5567, January 29, 2009, effective July 1, 2010]