SARC-2000-01 (May 23, 2000)

On May 19, 2000, the Supervision Appeals Review Committee (“Committee”) of the Federal Deposit Insurance Corporation (“FDIC”) considered the appeal by [Bank] (“Bank”), of the determination that the Bank violated the requirements of section 226.5a(d)(2) of 12 C.F.R. Part 226, Truth in Lending (Regulation Z) (“Regulation Z”).

After carefully considering the issues raised in your appeal package dated March 23, 2000, the Committee concluded that the finding of a violation of Regulation Z should be affirmed.

The Committee concluded that:

• The Bank’s interpretation of the term “use” is not supported by the language and legislative history of the Truth in Lending Act (“TILA”). Both plainly employ the term “use” to connote action beyond simple receipt and possession of a credit card. Taken in consideration with the appearance of the term in the context of credit cards in other provisions of the TILA, this language strongly indicates that a broad interpretation of “use” to encompass mere possession with the potential to use the credit card to obtain cash, property, goods or services, is in error.
   
•  The Bank’s interpretation of the term “impose” is not supported by the TILA or Regulation Z. It is our opinion that the provisions of Regulation Z which are cited by the Bank to support this interpretation do not create a distinction between “charging” or “billing” a fee on the one hand and the “imposition” of a fee on the other that works to the benefit of a particular creditor. Instead, they ensure that a consumer is on notice as to the amount and nature of a fee before it is incurred, in keeping with the stated purpose of the TILA and Regulation Z which is to promote the informed use of credit;
   
•  The Bank’s argument that Regulation Z does not override state law in this context overlooks specific language in the TILA. Section 111(e) of the TILA (15 U.S.C. § 1610(e)) provides that the TILA provisions pertaining to credit card disclosures shall supersede any provision of the law of any State relating to the disclosure of information in any credit or charge card application or solicitation; and
   
•  The purposes which the Bank argues are fulfilled by its policy are fully served by adhering to Regulation Z requirements. Section 226.5a(d) explicitly provides for notice of the annual fee by the creditor to the consumer, within 30 days after the consumer requests the card, but in no event later than the delivery of the card. The distinction is that the bank may not actually charge such a fee to the consumer until such time as he or she accepts the card by using it. At that point, the annual fee will be owed to the Bank and can be reflected as a debt in the Bank’s records and its periodic statements to the consumer.

With respect to this last point, our research shows that several credit card issuers have dealt with this issue by providing the required Regulation Z disclosures both telephonically when the solicitation is made and in writing when the credit card is sent to the accountholder. Measures such as this definitively resolve the issue of whether the credit card issuer may charge an annual fee to the credit card holder.

This decision is considered a final supervisory determination by the FDIC.

By direction of the Supervision Appeals Review Committee of the Federal Deposit Insurance Corporation.