Agencies Propose Clarifications to Credit Card Rules; Congress, White House Seek More Reforms (Part 2 of 3)
Following up on the final rules announced in December 2008 (the December Rules) amending Regulations AA (Unfair and Deceptive Acts or Practices) and Z (Truth in Lending), the Board of Governors of the Federal Reserve System (the Board), the Office of Thrift Supervision (OTS) and the National Credit Union Administration (NCUA, and together with the Board and the OTS, the Agencies) recently proposed clarifications to the December Rules. The July 1, 2010, effective date of the December Rules remains unchanged. Comments on the proposals must be submitted by June 4, 2009.
Issuers have anticipated these clarifications for several months because the December Rules left various significant issues unaddressed or unclear. A previous Davis Wright Tremaine alert, dated May 6, briefly summarized the new proposals relating to deferred interest plans. This alert addresses other significant new proposals. Issuers which would be materially affected by these proposals should consider commenting to the Agencies. A subsequent alert will look at the fast-changing legislative landscape. New legislation is expected to be enacted in the near future.
Significant elements of the new proposals include the following:
Acquired and transferred balances; second cards
Acquired accounts: The Agencies propose that if a bank acquires a consumer credit card account with an outstanding balance, the account remains subject to the same protections as prior to the acquisition—for example, the acquirer could not increase the APR on the acquired balance except as permitted by the December Rules. This rule could materially impact the valuation of portfolios that are sold as retailers move from one issuer to another.
Consider the case of a program agreement which provides for the portfolio to be valued by means of an appraisal process and which sets forth the assumptions the appraiser must consider, including that the terms of the existing program agreement will continue and that such terms accord the issuer significant discretion over repricing. Whereas in the past, the appraisers might have assumed that in the medium term a purchaser would engage in significant repricing of carryover balances—to make up for possible declines in interchange revenue, for example—going forward, the appraisers would not be able to assume the repricing of such balances, except subject to the stringent limitations of the December Rules.
Also, when a card account is acquired by one issuer from another, the acquiring issuer would be required to include on the periodic statement—either in the aggregate disclosures or as separate totals—the interest charges and fees incurred by the consumer prior to the acquisition.
Balance transfers: The Agencies propose that if a balance is transferred from a consumer credit card account issued by a bank to another (non-home secured) credit account issued by the same bank or an affiliate, the account—as above—remains subject to the same protections as prior to the transfer. This rule would apply, for example, to the outstanding balances of private label cards converted into general purpose cards. However, balances transferred from one issuer to a different issuer at the election of the consumer (in response to a balance transfer offer, for example) would be subject to terms agreed upon by the cardholder and the transferee issuer.
Second cards: When a consumer has a card account with an issuer and then opens a second card account with that same issuer, the opening of the second account would constitute an “account opening,” triggering provisions of the December Rules—notably the limits on repricing during the first year thereafter. However, no new account opening would occur when an issuer replaces one card account with another card account, such as an upgrade from a gold to a platinum product.
Also, a product upgrade would entail the same periodic-statement disclosure requirements mentioned under “Acquired accounts,” above. The Agencies are asking for comment on the appropriate amount of time for the replacement of one consumer credit card account with another: 15 days, 30 days or another period.
The Agencies propose to amend the December Rules to permit creditors, at the time an account is established in person in connection with the financing of a purchase, to (at the issuer’s option) include in the disclosure table (required by the December Rules to be provided at account opening) either (1) the specific APR that will apply or (2) the range of APRs that could apply, if the disclosure includes a statement that the APRs vary by the consumer’s creditworthiness (or by state) and refers the consumer to a disclosure provided with the table that indicates the actual APR applicable to the consumer’s account.
The Agencies also would clarify that a variable rate would be deemed accurate if it is a rate as of a specified date and this rate was in effect within the last 30 days before the disclosures are provided.
Stepped rates: The December Rules permit “stepped rates”—for example, where the issuer discloses at account opening that the 5% promotional purchase APR will go to 15% after six months. The Agencies propose to clarify that the permission applies only to step-ups that are definite, not those that are contingent on the occurrence of some event or within the issuer's discretion. The Agencies also propose to clarify that issuers would not be permitted to step up to a lower rate than the initially disclosed go-to rate while retaining the right to step all the way up to the initially disclosed go-to rate.
Timing: The December Rules provide that an APR for a particular category of transactions can be increased pursuant to a change-in-terms notice for transactions occurring more than seven days after provision of the notice. The December Rules also provide that notice of an increased APR must be provided at least 45 days prior to the date the increased rate will apply. Acknowledging that these rules have created “some confusion,” the Agencies are proposing to clarify that the issuer cannot begin accruing interest at the new rate until completion of the 45-day period, but the balances to which the new rate applies can include all transactions occurring after the seven-day period.
The Agencies also propose that for purposes of the seven- and 45-day periods, the date of a transaction is the date on which it occurs (without regard to when the transaction is authorized, settled or posted). Where a merchant places a “hold” on a cardholder's available credit (e.g., at hotel check-in), the date of the related transaction would be the date on which the merchant determines the actual transaction amount (e.g., at check-out). Also, where the APR for convenience checks is disclosed on or with the checks (even if higher than other APRs on the account), neither the seven-day nor the 45-day notice periods apply.
Under the December Rules, if an issuer properly increases the APR on a category of transactions going forward, the existing balance in that category remains subject to the old, lower APR and is referred to as a “protected balance.” The December Rules stated that an issuer must not assess any fee or charge based solely on a protected balance. The Agencies now propose that, for card accounts with protected balances, the issuer may assess periodic fees that were assessed before the card account had a protected balance and also may assess fees such as late payment fees, even if the only balance on the account is protected.
The proposed clarifications to Regulation AA can be found here. The proposed clarifications to Regulation Z can be found here.
Davis Wright Tremaine hopes the foregoing is helpful, and, as indicated above, will shortly issue an additional alert on pending legislative activity.
If you have any comments, or would like more information, please contact James H. Mann, Scot D. Tucker or Andrew Owens.