Insights

On November 2, 2010, the Federal Reserve Board published proposed amendments to federal Regulation Z to clarify certain rules enacted to implement the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act).

The Board’s announcement of the proposals highlighted the following clarifications among the many proposed amendments:

• Promotional programs that waive interest charges for a specified period of time are subject to the same protections as promotional programs that apply a reduced rate for a specified period. For example, a card issuer that offers to waive interest charges for six months would be prohibited from revoking the waiver and charging interest during the six-month period unless the account becomes more than 60 days delinquent.
• Application and similar fees that a consumer is required to pay before a credit card account is opened are covered by the same limitations as fees charged during the first year after the account is opened. Because the total amount of these fees cannot exceed 25% of the account’s initial credit limit, a card issuer that, for example, charges a $75 fee to apply for a credit card with a $400 credit limit generally would not be permitted to charge more than $25 in additional fees during the first year after account opening.
• When evaluating a consumer’s ability to make the required payments before opening a new credit card account or increasing the credit limit on an existing account, card issuers must consider information regarding the consumer’s independent income, rather than his or her household income.

In addition, in one of the more significant proposals, which is particularly important for creditors who offer open-end programs that are not accessible by credit cards, the Board has proposed to clarify that the term “credit card” includes certain accounts accessible only by account numbers. Specifically, the proposal would treat an account number as a credit card when the account number can be used to access an open-end line of credit to purchase goods or services. The proposal, then, would treat as credit cards not only account numbers that can be used to purchase goods or services over the Internet, for instance, but also account numbers that can be used to access credit at retailers (such as furniture stores) that offer open-end financing to their customers.

This proposal, if enacted, would subject accounts accessible by account numbers (even if physical devices, such as plates and cards, are not issued) to the same restrictions as apply to typical credit card accounts, including prohibitions on raising interest rates except under certain circumstances, requirements regarding the right of consumers to reject certain changes in terms, obligations to provide copies of agreements to the Board and consumers, and other provisions enacted under the CARD Act.

With respect to accounts accessible only by account numbers, the Board explains its rationale for the proposal in the Supplementary Information to the proposals:

[T]he Board is concerned that, when an account number can be used to access an open-end line of credit to purchase goods or services, it would be inconsistent with the Credit Card Act to exempt the line of credit from the protections provided for credit card accounts.

This proposed “clarification” appears to be the first time that either Regulation Z or the Commentary would treat accounts that are not accessed through a card, plate or other device as a credit card.

In another development significant to creditors who offer accounts that are not accessible by credit cards, the proposals would prohibit creditors who have rate floors on their variable rate open-end accounts (not home secured) from increasing the rate on the account in accordance with the variable rate formula unless they provide 45 days’ advance notice of the exception (i.e., treat each rate increase as a change in terms). The Board reasons that the exception to providing advance notice on a variable rate account applies only to the extent that the creditor does not control the index used to calculate the variable rate. The Board believes, consistent with its rationale for the variable rate exception to increasing rates on credit card accounts, that a creditor exhibits control over an index if it imposes a rate floor and, thus, cannot rely on the exception to notice.

Other proposals would prohibit creditors from disclosing in the application and account-opening summary tables regulatory limitations on both how long penalty rates remain in effect, and limitations on imposing interest charges on portions of balances that are repaid during a grace period. Many creditors have struggled with whether the rules require them to include references to these substantive limitations in the tabular disclosures required under Section 226.5a and 226.6 of Regulation Z. The Board proposes to clarify their position by prohibiting creditors from explaining that penalty rates imposed for 60-day delinquencies will be reduced if six consecutive payments are made after the increase. Creditors would also be prohibited from including detail about partial grace period rules in the grace period portion of the summary table (that is, that interest will not accrue on any portion of a balance subject to a grace period that is repaid during the grace period).

The proposals would also clarify that a “significant change in account terms” for purposes of change-in-terms requirements includes any change to information required to be disclosed in the account opening summary table, any increase in the minimum payment, and the acquisition of a security interest, as well as changes to any information relevant to the calculation of interest charges that is required to be disclosed at account opening. Accordingly, changes in the variable rate formula, for instance, would require advance notice under the rules, as these changes would qualify as significant changes in account terms.

Comments on the proposals must be submitted on or before January 3, 2011.

Daniel J. Laudicina is a partner in the Maryland office of Hudson Cook, LLP. Dan can be reached at 410-865-5435 or by email at dlaudicina@hudco.com.