Insights

While reading through the CFPB’s sample prototype consumer credit card agreement the other day, I noticed the following issue: The main agreement uses certain defined terms (and the definitions for those terms deliberately appear outside the main agreement, in a set of CPFB definitions that are expressly incorporated by reference into the main agreement). For example, “card” is a specifically defined term, which the CFPB has defined to mean “the physical card, the account number, or any device (including a check) that can be used to access your credit card account.”

Including a paper check within the concept of a “card” is interesting, because as a general rule, Regulation Z defines a credit card to mean a device that may be used more than once to obtain an extension of credit. In other words, a credit card needs to be re-useable. Paper checks are not re-useable, and therefore are not generally considered credit cards for Regulation Z purposes (even though they could be used to obtain extensions of credit in connection with a credit card account, and are the subject of specific credit card account “access device” provisions in Regulation Z).

The CFPB sample prototype consumer credit card agreement says that the “card” may be used for “purchases, cash advances, or balance transfers.” “Purchases” is defined by the CFPB to include “the use of your card to buy or lease products or services” (excluding, however, use of the card to purchase cash or cash equivalents, such as casino chips or lottery tickets – such transactions are defined as “cash advances”). Implicitly, therefore, the use of a credit card account access device (such as a paper check issued by the credit card issuer) to purchase tangible goods or services from a retailer falls within the defined term, “purchases.” “Cash advance” is defined by the CFPB to include the cashing of an “access check.” The “cash advance” definition does not include the use of an access check to pay for tangible goods or services.

In many instances, however, credit card issuers might treat the use of a paper check or draft to obtain any extension of credit against the credit card account as a cash advance transaction (even if the check is payable to a retail seller and is used to purchase goods or services), and might not consider any check-initiated credit card account transactions to be “purchase” transactions for finance charge calculation, accrual, and other purposes.

Whether the use of a paper check to purchase (charge) goods or services is treated as a “purchase” or as a “cash advance” on a credit card account is significant, because credit card “purchase” transactions often have finance charge grace periods and cash advances typically do not. Cash advances often also have transaction fees and may be subject to different (sometimes higher) Annual Percentage Rates than purchases. Model Form G-19 (part of Appendix G to Regulation Z) specifically acknowledges that paper checks used to access a credit card account are typically treated as cash advances, are therefore often subject to a cash advance transaction fee, and typically have finance charges that accrue as of the transaction date (without any grace period).

The distinction between a purchase and a cash advance, and between a transaction initiated with a paper check (as opposed to the actual credit card or credit card number) is therefore very important, but these distinctions do not appear in the CFPB’s sample prototype consumer credit card agreement. If one were to add additional provisions to the CFPB prototype, to specifically address the use of paper checks provided to cardholders as an additional means of obtaining credit advances against the credit card account, that would of course make the agreement longer and more complicated – undercutting the CFPB’s desire to see consumer credit card agreements become shorter, simpler and less complex, but perhaps providing a tangible example of why consumer credit agreements may tend, over time, to become longer and more detailed, to address these and other unanticipated issues that might otherwise create customer confusion.

As another example of how plain, simple English can actually help lengthen a consumer credit document, it is interesting to note that the Fannie Mae/Freddie Mac Maine plain language first mortgage instrument occupies a full 17 pages, while (by way of comparison) the New Jersey uniform first mortgage instrument is 15 pages long.

Elizabeth C. Yen is a partner in the Connecticut office of Hudson Cook, LLP. She can be reached at 203-776-1911 or by email at eyen@hudco.com.