[Federal Register: June 14, 2007 (Volume 72, Number 114)]
[Proposed Rules]
[Page 32947-33145]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14jn07-19]
[[Page 32947]]
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Part II
Federal Reserve System
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12 CFR Part 226
Truth in Lending; Proposed Rule
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FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-1286]
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Proposed rule; request for public comment.
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SUMMARY: The Board proposes to amend Regulation Z, which implements the
Truth in Lending Act (TILA), and the staff commentary to the
regulation, following a comprehensive review of TILA's rules for open-
end (revolving) credit that is not home-secured. The proposed revisions
take into consideration comments from the public on an initial advance
notice of proposed rulemaking (ANPR) published in December 2004 on a
variety of issues relating to the format and content of open-end credit
disclosures and the substantive protections provided under the
regulation. The proposal also considers comments received on a second
ANPR published in October 2005 that addressed several amendments to
TILA's open-end credit rules contained in the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005. Consumer testing was
conducted as a part of the review.
Except as otherwise noted, the proposed changes apply solely to
open-end credit. Disclosures accompanying credit card applications and
solicitations would highlight fees and reasons penalty rates might be
applied, such as for paying late. Creditors would be required to
summarize key terms at account opening and when terms are changed. The
proposal would identify specific fees that must be disclosed to
consumers in writing before an account is opened, and give creditors
flexibility regarding how and when to disclose other fees imposed as
part of the open-end plan. Periodic statements would break out costs
for interest and fees. Two alternatives are proposed dealing with the
``effective'' or ``historical'' annual percentage rate disclosed on
periodic statements.
Rules of general applicability such as the definition of open-end
credit and dispute resolution procedures would apply to all open-end
plans, including home-equity lines of credit. Rules regarding the
disclosure of debt cancellation and debt suspension agreements would be
revised for both closed-end and open-end credit transactions. Loans
taken against employer-sponsored retirement plans would be exempt from
TILA coverage.
DATES: Comments must be received on or before October 12, 2007.
ADDRESSES: You may submit comments, identified by Docket No. R-1286, by
any of the following methods:
Agency Web Site: http://www.federalreserve.gov Follow the instructions for submitting comments at http://www.federalreserve.gov/.
.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: regs.comments@federal reserve.gov. Include the
docket number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper in Room MP-500 of the Board's Martin Building (20th and C
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Amy Burke or Vivian Wong, Attorneys,
Krista Ayoub, Dan Sokolov, Ky Tran-Trong, or John Wood, Counsels, or
Jane Ahrens, Senior Counsel, Division of Consumer and Community
Affairs, Board of Governors of the Federal Reserve System, at (202)
452-3667 or 452-2412; for users of Telecommunications Device for the
Deaf (TDD) only, contact (202) 263-4869.
SUPPLEMENTARY INFORMATION:
I. Background on TILA and Regulation Z
Congress enacted the Truth in Lending Act (TILA) based on findings
that economic stability would be enhanced and competition among
consumer credit providers would be strengthened by the informed use of
credit resulting from consumers' awareness of the cost of credit. The
purposes of TILA are (1) to provide a meaningful disclosure of credit
terms to enable consumers to compare credit terms available in the
marketplace more readily and avoid the uninformed use of credit; and
(2) to protect consumers against inaccurate and unfair credit billing
and credit card practices.
TILA's disclosures differ depending on whether consumer credit is
an open-end (revolving) plan or a closed-end (installment) loan. TILA
also contains procedural and substantive protections for consumers.
TILA is implemented by the Board's Regulation Z. An Official Staff
Commentary interprets the requirements of Regulation Z. By statute,
creditors that follow in good faith Board or official staff
interpretations are insulated from civil liability, criminal penalties,
or administrative sanction.
II. Summary of Major Proposed Changes
The goal of the proposed amendments to Regulation Z is to improve
the effectiveness of the disclosures that creditors provide to
consumers at application and throughout the life of an open-end (not
home-secured) account. The proposed changes are the result of the
Board's review of the provisions that apply to open-end (not home-
secured) credit. The Board's last comprehensive review of Regulation Z
was in 1981. The Board is proposing changes to format, timing, and
content requirements for the five main types of open-end credit
disclosures governed by Regulation Z: (1) Credit and charge card
application and solicitation disclosures; (2) account-opening
disclosures; (3) periodic statement disclosures; (4) change-in-terms
notices; and (5) advertising provisions.
Applications and solicitations. The proposal contains changes to
the format and content to make the credit and charge card application
and solicitation disclosures more meaningful and easier for consumers
to use. The proposed changes include:
Adopting new format requirements for the summary table,
including rules regarding: Type size and use of boldface type for
certain key terms, placement of information, and the use of cross-
references.
Revising content, including: A requirement that creditors
disclose the duration that penalty rates may be in effect, a shorter
disclosure about variable rates, new disclosures highlighting the
effect of creditors' payment allocation practices, and a reference to
consumer education materials on the Board's Web site.
Account-opening disclosures. The proposal also contains revisions
to the cost disclosures provided at account opening to make the
information more conspicuous and easier to read. The proposed changes
include:
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Disclosing certain key terms in a summary table at account
opening, which would be substantially similar to the table required for
credit and charge card applications and solicitations, in order to
summarize for consumers key information that is most important to
informed decision-making.
Adopting a different approach to disclosing fees, to
provide greater clarity for identifying fees that must be disclosed. In
addition, creditors would have flexibility to disclose charges (other
than those in the summary table) in writing or orally.
Periodic statement disclosures. The proposal also contains
revisions to make disclosures on periodic statements more
understandable, primarily by making changes to the format requirements,
such as by grouping fees, interest charges, and transactions together.
The proposed changes include:
Itemizing interest charges for different types of
transactions, such as purchases and cash advances, and providing
separate totals of fees and interest for the month and year-to-date.
Modifying the provisions for disclosing the ``effective
APR,'' including format and terminology requirements to make it more
understandable. Because of concerns about the disclosure's
effectiveness, however, the Board is also soliciting comment on whether
this rate should be required to be disclosed.
Requiring disclosure of the effect of making only the
minimum required payment on repayment of balances (changes required by
the Bankruptcy Act).
Changes in consumer's interest rate and other account terms. The
proposal would expand the circumstances under which consumers receive
written notice of changes in the terms (e.g., an increase in the
interest rate) applicable to their accounts, and increase the amount of
time these notices must be sent before the change becomes effective.
The proposed changes include:
Generally increasing advance notice before a changed term
can be imposed from 15 to 45 days, to better allow consumers to obtain
alternative financing or change their account usage.
Requiring creditors to provide 45 days' prior notice
before the creditor increases a rate due to the consumer's delinquency
or default.
When a change-in-terms notice accompanies a periodic
statement, requiring a tabular disclosure on the front of the periodic
statement of the key terms being changed.
Advertising provisions. The proposal would revise the rules
governing advertising of open-end credit to help ensure consumers
better understand the credit terms offered. These proposed revisions
include:
Requiring advertisements that state a minimum monthly
payment on a plan offered to finance the purchase of goods or services
to state, in equal prominence to the minimum payment, the time period
required to pay the balance and the total of payments if only minimum
payments are made.
Permitting advertisements to refer to a rate as ``fixed''
only if the advertisement specifies a time period for which the rate is
fixed and the rate will not increase for any reason during that time,
or if a time period is not specified, if the rate will not increase for
any reason while the plan is open.
III. The Board's Review of Open-End Credit Rules
A. December 2004 Advance Notice of Proposed Rulemaking
The Board began a review of Regulation Z in December 2004.\1\ The
Board initiated its review of Regulation Z by issuing an advance notice
of proposed rulemaking (December 2004 ANPR). 69 FR 70925; December 8,
2004. At that time, the Board announced its intent to conduct its
review of Regulation Z in stages, focusing first on the rules for open-
end (revolving) credit accounts that are not home-secured, chiefly
general-purpose credit cards and retailer credit card plans. The
December 2004 ANPR sought public comment on a variety of specific
issues relating to three broad categories: the format of open-end
credit disclosures, the content of those disclosures, and the
substantive protections provided for open-end credit under the
regulation. The December 2004 ANPR solicited comment on the scope of
the Board's review, and also requested commenters to identify other
issues that the Board should address in the review. The comment period
closed on March 28, 2005.
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\1\ The review was initiated pursuant to requirements of section
303 of the Riegle Community Development and Regulatory Improvement
Act of 1994, section 610(c) of the Regulatory Flexibility Act of
1980, and section 2222 of the Economic Growth and Regulatory
Paperwork Reduction Act of 1996.
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The Board received over 200 comment letters in response to the
December 2004 ANPR. More than half of the comments were from individual
consumers. About 60 comments were received from the industry or
industry representatives, and about 20 comments were received from
consumer advocates and community development groups. The Office of the
Comptroller of the Currency, one state agency, and one member of
Congress also submitted comments.
Scope. Commenters' views on a staged review of Regulation Z were
divided. Some believe reviewing the regulation in stages makes the
process manageable and focuses discussion and analysis. Others
supported an independent focus on open-end credit rules because they
believe open-end credit by its nature is distinct from other credit
products covered by TILA and Regulation Z.
Some commenters supported the Board's approach generally, but
voiced concern that looking at the regulation in a piecemeal fashion
may lead to decisions in the early stages of the review that may need
to be revisited later. If the review is staged, these commenters want
all changes implemented at the same time, to ensure consistency between
the open-end and closed-end rules.
Some commenters urged the Board to include open-end rules affecting
home-equity lines of credit (HELOCs) in the initial stage of the
review. If the Board chooses not to expand its review of open-end
credit rules to cover home-secured credit, these commenters urged the
Board to avoid making any revisions that would be inconsistent with
existing HELOC requirements.
A few commenters concurred with the Board's approach of reviewing
Regulation Z in stages, but they preferred that the Board start with
rules of general applicability, such as definitions. These commenters
generally urged the Board to provide additional clarity on the
definition of ``finance charge,'' TILA's dollar cost of credit.
Finally, a few commenters stated the Board needs to review the
entire regulation at the same time. They suggested a staged approach is
not workable, and cited concerns about duplicating efforts, creating
inconsistencies, and revisiting changes made in earlier stages of a
lengthy review.
Format. In general, commenters representing both consumers and
industry stated that the tabular format requirements for TILA's direct-
mail credit card application and solicitation disclosures have proven
useful to consumers, although a variety of suggestions were made to add
or delete specific disclosures. Many, however, noted that typical
account-opening disclosures are lengthy and complex, and suggested that
the effectiveness of account-opening disclosures could be improved if
key terms were summarized in a standardized format, perhaps in the same
format as TILA's direct-mail credit card application and solicitation
[[Page 32950]]
disclosures. These suggestions were consistent with the views of some
members of the Board's Consumer Advisory Council. Industry commenters
supported the Board's plan to use focus groups or other consumer
research tools to test the effectiveness of any proposed revisions.
To combat ``information overload,'' many commenters asked the Board
to emphasize only the most important information that consumers need at
the time the disclosure is given. They asked the Board to avoid rules
that require the repetitive delivery of complex information, not all of
which is essential to comparison shopping, such as a lengthy
explanation of the creditor's method of calculating balances now
required at account opening and on periodic statements. Commenters
suggested that the Board would most effectively promote comparison
shopping by focusing on essential terms in a simplified way. They
believe some information could also be provided to consumers through
nonregulatory, educational methods. Taken together, these approaches
could lead to simpler disclosures that consumers might be more inclined
to read and understand.
Content. In general, commenters provided a variety of views on how
to simplify TILA's cost disclosures. For example, some suggested that
creditors should disclose only interest as the ``finance charge'' and
simply identify all other fees and charges. Others suggested all fees
associated with an open-end plan should be disclosed as the ``finance
charge.'' Creditors sought, above all, clear rules.
Comments were divided on the usefulness of open-end APRs. TILA
requires creditors to disclose an ``interest rate'' APR for shopping
disclosures (such as in advertisements and solicitations) and at
account opening, and an ``effective'' APR on periodic statements that
reflects interest and fees, such as transaction charges assessed during
the billing period. In general, consumer groups suggested that the
Board mandate for shopping disclosures an ``average'' or ``typical''
effective APR based on an historical average cost to consumers with
similar accounts. An average APR, consumer representatives stated,
would give consumers a more accurate picture of what consumers' actual
cost might be. Regarding the effective APR on periodic statements,
consumer advocates stated that it is a key disclosure that is helpful,
and can provide ``shock value'' to consumers when fees cause the APR to
spike for the billing cycle. Commenters representing industry argued
that an effective APR is not meaningful, confuses consumers, and is
difficult to explain. Some commenters suggested that a disclosure on
the periodic statement that provides context by explaining what costs
are included in the effective APR might improve its usefulness.
Regarding advance notice of changes to rates and fees, comments
were sharply divided. Creditors generally believe the current notice
requirements are adequate, although for rate (and other) changes not
involving a consumer's default, a number of creditors supported
increasing the advance notice requirement from 15 to 30 days. Consumers
and consumer representatives generally believe that when terms change,
consumers should have the right under TILA to opt out of the new terms,
or be allowed a much longer time period to find alternative credit
products. They suggested a two-billing cycle advance notice or as long
as 90 days. More fundamentally, these commenters believe card issuers
should be held to the initial terms of the credit contract, at least
until the credit card expires.
Where triggering events are set forth in the account agreement such
as events that might trigger penalty pricing, creditors believe there
is no need to provide additional notice when the event occurs; they are
not changing a term, they stated, but merely implementing the
agreement. Some suggest that instead of providing a notice when penalty
pricing is triggered, penalty pricing and the triggers should be better
emphasized in the application and account-opening disclosures.
Consumers and consumer representatives agree that creditors' policies
about when terms may change should be more prominently displayed,
including in the credit card application disclosures. They further
believe the Board should provide new substantive protections to
consumers, such as prohibiting the practice of increasing rates merely
because the consumer paid late on another credit account.
B. The Bankruptcy Act's Amendments to TILA and October 2005 Advance
Notice of Proposed Rulemaking
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
(the ``Bankruptcy Act'') primarily amended the federal bankruptcy code,
but also contained several provisions amending TILA. Public Law 109-8,
119 Stat. 23. The Bankruptcy Act's TILA amendments principally deal
with open-end credit accounts and require new disclosures on periodic
statements, on credit card applications and solicitations, and in
advertisements.
In October 2005, the Board published a second ANPR to solicit
comment on implementing the Bankruptcy Act amendments (October 2005
ANPR). 70 FR 60235; October 17, 2005. In the October 2005 ANPR, the
Board stated its intent to implement the Bankruptcy Act amendments as
part of the Board's ongoing review of Regulation Z's open-end credit
rules. The comment period for the October 2005 ANPR closed on December
16, 2005.
The Board received approximately 50 comment letters in response to
the October 2005 ANPR. Forty-five letters were submitted by financial
institutions and their trade groups. Five letters were submitted by
consumer groups.
Minimum payment warnings. Under the Bankruptcy Act, creditors that
offer open-end accounts must provide standardized disclosures on each
periodic statement about the effects of making only minimum payments,
including an example of how long it would take to pay off a specified
balance, along with a toll-free telephone number that consumers can use
to obtain an estimate of how long it will take to pay off their own
balance if only minimum payments are made. The Board must develop a
table that creditors can use in responding to consumers requesting such
estimates.
Industry commenters generally favored limiting the minimum payment
disclosure to credit card accounts (thus, excluding HELOCs and
overdraft lines of credit) and to those consumers who regularly make
only minimum payments. Consumer groups generally favored broadly
applying the rule to all types of open-end credit and to all open-end
accountholders.
Industry commenters supported having an option to provide
customized information (reflecting a consumer's actual account status)
on the periodic statement or in response to a consumer's telephone
call, but also wanted the option to use a standardized formula
developed by the Board. Consumer group commenters asked the Board to
require creditors to provide more customized estimates of payoff
periods through the toll-free telephone number and to not allow
creditors to use a standardized formula, and supported disclosure of an
``actual'' repayment time on the periodic statement.
Late-payment fees. Under the Bankruptcy Act, creditors offering
open-end accounts must disclose on each periodic statement the earliest
date on which a late payment fee may be charged, as well as the amount
of the fee.
Industry commenters urged the Board to base the disclosure
requirement on
[[Page 32951]]
the contractual payment due date and to disregard any ``courtesy''
period that creditors informally recognize following the contractual
payment due date. Although the industry provided mixed comments on any
format requirements, most opposed a proximity requirement for
disclosing the amount of the fee and the date. Comments were mixed on
adding information about penalty APRs and ``cut-off times'' to the late
payment disclosures. While supporters (a mix of industry and consumer
commenters) believe the additional information is useful, others were
concerned about the complexity of such a disclosure, and opposed the
approach for that reason. Consumer commenters suggested substantive
protections to ensure consumers' payments are timely credited, such as
considering the postmark date to be the date of receipt.
Internet solicitations. The Bankruptcy Act provides that credit
card issuers offering cards on the Internet must include the same
tabular summary of key terms that is currently required for
applications or solicitations sent by direct mail.
Although the Bankruptcy Act refers only to solicitations (where no
application is required), most commenters (both industry and consumer
groups) agreed that Internet applications should be treated the same as
solicitations. Many industry commenters stated that the Board's interim
final rule on electronic disclosures, issued in 2001, would be
appropriate to implement the Bankruptcy Act. Regarding accuracy
standards, the majority of industry commenters addressing this issue
indicated that issuers should be required to update Internet
disclosures every 30 days, while consumer groups suggested that the
disclosures should be updated in a ``timely fashion,'' with 30 days
being too long in some instances.
Introductory rate offers. Under the Bankruptcy Act, credit card
issuers offering discounted introductory rates must clearly and
conspicuously disclose in marketing materials the expiration date of
the offer, the rate that will apply after that date, and an explanation
of how the introductory rate may be revoked (for example, if the
consumer makes a late payment).
In general, industry commenters asked for flexibility in complying
with the new requirements. Consumer groups supported stricter
standards, such as requiring an equivalent typeface for the word
``introductory'' in immediate proximity to the temporary rate and
requiring the expiration date and subsequent rate to appear either
side-by-side with, or immediately under or above, the most prominent
statement of the temporary rate.
Account termination. Under the Bankruptcy Act, creditors are
prohibited from terminating an open-end account before its expiration
date solely because the consumer has not incurred finance charges on
the account. Creditors are permitted, however, to terminate an account
for inactivity.
Regarding guidance on what should be considered an ``expiration
date,'' several industry commenters suggested using card expiration
dates as the account expiration date. Others cautioned against using
such an approach, because accounts do not terminate upon a card
expiration date. Regarding what constitutes ``inactivity,'' many
industry commenters stated no further guidance is necessary. Among
those suggesting additional guidance, most suggested ``activity''
should be measured only by consumers' actions (charges and payments) as
opposed to card issuer activity (for example, refunding fees, billing
inactivity fees, or waiving unpaid balances).
High loan-to-value mortgage credit. For home-secured credit that
may exceed the dwelling's fair-market value, the Bankruptcy Act
amendments require creditors to provide additional disclosures at the
time of application and in advertisements (for both open-end and
closed-end credit). The disclosures would warn consumers that interest
on the portion of the loan that exceeds the home's fair-market value is
not tax deductible and encourage consumers to consult a tax advisor.
Because these amendments deal with home-secured credit, the Board is
not proposing revisions to Regulation Z to implement these provisions
at this time. The Board anticipates implementing these provisions in
connection with the upcoming review of Regulation Z's rules for
mortgage transactions. Nevertheless, the following is a summary of the
comments received.
In general, creditors asked for flexibility in providing the
disclosure, either by permitting the notice to be provided to all
mortgage applicants, or to be provided later in the approval process
after creditors have determined the disclosure is triggered. Similarly,
a number of industry commenters advocated limiting the advertising rule
to creditors that specifically market high loan-to-value mortgage
loans. Creditor commenters asked for guidance on loan-to-value
calculations and safe harbors for how creditors determine property
values. Consumer advocates favored triggering the disclosure when the
possibility of negative amortization could occur.
C. Consumer Testing
A principal goal for the Regulation Z review is to produce revised
and improved credit card disclosures that consumers will be more likely
to pay attention to, understand, and use in their decisions, while at
the same time not creating undue burdens for creditors. In April 2006,
the Board retained a research and consulting firm (Macro International)
that specializes in designing and testing documents to conduct consumer
testing to help the Board review Regulation Z's credit card rules.
Specifically, the Board used consumer testing to develop proposed model
forms for the following credit card disclosures required by Regulation
Z:
Summary table disclosures provided in direct-mail
solicitations and applications;
Disclosures provided at account opening;
Periodic statement disclosures; and
Subsequent disclosures, such as notices provided when key
account terms are changed, and notices on checks provided to access
credit card accounts.
Working closely with the Board, Macro International conducted
several tests. Each round of testing was conducted in a different city,
throughout the United States. In addition, the consumer testing groups
contained participants with a range of ethnicities, ages, educational
levels, credit card behavior, and whether a consumer likely has a prime
or subprime credit card.
Exploratory focus groups. In May and June 2006, the Board worked
with Macro International to conduct two sets of focus groups with
credit card consumers, in part, to learn more about what information
consumers currently use in making decisions about their credit card
accounts. Each focus group consisted of between eight and thirteen
people that discussed issues identified by the Board and raised by a
moderator from Macro International. Through these focus groups, the
Board gathered information on what credit terms consumers usually
consider when shopping for a credit card, what information they find
useful when they receive a new credit card in the mail, and what
information they find useful on periodic statements.
Cognitive interviews on existing disclosures. In August 2006, the
Board worked with Macro International to conduct nine cognitive
interviews with credit card customers. These cognitive interviews
consisted of one-on-one discussions with consumers, during
[[Page 32952]]
which consumers were asked to view existing sample credit card
disclosures. The goals of these interviews were: (1) To learn more
about what information consumers read when they receive current credit
card disclosures; (2) to research how easily consumers can find various
pieces of information in these disclosures; and (3) to test consumers'
understanding of certain credit card-related words and phrases.
1. Initial design of disclosures for testing. In the fall of 2006,
the Board worked with Macro International to develop sample credit card
disclosures to be used in the later rounds of testing, taking into
account information learned through the focus groups and the cognitive
interviews.
2. Additional cognitive interviews and revisions to disclosures. In
late 2006 and early 2007, the Board worked with Macro International to
conduct four rounds of cognitive interviews (between seven and nine
participants per round), where consumers were asked to view new sample
credit card disclosures developed by the Board and Macro International.
The rounds of interviews were conducted sequentially to allow for
revisions to the testing materials based on what was learned from the
testing during each previous round.
Results of testing. Several of the model forms were developed
through the testing. A report summarizing the results of the testing is
available on the Board's public Web site: http://www.federalreserve.gov
.
Testing participants generally read the summary table provided in
direct-mail credit card solicitations and applications and ignored
information presented outside of the table. Thus, the proposal requires
that information about events that trigger penalty rates and about
important fees (late-payment fees, over-the-credit-limit fees, balance
transfer fees, and cash advance fees) be placed in the table.
Currently, this information may be placed outside the table.
With respect to the account-opening disclosures, consumer testing
indicates that consumers commonly do not review their account
agreements, which are often in small print and dense prose. The
proposal would require creditors to include a table summarizing the key
terms applicable to the account, similar to the table required for
credit card applications and solicitations. Setting apart the most
important terms in this way will better ensure that consumers are
apprised of those terms.
With respect to periodic statement disclosures, testing
participants found it beneficial to have the different types of
transactions grouped together by type. Thus, the proposal requires
creditors to group transactions together by type, such as purchases,
cash advances, and balance transfers. In addition, many consumers more
easily noticed the number and amount of fees when the fees were
itemized and grouped together with interest charges. Consumers also
noticed fees and interest charges more readily when they were located
near the disclosure of the transactions on the account. Thus, under the
proposal, creditors would be required to group all fees together and
describe them in a manner consistent with consumers' general
understanding of costs (``interest charge'' or ``fee''), without regard
to whether the fees would be considered ``finance charges,'' ``other
charges'' or neither under the regulation.
With respect to change-in-terms notices, consumer testing indicates
that much like the account-opening disclosures, consumers may not
typically read such notices, because they are often in small print and
dense prose. To enhance the effectiveness of change-in-terms notices,
when a creditor is changing terms which were required to be disclosed
in the summary table provided at account opening, the proposed rules
would require the creditor to include a table summarizing any such
changed terms. Creditors commonly provide notices about changes to
terms or rates in the same envelope with periodic statements. Consumer
testing indicates that consumers may not typically look at the notices
if they are provided as separate inserts given with periodic
statements. Thus, in such cases, a table summarizing the change would
have to appear on the periodic statement directly above the transaction
list, where consumers are more likely to notice the changes.
Additional testing after comment period. After receiving comments
from the public on the proposal and the revised disclosure forms, the
Board will work with Macro International to revise the model
disclosures. Macro International then will conduct additional rounds of
cognitive interviews to test the revised disclosures. After the
cognitive interviews, quantitative testing will be conducted. The goal
of the quantitative testing is to measure consumers' comprehension and
the usability of the newly-developed disclosures relative to existing
disclosures and formats.
D. Other Outreach and Research
The Board also solicited input from members of the Board's Consumer
Advisory Council on various issues presented by the review of
Regulation Z's open-end credit rules. During 2005 and 2006, for
example, the Council discussed the feasibility and advisability of
reviewing Regulation Z in stages, ways to improve the summary table
provided on or with credit card applications and solicitations, issues
related to TILA's substantive protections (including dispute resolution
procedures), and issues related to the Bankruptcy Act amendments. In
addition, the Board met or conducted conference calls with various
industry and consumer group representatives throughout the review
process leading to this proposal. The Board also reviewed disclosures
currently provided by creditors, consumer complaints received by the
federal banking agencies, and surveys on credit card usage to help
inform the proposal.\2\
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\2\ Surveys reviewed include: Thomas A. Durkin, Credit Cards:
Use and Consumer Attitudes, 1970-2000, Federal Reserve Bulletin,
(September 2000); Thomas A. Durkin, Consumers and Credit
Disclosures: Credit Cards and Credit Insurance, Federal Reserve
Bulletin (April 2002).
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E. Reviewing Regulation Z in Stages
Based on the comments received and upon its own analysis, the Board
is proceeding with a review of Regulation Z in stages. This proposal
largely contains revisions to rules affecting open-end plans other than
HELOCs subject to Sec. 226.5b. These open-end (not home-secured) plans
are distinct from other TILA-covered products, and conducting a review
in stages allows for a manageable process. Possible revisions to rules
affecting HELOCs will be considered in the Board's review of home-
secured credit, currently underway. To minimize compliance burden for
creditors offering HELOCs as well as other open-end credit, many of the
open-end rules would be reorganized to delineate clearly the
requirements for HELOCs and other forms of open-end credit. Although
this reorganization would increase the size of the regulation and
commentary, the Board believes a clear delineation of rules for HELOCs
and other forms of open-end credit pending the review of HELOC rules
provides a clear compliance benefit to creditors. Creditors that
generate a single periodic statement for all open-end products would be
given the option to retain the existing periodic statement disclosure
scheme for HELOCs, or to disclose information on periodic statements
under the revised rules for other open-end plans.
F. Implementation Period
The Board contemplates providing creditors sufficient time to
implement
[[Page 32953]]
any revisions that may be adopted. The Board seeks comment on an
appropriate implementation period.
IV. The Board's Rulemaking Authority
TILA mandates that the Board prescribe regulations to carry out the
purposes of the act. TILA also specifically authorizes the Board, among
other things, to do the following:
Issue regulations that contain such classifications,
differentiations, or other provisions, or that provide for such
adjustments and exceptions for any class of transactions, that in the
Board's judgment are necessary or proper to effectuate the purposes of
TILA, facilitate compliance with the act, or prevent circumvention or
evasion. 15 U.S.C. 1604(a).
Exempt from all or part of TILA any class of transactions
if the Board determines that TILA coverage does not provide a
meaningful benefit to consumers in the form of useful information or
protection. The Board must consider factors identified in the act and
publish its rationale at the time it proposes an exemption for comment.
15 U.S.C. 1604(f).
Add or modify information required to be disclosed with
credit and charge card applications or solicitations if the Board
determines the action is necessary to carry out the purposes of, or
prevent evasions of, the application and solicitation disclosure rules.
15 U.S.C. 1637(c)(5).
Require disclosures in advertisements of open-end plans.
15 U.S.C. 1663.
In the course of developing the proposal, the Board has considered
the information collected from comment letters submitted in response to
its ANPRs, its experience in implementing and enforcing Regulation Z,
and the results obtained from testing various disclosure options in
controlled consumer tests. For the reasons discussed in this notice,
the Board believes this proposal is appropriate to effectuate the
purposes of TILA, to prevent the circumvention or evasion of TILA, and
to facilitate compliance with the act.
Also as explained in this notice, the Board believes that the
specific exemptions proposed are appropriate because the existing
requirements do not provide a meaningful benefit to consumers in the
form of useful information or protection. In reaching this conclusion,
the Board considered (1) the amount of the loan and whether the
disclosure provides a benefit to consumers who are parties to the
transaction involving a loan of such amount; (2) the extent to which
the requirement complicates, hinders, or makes more expensive the
credit process; (3) the status of the borrower, including any related
financial arrangements of the borrower, the financial sophistication of
the borrower relative to the type of transaction, and the importance to
the borrower of the credit, related supporting property, and coverage
under TILA; (4) whether the loan is secured by the principal residence
of the borrower; and (5) whether the exemption would undermine the goal
of consumer protection. The rationales for these proposed exemptions
are explained below.
V. Discussion of Major Proposed Revisions
The goal of the proposed revisions is to improve the effectiveness
of the Regulation Z disclosures that must be provided to consumers for
open-end accounts. A summary of the key account terms must accompany
applications and solicitations for credit card accounts. For all open-
end credit plans, creditors must disclose costs and terms at account
opening, generally before the first transaction. Consumers must receive
periodic statements of account activity, and creditors must provide
notice before certain changes in the account terms may become
effective.
To shop for and understand the cost of credit, consumers must be
able to identify and understand the key terms of open-end accounts. But
the terms and conditions affecting credit card account pricing can be
complex. The proposed revisions to Regulation Z are intended to provide
the most essential information to consumers when the information would
be most useful to them, with content and formats that are clear and
conspicuous. The proposed revisions are expected to improve consumers'
ability to make informed credit decisions and enhance competition among
credit card issuers. Many of the changes are based on the consumer
testing that was conducted in connection with the review of Regulation
Z.
In considering the proposed revisions, the Board has also sought to
balance the potential benefits for consumers with the compliance
burdens imposed on creditors. For example, the proposed revisions seek
to provide greater certainty to creditors in identifying what costs
must be disclosed for open-end plans, and when those costs must be
disclosed. More effective disclosures may also reduce customer
confusion and misunderstanding, which may also ease creditors' costs
relating to consumer complaints and inquiries.
A. Credit Card Applications and Solicitations
Under Regulation Z, credit and charge card issuers are required to
provide information about key costs and terms with their applications
and solicitations.\3\ This information is abbreviated, to help
consumers focus on only the most important terms and decide whether to
apply for the credit card account. If consumers respond to the offer
and are issued a credit card, creditors must provide more detailed
disclosures at account opening, before the first transaction occurs.
---------------------------------------------------------------------------
\3\ Charge cards are a type of credit card for which full
payment is typically expected upon receipt of the billing statement.
To ease discussion, this notice will refer simply to ``credit
cards.''
---------------------------------------------------------------------------
The application and solicitation disclosures are considered among
the most effective TILA disclosures principally because they must be
presented in a standardized table with headings, content, and format
substantially similar to the model forms published by the Board. In
2001, the Board revised Regulation Z to enhance the application and
solicitation disclosures by adding rules and guidance concerning the
minimum type size and requiring additional fee disclosures.
Penalty pricing. The proposal would make several revisions that
seek to improve consumers' understanding of default or penalty pricing.
Currently, credit card issuers must disclose inside the table the APR
that will apply in the event of the consumer's ``default.'' Some
creditors define a ``default'' as making one late payment or exceeding
the credit limit once. The actions that may trigger the penalty APR are
currently required to be disclosed outside the table.
Consumer testing indicated that many consumers did not notice the
information about penalty pricing when it was disclosed outside the
table. Under the proposal, card issuers would be required to include in
the table the specific actions that trigger penalty APRs (such as a
late payment), the rate that will apply, the balances to which the
penalty rate will apply, and the circumstances under which the penalty
rate will expire or, if true, the fact that the penalty rate could
apply indefinitely. The regulation would require card issuers to use
the term ``penalty APR'' because the testing demonstrated that some
consumers are confused by the term ``default rate.''
Similarly, the proposal requires card issuers to disclose inside
(rather than outside) the table the fees for paying late, exceeding a
credit limit, or making a payment that is returned, along with
[[Page 32954]]
a cross-reference to the penalty rate if, for example, paying late
could also trigger the penalty rate. Cash advance fees and balance
transfer fees would also be disclosed inside the table. This proposed
change is also based on consumer testing results; fees disclosed
outside the table were often not noticed. Requiring card issuers to
disclose returned-payment fees would be a new disclosure.
Variable-rate information. Currently, applications and
solicitations offering variable APRs must disclose inside the table the
index or formula used to make adjustments and the amount of any margin
that is added. Additional details, such as how often the rate may
change, must be disclosed outside the table. Under the proposal,
information about variable APRs would be reduced to a single phrase
indicating the APR varies ``with the market,'' along with a reference
to the type of index, such as ``Prime.'' Consumer testing indicated
that few consumers use the variable-rate information when shopping for
a card. Moreover, participants were distracted or confused by details
about margin values, how often the rate may change, and where an index
can be found.
Payment allocation. The proposal would add a new disclosure to the
table about the effect on credit costs of creditors' payment allocation
methods when payments are applied entirely to transferred balances at
low introductory APRs. If, as is common, a creditor allocates payments
to low-rate balances first, consumers who make purchases on the account
will not be able to take advantage of any ``grace period'' on
purchases, without paying off the entire balance, including the low-
rate balance transfer. Consumer testing indicated that consumers are
often confused about this aspect of balance transfer offers. The new
disclosure would alert consumers that they will pay interest on their
purchases until the transferred balance is paid in full.
Web site reference. The proposal would also require card issuers to
include a reference to the Board's Web site, where additional
information is available about how to compare credit cards and what
factors to consider. This responds to commenters who suggested that the
Board consider nonregulatory approaches to provide opportunities for
consumers to learn about credit products.
Subprime accounts. The proposal also addresses a concern that has
been raised about subprime credit cards, which are generally offered to
consumers with low credit scores or credit problems. Subprime credit
cards often have substantial fees associated with opening the account.
Typically, fees for the issuance or availability of credit are billed
to consumers on the first periodic statement, and can substantially
reduce the amount of credit available to the consumer. For example, the
initial fees on an account with a $250 credit limit may reduce the
available credit to less than $100. Consumer complaints received by the
federal banking agencies state that consumers were unaware when they
applied for cards of how little credit would be available after all the
fees were assessed at account opening.
To address this concern, the proposal would require additional
disclosures if the card issuer requires fees or a security deposit to
issue the card that are 25 percent or more of the minimum credit limit
offered for the account. In such cases, the card issuer would be
required to include an example in the table of the amount of available
credit the consumer would have after paying the fees or security
deposit, assuming the consumer receives the minimum credit limit.
Balance computation methods. TILA requires creditors to identify
their balance computation method by name, and Regulation Z requires
that the disclosure be inside the table. However, consumer testing
suggests that these names, such as the ``two-cycle average daily
balance method,'' hold little meaning for consumers, and that consumers
do not consider such information when shopping for accounts.
Accordingly, the proposed rule requires creditors to place the name of
the balance computation method outside the table, so that the
disclosure does not detract from information that is more important to
consumers.
B. Account-Opening Disclosures
Regulation Z requires creditors to disclose costs and terms before
the first transaction is made on the account. The disclosures must
specify the circumstances under which a ``finance charge'' may be
imposed and how it will be determined. A ``finance charge'' is any
charge that may be imposed as a condition of or an incident to the
extension of credit, and includes, for example, interest, transaction
charges, and minimum charges. The finance charge disclosures include a
disclosure of each periodic rate of interest that may be applied to an
outstanding balance (e.g., purchases, cash advances) as well as the
corresponding annual percentage rate (APR). Creditors must also explain
any grace period for making a payment without incurring a finance
charge. They must also disclose the amount of any charge other than a
finance charge that may be imposed as part of the credit plan (``other
charges''), such as a late-payment charge. Consumers'' rights and
responsibilities in the case of unauthorized use or billing disputes
must also be explained. Currently, there are few format requirements
for these account-opening disclosures, which are typically interspersed
among other contractual terms in the creditor's account agreement.
Account-opening summary table. Account-opening disclosures have
often been criticized because the key terms TILA requires to be
disclosed are often interspersed within the credit agreements, and such
agreements are long and complex. The proposal to require creditors to
include a table summarizing the key terms addresses that concern by
making the information more conspicuous. Creditors may continue,
however, to provide other account-opening disclosures, aside from the
fees and terms specified in the table, with other terms in their
account agreements.
The new table provided at account opening would be substantially
similar to the table provided with direct-mail credit card applications
and solicitations. Consumer testing and surveys indicate that consumers
generally are aware of the table on applications and solicitations.
Consumer testing also indicates that consumers may not typically read
their account agreements, which are often in small print and dense
prose. Thus, setting apart the most important terms in a summary table
will better ensure that consumers are aware of those terms.
The table required at account opening would include more
information than the table required at application. For example, it
would include a disclosure of any fee for transactions in a foreign
currency or that take place in a foreign country. However, to reduce
compliance burden for creditors that provide account-opening
disclosures at application, the proposal would allow creditors to
provide the more specific and inclusive account-opening table at
application in lieu of the table otherwise required at application.
How charges are disclosed. Under the current rules, a creditor must
disclose any ``finance charge'' or ``other charge'' in the written
account-opening disclosures. A subsequent written notice is required if
one of the fees disclosed at account opening increases or if certain
fees are newly introduced during the life of the plan. The terms
``finance charge'' and ``other charge'' are given broad and flexible
meanings in the regulation and commentary. This ensures that TILA
adapts to changing
[[Page 32955]]
conditions, but it also creates uncertainty. The distinctions among
finance charges, other charges, and charges that do not fall into
either category are not always clear. As creditors develop new kinds of
services, some find it difficult to determine if associated charges for
the new services meet the standard for a ``finance charge'' or ``other
charge'' or are not covered by TILA at all. This uncertainty can pose
legal risks for creditors that act in good faith to comply with the
law. Examples of included or excluded charges are in the regulation and
commentary, but these examples cannot provide definitive guidance in
all cases. Creditors are subject to civil liability and administrative
enforcement for underdisclosing the finance charge or otherwise making
erroneous disclosures, so the consequences of an error can be
significant. Furthermore, overdisclosure of rates and finance charges
is not permitted by Regulation Z for open-end credit.
The fee disclosure rules also have been criticized as being
outdated. These rules require creditors to provide fee disclosures at
account opening, which may be months, and possibly years, before a
particular disclosure is relevant to the consumer, such as when the
consumer calls the creditor to request a service for which a fee is
imposed. In addition, an account-related transaction may occur by
telephone, when a written disclosure is not feasible.
The proposed rule is intended to respond to these criticisms while
still giving full effect to TILA's requirement to disclose credit
charges before they are imposed. Accordingly, under the proposal, the
rules would be revised to (1) specify precisely the charges that
creditors must disclose in writing at account opening (interest,
minimum charges, transaction fees, annual fees, and penalty fees such
as for paying late), which would be listed in the summary table, and;
(2) permit creditors to disclose other less critical charges orally or
in writing before the consumer agrees to or becomes obligated to pay
the charge. Although the proposal would permit creditors to disclose
certain costs orally for purposes of TILA, the Board anticipates that
creditors will continue to identify fees in the account agreement for
contract or other reasons.
Under the proposal, some charges would be covered by TILA that the
current regulation, as interpreted by the staff commentary, excludes
from TILA coverage, such as fees for expedited payment and expedited
delivery. It may not have been useful to consumers to cover such
charges under TILA when such coverage would have meant only that the
charges were disclosed long before they became relevant to the
consumer. The Board believes it would be useful to consumers to cover
such charges under TILA as part of a rule that permits their disclosure
at a relevant time. Further, as new services (and associated charges)
are developed, the proposal minimizes risk of civil liability
associated with the determination as to whether a fee is a finance
charge or an other charge, or is not covered by TILA at all.
C. Periodic Statements
Creditors are required to provide periodic statements reflecting
the account activity for the billing cycle (typically, about one
month). In addition to identifying each transaction on the account,
creditors must identify each ``finance charge'' using that term, and
each ``other charge'' assessed against the account during the statement
period. When a periodic interest rate is applied to an outstanding
balance to compute the finance charge, creditors must disclose the
periodic rate and its corresponding APR. Creditors must also disclose
an ``effective'' or ``historical'' APR for the billing cycle, which,
unlike the corresponding APR, includes not just interest but also
finance charges imposed in the form of fees (such as cash advance fees
or balance transfer fees). Periodic statements must also state the time
period a consumer has to pay an outstanding balance to avoid additional
finance charges (the ``grace period''), if applicable.
Fees and interest costs. The proposal contains a number of
revisions to the periodic statement to improve consumers' understanding
of fees and interest costs. Currently, creditors must identify on
periodic statements any ``finance charges'' that have been added to the
account during the billing cycle, and creditors typically list these
charges with other transactions, such as purchases, chronologically on
the statement. The finance charges must be itemized by type. Thus,
interest charges might be described as ``finance charges due to
periodic rates.'' Charges such as late payment fees, which are not
``finance charges,'' are typically disclosed individually and are
interspersed among other transactions.
Consumer testing indicated that consumers generally understand that
``interest'' is the cost that results from applying a rate to a balance
over time and distinguish ``interest'' from other fees, such as a cash
advance fee or a late payment fee. Consumer testing also indicated that
many consumers more easily determine the number and amount of fees when
the fees are itemized and grouped together.
Thus, under the proposal, creditors would be required to group all
charges together and describe them in a manner consistent with
consumers' general understanding of costs (``interest charge'' or
``fee''), without regard to whether the charges would be considered
``finance charges,'' ``other charges,'' or neither. Interest charges
would be identified by type (for example, interest on purchases or
interest on balance transfers) as would fees (for example, cash advance
fee or late-payment fee).
Consumer testing also indicated that many consumers more quickly
and accurately determined the total dollar cost of credit for the
billing cycle when a total dollar amount of fees for the cycle was
disclosed. Thus, the proposal would require creditors to disclose the
(1) total fees and (2) total interest imposed for the cycle. The
proposal would also require disclosure of year-to-date totals for
interest charges and fees. For many consumers, costs disclosed in
dollars are more readily understood than costs disclosed as percentage
rates. The year-to-date figures are intended to assist consumers in
better understanding the overall cost of their credit account and would
be an important disclosure and an effective aid in understanding
annualized costs, especially if the Board were to eliminate the
requirement to disclose the effective APR on periodic statements, as
discussed below.
The effective APR. The ``effective'' APR disclosed on periodic
statements reflects the cost of interest and certain other finance
charges imposed during the statement period. For example, for a cash
advance, the effective APR reflects both interest and any flat or
proportional fee assessed for the advance.
For the reasons discussed below, the Board is proposing two
alternative approaches to address the effective APR. The first approach
would try to improve consumer understanding of this rate and reduce
creditor uncertainty about its calculation. The second approach would
eliminate the requirement to disclose the effective APR.
Creditors believe the effective APR should be eliminated. They
believe consumers do not understand the effective APR, including how it
differs from the corresponding (interest rate) APR, why it is often
``high,'' and which fees the effective APR reflects. Creditors say they
find it difficult, if not impossible, to explain the effective APR to
consumers who call them with questions or concerns. They note that
[[Page 32956]]
callers sometimes believe, erroneously, that the effective APR signals
a prospective increase in their interest rate, and they may make
uninformed decisions as a result. And, creditors say, even if the
consumer does understand the effective APR, the disclosure does not
provide any more information than a disclosure of the total dollar
costs for the billing cycle. Moreover, creditors say the effective APR
is arbitrary and inherently inaccurate, principally because it
amortizes the cost for credit over only one month (billing cycle) even
though the consumer may take several months (or longer) to repay the
debt.
Consumer groups acknowledge that the effective APR is not well
understood, but argue that it nonetheless serves a useful purpose by
showing the higher cost of some credit transactions. They contend the
effective APR helps consumers decide each month whether to continue
using the account, to shop for another credit product, or to use an
alternative means of payment such as a debit card. Consumer groups also
contend that reflecting costs, such as cash advance fees and balance
transfer fees, in the effective APR creates a ``sticker shock'' and
alerts consumers that the overall cost of a transaction for the cycle
is high and exceeds the advertised corresponding APR. This shock, they
say, may persuade some consumers not to use certain features on the
account, such as cash advances, in the future. In their view, the
utility of the effective APR would be maximized if it reflected all
costs imposed during the cycle (rather than only some costs as is
currently the case).
As part of the consumer testing, mock periodic statements were
developed in an attempt to improve consumers' understanding of the
effective APR. A written explanation and varying terminology were
tested. In most rounds participants showed little understanding of the
effective APR, but the form was adjusted between rounds as to
terminology and format, and in the last round a number of participants
showed more understanding of the effective APR.
Thus, the draft proposal includes a number of revisions to the
presentation of the effective APR intended to help consumers understand
the figure. In addition, the proposal seeks to improve consumer
understanding and reduce creditor uncertainty by specifying more
clearly which fees are to be included in the effective APR.\4\ As
mentioned, however, the Board is also seeking comment on an alternative
proposal to eliminate the disclosure on the basis that it may not
provide consumers a meaningful benefit.
---------------------------------------------------------------------------
\4\ The proposal also would reverse a staff commentary provision
that excludes ATM fees from the finance charge and effective APR;
and it would address for the first time foreign transaction fees,
which it would clarify are to be included in the finance charge and
effective APR.
---------------------------------------------------------------------------
Transactions. Currently, there are no format requirements for
disclosing different types of transactions, such as purchases, cash
advances, and balance transfers on periodic statements. Often,
transactions are presented together in chronological order. Consumer
testing indicated that participants found it helpful to have similar
types of transactions grouped together on the statement. Consumers also
found it helpful, within the broad grouping of fees and transactions,
when transactions were segregated by type (e.g., listing all purchases
together, separate from cash advances or balance transfers). Further,
consumers noticed fees and interest charges more readily when they were
located near the transactions. For these reasons, the proposal requires
creditors to: (1) Group similar transactions together by type, such as
purchases, cash advances, and balance transfers, and (2) group fees and
interest charges together, itemized by type, with the list of
transactions.
Late payments. Currently, creditors must disclose the date by which
consumers must pay a balance to avoid finance charges. Creditors must
also disclose any cut-off time for receiving payments on the payment
due date; this is usually disclosed on the reverse side of periodic
statements. The Bankruptcy Act amendments expressly require creditors
to disclose the payment due date (or if different, the date after which
a late-payment fee may be imposed) along with the amount of the late-
payment fee.
Under the proposal, creditors would be required to disclose the
payment due date on the front side of the periodic statement and,
closely proximate to the date, any cut-off time if it is before 5 p.m.
Consumer testing indicates that many consumers believe cut-off times
are the close of the business day and more readily notice the cut-off
time when it is located near the due date.
Creditors would also be required to disclose, in close proximity to
the due date, the amount of the late-payment fee and the penalty APR
that could be triggered by a late payment. Applying the penalty APR to
outstanding balances can significantly increase costs. Thus, it is
important for consumers to be alerted to the consequence of paying
late.
Minimum payments. The Bankruptcy Act requires creditors offering
open-end plans to provide a warning about the effects of making only
minimum payments. The proposal would implement this requirement solely
for credit card issuers. Under the proposal, card issuers must provide
(1) a ``warning'' statement indicating that making only the minimum
payment will increase the interest the consumer pays and the time it
takes to repay the consumer's balance; (2) a hypothetical example of
how long it would take to pay a specified balance in full if only
minimum payments are made; and (3) a toll-free telephone number that
consumers may call to obtain an estimate of the time it would take to
repay their actual account balance using minimum payments. Most card
issuers must establish and maintain their own toll-free telephone
numbers to provide the repayment estimates. However, the Board is
required to establish and maintain, for two years, a toll-free
telephone number for creditors that are depository institutions having
assets of $250 million or less. This number is for the customers of
those institutions to call to get answers to questions about how long
it will take to pay their account in full making only the minimum
payment. The Federal Trade Commission (FTC) must maintain a similar
toll-free telephone number for use by customers of creditors that are
not depository institutions. In order to standardize the information
provided to consumers through the toll-free telephone numbers, the
Bankruptcy Act amendments direct the Board to prepare a ``table''
illustrating the approximate number of months it would take to repay an
outstanding balance if the consumer pays only the required minimum
monthly payments and if no other advances are made (``generic repayment
estimate'').
Pursuant to the Bankruptcy Act amendments, the proposal also allows
a card issuer to establish a toll-free telephone number to provide
customers with the actual number of months that it will take consumers
to repay their outstanding balance (``actual repayment disclosure'')
instead of providing an estimate based on the Board-created table. A
card issuer that does so need not include a hypothetical example on its
periodic statements, but must disclose the warning statement and the
toll-free telephone number.
The proposal also allows card issuers to provide the actual
repayment disclosure on their periodic statements. Card issuers would
be encouraged to use this approach. Participants in consumer testing
who typically carry
[[Page 32957]]
credit card balances (revolvers) found an estimated repayment period
based on terms that apply to their own account more useful than a
hypothetical example. To encourage card issuers to provide the actual
repayment disclosure on their periodic statements, the proposal
provides that if card issuers do so, they need not disclose the
warning, the hypothetical example and a toll-free telephone number on
the periodic statement, nor need they maintain a toll-free telephone
number to provide the actual repayment disclosure.
As described above, the Bankruptcy Act also requires the Board to
develop a ``table'' that creditors, the Board and the FTC must use to
create generic repayment estimates. Instead of creating a table, the
proposal contains guidance for how to calculate generic repayment
estimates. Consumers that call the toll-free telephone number could be
prompted to input information about their outstanding balance and the
APR applicable to their account. Although issuers have the ability to
program their systems to obtain consumers' account information from
their account management systems, for the reasons discussed in the
section-by-section analysis to Appendix M-1, the proposal does not
require issuers to do so.
D. Changes in Consumer's Interest Rate and Other Account Terms
Regulation Z requires creditors to provide advance written notice
of some changes to the terms of an open-end plan. The proposal includes
several revisions to Regulation Z's requirements for notifying
consumers about such changes.
Currently, Regulation Z requires creditors to send, in most cases,
notices 15 days before the effective date of certain changes in the
account terms. However, creditors need not inform consumers in advance
if the rate applicable to their account increases due to default or
delinquency. Thus, consumers may not realize until they receive their
monthly statement for a billing cycle that their late payment triggered
application of the higher penalty rate, effective the first day of the
month's statement.
Timing. Currently, Regulation Z generally requires creditors to
mail a change-in-terms notice 15 days before a change takes effect.
Consumer groups and others have criticized the 15-day period as
providing too little time after the notice is sent for the consumer to
receive the notice, shop for alternative credit and possibly pay off
the existing credit card account. Under the proposal, notice must be
sent at least 45 days before the effective date of the change, which
would give consumers about a month to pursue their options.
Penalty rates. Currently, creditors must inform consumers about
rates that are increased due to default or delinquency, but not in
advance of implementation of the increase. Contractual thresholds for
default are sometimes very low, and penalty pricing commonly applies to
all existing balances, including low-rate promotional balances. An
event triggering the default may occur a year or more after the account
is opened. For example, a consumer may open an account, and a year or
more later may take advantage of a low promotional rate to transfer
balances from another account. That consumer reasonably may not recall
reading in the account-opening disclosure that a single transaction
exceeding the credit limit could cause the interest rates on existing
balances, including on the promotional transfer, to increase. Thus, the
proposal would expand the events triggering advance notice to include
increases triggered by default or delinquency. Advance notice of a
potentially significant increase in the cost of credit is intended to
allow consumers to consider alternatives before the increase is
imposed, such as making other financial arrangements or choosing not to
engage in additional transactions that will increase the balances on
their account. Comment is solicited on whether a shorter time period
than 45 days' advance notice would be adequate. Actions creditors may
engage in to mitigate risk, such as by lowering credit limits or
suspending credit privileges, are not affected by the proposal.
Format. Currently, there are few format requirements for change-in-
terms disclosures. As with account-opening disclosures, creditors
commonly intersperse change-in-terms notices with other amendments to
the account agreement, and both are provided in pamphlets in small
print and dense prose. Consumer testing indicates many consumers set
aside and do not read densely-worded pamphlets.
Under the proposal, creditors may continue to notify consumers
about changes to terms required to be disclosed by Regulation Z, along
with other changes to the account agreement. However, if a changed term
is one that must be provided in the account-opening summary table,
creditors must provide that change in a summary table to enhance the
effectiveness of the change-in-terms notice.
Creditors commonly enclose notices about changes to terms or rates
with periodic statements. Under the proposal, if a notice enclosed with
a periodic statement discusses a change to a term that must be
disclosed in the account-opening summary table, or announces that a
penalty rate will be imposed on the account, a table summarizing the
impending change must appear on the periodic statement. The table would
have to appear directly above the transaction list, in light of testing
that shows many consumers tend to focus on the list of transactions.
Consumers who participated in testing set aside change-in-terms
pamphlets that accompanied periodic statements. Participants uniformly
looked at the front side of periodic statements and reviewed at least
the transactions.
E. Advertisements
Advertising minimum payments. Consumers commonly are offered the
option to finance the purchase of goods or services (such as appliances
or furniture) by establishing an open-end credit plan. The monthly
minimum payments associated with the purchase are often advertised as
part of the offer. Under current rules, advertisements for open-end
credit plans are not required to include information about the time it
will take to pay for a purchase or the total cost if only minimum
payments are made; if the transaction were a closed-end installment
loan, the number of payments and the total cost would be disclosed.
Under the proposal, advertisements stating a minimum monthly payment
for an open-end credit plan that would be established to finance the
purchase of goods or services must state, in equal prominence to the
minimum payment, the time period required to pay the balance and the
total of payments if only minimum payments are made.
Advertising ``fixed'' rates. Creditors sometimes advertise the APR
for open-end accounts as a ``fixed'' rate even though the creditor
reserves the right to change the rate at any time for any reason.
Consumer testing indicated that many consumers believe that a ``fixed
rate'' will not change, and do not understand that creditors may use
the term ``fixed'' as a shorthand reference for rates that do not vary
based on changes in an index or formula. Under the proposal, an
advertisement may refer to a rate as ``fixed'' if the advertisement
specifies a time period the rate will be fixed and the rate will not
increase during that period. If a time period is not specified, the
advertisement may refer to a rate as ``fixed'' only if the rate will
not increase while the plan is open.
[[Page 32958]]
F. Other Disclosures and Protections
``Open-end'' plans comprised of closed-end features. Some creditors
give open-end credit disclosures on credit plans that include closed-
end features, that is, separate loans with fixed repayment periods.
These creditors treat these loans as advances on a revolving credit
line for purposes of Regulation Z even though the consumer's credit
information is separately evaluated and he or she may have to complete
a separate application for each ``advance,'' and the consumer's
payments on the ``advance'' do not replenish the ``line.'' Provisions
in the commentary lend support to this approach. The proposal would
revise these provisions to indicate closed-end disclosures rather than
open-end disclosures are appropriate when the credit being extended is
individual loans that are individually approved and underwritten.
Checks that access a credit card account. Many credit card issuers
provide accountholders with checks that can be used to obtain cash, pay
the outstanding balance on another account, or purchase goods and
services directly from merchants. The solicitation letter accompanying
the checks may offer a low introductory APR for transactions that use
the checks. The proposed revisions would require the checks mailed by
card issuers to be accompanied by cost disclosures.
Currently, creditors need not disclose costs associated with using
the checks if the finance charges that would apply (that is, the
interest rate and transaction fees) have been previously disclosed,
such as in the account agreement. If the check is sent 30 days or more
after the account is opened, creditors must refer consumers to their
account agreements for more information about how the rate and fees are
determined.
Consumers may receive these checks throughout the life of the
credit card account. Thus, significant time may elapse between the time
account-opening disclosures are provided and the time a consumer
considers using the check. In addition, consumer testing indicates that
consumers may not notice references to other documents such as the
account-opening disclosures or periodic statements for rate information
because they tend to look for percentages and dollar figures when
looking for the costs of using the checks. Under the proposed
revisions, checks that can access credit card accounts must be
accompanied by information about the rates and fees that will apply if
the checks are used, and about whether a grace period exists. To ensure
the disclosures are conspicuous, creditors would be required to provide
the information in a table, on the front side of the page containing
the checks.
Credit insurance, debt cancellation, and debt suspension coverage.
Under Regulation Z, premiums for credit life, accident, health, or
loss-of-income insurance are considered finance charges if the
insurance is written in connection with a credit transaction. However,
these costs may be excluded from the finance charge and APR (for both
open-end and closed-end credit transactions), if creditors disclose the
cost and the fact that the coverage is not required to obtain credit,
and the consumer signs or initials an affirmative written request for
the insurance. Since 1996, the same rules have applied to creditors'
``debt cancellation'' agreements, in which a creditor agrees to cancel
the debt, or part of it, on the occurrence of specified events.
Under the proposal, the existing rules for debt cancellation
coverage would also be applied to ``debt suspension'' coverage (for
both open-end credit and closed-end transactions). ``Debt suspension''
products are related to, but different from, debt cancellation. Debt
suspension products merely defer consumers' obligation to make the
minimum payment for some period after the occurrence of a specified
event. During the suspension period, interest may continue to accrue,
or it may be suspended as well. Under the proposal, to exclude the cost
of debt suspension coverage from the finance charge and APR, creditors
must inform consumers that the coverage suspends, but does not cancel,
the debt.
Under the current rules, charges for credit insurance and debt
cancellation coverage are deemed not to be finance charges if a
consumer requests coverage after an open-end credit account is opened
or after a closed-end credit transaction is consummated (the coverage
is deemed not to be ``written in connection'' with the credit
transaction). Because in such cases the charges are defined as non-
finance charges, Regulation Z does not require a disclosure or written
evidence of consent to exclude them from the finance charge. The
proposed revisions to Regulation Z would implement a broader
interpretation of ``written in connection'' with a credit transaction
and require creditors to provide disclosures, and obtain evidence of
consent, on sales of credit insurance or debt cancellation or
suspension coverage during the life of an open-end account. If a
consumer requests the coverage by telephone, creditors may provide the
disclosures orally, but in that case they must mail written disclosures
within three days of the call.\5\
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\5\ The proposed revisions to Regulation Z requiring disclosures
to be mailed within three days of a telephone request for these
products are consistent with the rules of the federal banking
agencies governing insured depository institutions' sales of
insurance and with guidance published by the Office of the
Comptroller of the Currency (OCC) concerning national banks' sales
of debt cancellation and debt suspension products.
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VI. Section-by-Section Analysis
In reviewing the rules affecting open-end credit, the Board has
reorganized some provisions to make the regulation easier to use. Rules
affecting home-equity lines of credit (HELOCs) subject to Sec. 226.5b
are separately delineated in Sec. 226.6 (account-opening disclosures),
Sec. 226.7 (periodic statements), and Sec. 226.9 (subsequent
disclosures) Footnotes have been moved to the text of the regulation or
commentary, as appropriate. These proposed revisions are identified in
a table below.
See IX. Redesignation Table.
Introduction
The official staff commentary to Regulation Z begins with an
Introduction. Comment I-6 discusses reference materials published at
the end of each section of the commentary adopted in 1981. 46 FR
50,288; October 9, 1981. The references were intended as a compliance
aid during the transition to the 1981 revisions to Regulation Z. The
Board would delete these references and comment I-6, as obsolete.
Comment I-3, I-4(b), and I-7, which address 1981 rules of transition,
also would be deleted as obsolete.
Section 226.1 Authority, Purpose, Coverage, Organization, Enforcement,
and Liability
Section 226.1(c) generally outlines the persons and transactions
covered by Regulation Z. Comment 1(c)-1 provides, in part, that the
regulation applies to consumer credit extended to residents (including
resident aliens) of a state. Technical revisions are proposed for
clarity. Comment is requested if further guidance on the scope of
coverage would be helpful.
Section 226.1(d)(2), which summarizes the organization of the
regulation's open-end credit rules (Subpart B), would be amended to
reinsert text inadvertently deleted in a previous rulemaking. See 54 FR
24670; June 9, 1989. Section 226.1(d)(4), which summarizes
miscellaneous provisions in the regulation (Subpart D), would be
updated to describe amendments made in 2001 to Subpart D relating to
[[Page 32959]]
disclosures made in languages other than English. See 66 FR 17339;
March 30, 2001. The substance of Footnote 1 would be deleted as
unnecessary.
Section 226.2 Definitions and Rules of Construction
2(a) Definitions
2(a)(2) Advertisement
For clarity, the Board proposes technical revisions to the
commentary to Sec. 226.2(a)(2), with no intended change in substance
or meaning. No changes are proposed for the text of Sec. 226.2(a)(2).
2(a)(4) Billing Cycle
TILA Section 127(b) provides that, for an open-end credit plan, the
creditor shall send the consumer a periodic statement for each billing
cycle at the end of which there is an outstanding balance or with
respect to which a finance charge is imposed. 15 U.S.C. 1637(b).
``Billing cycle'' is not defined in the statute, but is defined in
Sec. 226.2(a)(4) of Regulation Z as ``the interval between the days or
dates of regular periodic statements.'' In addition, Sec. 226.2(a)(4)
requires that billing cycles be equal and no longer than a quarter of a
year, and allows a variance of up to four days from the regular day or
date of the statement. Comment 2(a)(4)-3 provides an exception to the
requirement for equal cycles: the ``transitional billing cycle that can
occur when the creditor occasionally changes its billing cycles so as
to establish a new statement day or date.'' Under the proposal, the
Board would clarify that creditors may also vary the length of the
first cycle on an open-end account in certain situations.
Questions have sometimes arisen about the first cycle that occurs
when a consumer opens an open-end credit account, and specifically,
about whether the first cycle may vary by more than four days from the
regular cycle interval without violating the equal-cycle requirement.
For example, in order to establish the consumer's account on the
creditor's billing system, the first cycle may need to be longer or
shorter than a monthly period by more than four days, depending upon
the date the account is opened. The Board believes that such a variance
for a first cycle, within reason, would not harm consumers and would
facilitate compliance. Comment 2(a)(4)-3 would be revised to clarify
this point.
2(a)(15) Credit Card
TILA defines ``credit card'' as ``any card, plate, coupon book or
other credit device existing for the purpose of obtaining money,
property, labor, or services on credit.'' TILA Section 103(k); 15
U.S.C. 1602(k). In addition, Regulation Z provides that a credit card
is a ``single credit device that may be usable from time to time to
obtain credit.'' See Sec. 226.2(a)(15). The definition of ``credit
card'' in the regulation would remain largely unchanged; however, the
current reference to a ``coupon book'' in the definition would be
deleted as obsolete.
Checks that access credit card accounts. Credit card issuers
sometimes provide cardholders with checks that access a credit card
account, which can be used to obtain cash, purchase goods or services,
or pay the outstanding balance on another account. These checks are
often mailed to consumers unsolicited, sometimes with consumers'
monthly statements. When a consumer uses such a check, the amount of
the check will be billed to the cardholder's account.
Historically, checks that access credit card accounts have not been
treated as ``credit cards'' under TILA because each check can be used
only once and not ``from time to time.'' See comment 2(a)(15)-1. As a
result, TILA's protections involving merchant disputes, unauthorized
use of the account, and the prohibition against unsolicited issuance,
which apply only to ``credit cards,'' do not apply to these checks. See
Sec. 226.12. However, other protections do apply to such checks. See
Sec. 226.13. In the December 2004 ANPR, the Board solicited comment as
to whether it should extend TILA's protections for credit cards to
other extensions on credit card accounts, in particular checks that
access credit card accounts. Q45. The Board also asked whether the
industry is developing open-end credit plans that would allow consumers
to conduct transactions using only account numbers and that do not
involve the issuance of physical devices traditionally considered to be
credit cards. Q44.
In response to the December 2004 ANPR, several consumer commenters
urged the Board to expand the definition of ``credit card'' to include
checks that access a credit card account, in particular to address the
risk of increased fraud and heightened identity theft stemming from the
unrestricted issuance of such checks. Specifically, these commenters
cited concerns that these checks could be sent to a consumer at any
time without the consumer's request. Alternatively, some consumer
commenters suggested that if these checks continued to be issued on an
unsolicited basis, consumers should at least be able to opt out from
receiving them. In addition, one consumer group commented that the
Board could address non-physical credit cards by clarifying that the
term ``device'' as it appears in the definition of ``credit card'' can
include any physical object or a method or process.
Industry commenters opposed expanding the definition of ``credit
card'' to cover checks that access credit card accounts, for various
reasons. In general, industry commenters stated that they were aware of
few complaints regarding such checks, and that in their experience,
most consumers find the checks useful and convenient, as demonstrated
by their frequent use. In addressing unsolicited issuance concerns
specifically, industry commenters noted that upon a consumer's request,
most issuers will discontinue sending checks that access a credit card
account.
Industry commenters also stated that it was unnecessary to extend
the unauthorized use protections to convenience checks because
convenience check transactions are generally subject to the Uniform
Commercial Code (UCC) provisions governing checks, and thus a consumer
generally would not have any liability for a forged check, provided the
consumer complies with certain timing requirements. Industry commenters
also opposed applying the merchant dispute provisions (in Sec. 226.12)
to checks that access a credit card account, stating that these checks
are not processed through the payment card associations' networks.
Because card issuers may have no connection to or relationship with
merchants that accept these checks, industry commenters stated that
issuers do not have the ability to charge back to that merchant
transactions conducted with these checks. Accordingly, industry
commenters believed that the consumer was in the best position to
contact the merchant in the event of a dispute involving a transaction
using one of these checks.
In the proposal, the definition of ``credit card'' would remain
unchanged. The Board believes it may be unnecessary to address
unauthorized use concerns by treating checks that access credit card
accounts as credit cards, to the extent existing law or agreements
provide protections to these transactions. Moreover, under Regulation
Z, a consumer is currently able to assert billing error claims for
transactions involving checks that access a credit card account because
the billing error provisions in Sec. 226.13 apply to any extension of
credit under an open-end plan, and are not limited to credit cards. The
Board also does not
[[Page 32960]]
believe that it is necessary to require issuers to provide consumers
with the ability to opt out of receiving checks that access credit card
accounts. The Board understands that in many instances, issuers will
honor consumer requests to opt out of receiving such checks, and the
Board encourages creditors to continue the practice. In addition, as
noted above, consumers would be able to assert a billing error claim
with respect to any unauthorized transactions involving such checks and
is not liable for unauthorized transactions, as provided for under
Sec. 226.13.
Plans in which no physical device is issued. The proposal does not
address circumstances where a consumer may conduct a transaction on an
open-end plan that does not have a physical device. The Board had
solicited comment on such plans because it has received anecdotal
information about limited cases in which consumers obtained credit by
providing an account number (for example, to obtain food and services
at a resort) and where a physical device was not issued to the
consumer. Industry commenters stated that, in general, they were
unaware of any plans to provide open-end accounts that did not involve
the issuance of a card or other physical device. In particular,
industry commenters noted that creditors will continue to issue
physical devices because transactions where a card or other physical
device is present are generally far more secure and less likely to
involve fraud compared to those in which only the account number, along
with other information, is used to verify the identity of the user.
Moreover, industry commenters noted that consumers still need a
tangible device bearing account information that they can easily carry
with them. As a result, industry commenters generally believed that
issuers would be unlikely to abandon the issuance of a physical card or
device.
The Board believes that it is not necessary at this time to address
this issue, but it will continue to monitor developments in the
marketplace. Of course, to the extent a creditor has issued a device
that meets the definition of a ``credit card'' for an account,
transactions on that account are subject to the provisions that apply
to transactions involving the use of a ``credit card,'' even if the
particular transaction itself is not conducted using the device (for
example, in the case of phone or Internet transactions).
Coupon books. As noted above, the definition of ``credit card''
under both TILA and Regulation Z includes a reference to a ``coupon
book.'' Neither the statute nor the regulation provides any guidance on
the types of devices that would constitute a ``coupon book'' so as to
qualify as a ``credit card'' under the definition. Comment 2(a)(15)-1,
as discussed above, states that checks and similar instruments that can
be used only once to obtain a single credit extension are not ``credit
cards,'' and, logically such instruments, even if issued in a separate
booklet or in conjunction with a periodic statement, also would not be
considered to be coupon books. Thus, as the Board is not aware of
devices existing today that would qualify as a coupon book under the
statute and regulation, the Board is proposing to delete the reference
to such devices in the definition of ``credit card'' as obsolete.
Comment is requested as to whether removal of the reference to ``coupon
book'' in Sec. 226.2(a)(15) would help clarify the definition of
``credit card'' without inadvertently limiting the availability of
Regulation Z protections.
Charge cards. Comment 2(a)(15)-3 discusses charge cards and
identifies provisions in Regulation Z in which a charge card is
distinguished from a credit card. As discussed in detail in the
section-by-section analysis to Sec. 226.7(b)(11) and Sec.
226.7(b)(12), the new late payment and minimum payment disclosure
requirements contained in the Bankruptcy Act do not apply to charge
card issuers. Thus, comment 2(a)(15)-3 is updated to reflect those
changes.
2(a)(17) Creditor
For reasons explained in the section-by-section analysis to Sec.
226.3, the Board is proposing to exempt from TILA coverage credit
extended under employee-sponsored retirement plans. Comment
2(a)(17)(i)-8, which provides guidance on whether such a plan is a
creditor for purposes of TILA, would be deleted. The guidance would no
longer be necessary because loans granted under such plans would be
exempt from TILA and, as such, the definition of ``creditor'' would not
need to be clarified.
In addition, the substance of footnote 3 would be moved to a new
Sec. 226.2(a)(17)(v), and references revised, accordingly. The dates
used to illustrate numerical tests for determining whether a creditor
``regularly'' extends consumer credit are updated in comments 2(a)(17)-
3 through -6.
2(a)(20) Open-End Credit
Under TILA Section 103(i), as implemented by Sec. 226.2(a)(20) of
Regulation Z, ``open-end credit'' is consumer credit extended by a
creditor under a plan in which (1) the creditor reasonably contemplates
repeated transactions, (2) the creditor may impose a finance charge
from time to time on an outstanding unpaid balance, and (3) the amount
of credit that may be extended to the consumer during the term of the
plan, up to any limit set by the creditor, generally is made available
to the extent that any outstanding balance is repaid. Comment 2(a)(20)-
1 reiterates that consumer credit must meet all three of these criteria
to be open-end credit. Comment 2(a)(20)-5 currently states, with
respect to replenishment of the credit line, that a creditor need not
establish a specific credit limit for the line of credit and that the
line need not always be replenished to its original amount.
``Spurious'' open-end credit. The Board has received comments from
time to time from state attorneys general and consumer groups voicing
concern that the definition of open-end credit permits creditors to
treat as open-end plans certain credit transactions that would be more
properly characterized as closed-end credit. These commenters note that
as a practical matter, such ``spurious'' open-end credit is unlikely to
be used for repeated transactions and the credit line does not
replenish to the extent that the consumer pays down his or her balance.
Furthermore, these open-end plans may be established primarily to
finance an infrequently purchased product or service, the credit limits
for many of the creditor's customers may be close to the cost of that
product or service, and the creditor may have no reasonable grounds for
expecting that there will be repeated transactions by many of its
customers. When open-end disclosures are given for such products, the
concern voiced by state attorneys general and consumer groups is that
those disclosures fail to adequately disclose the period of time that
it will take to repay the balance, the total of the payments that a
consumer will be required to make (assuming in both cases that the
consumer makes only the minimum required payments).
In an effort to address these concerns, in 1997 the Board proposed
adding two sets of factors to the commentary, one set that creditors
should consider when determining whether they ``reasonably contemplate
repeated transactions,'' and another set to provide guidance on whether
a credit line is ``reusable.'' \6\
[[Page 32961]]
The Board received many comments from industry in response to this
proposal, most of which criticized the factors on the grounds that they
would result in excluding from the definition of ``open-end credit''
legitimate open-end credit products. In particular, commenters were
concerned about the status of private label credit cards that offer an
incentive to the consumer to make a large initial purchase. In response
to these concerns, the two sets of factors were not adopted in the
final commentary revisions.
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\6\ The factors that were proposed regarding the ``repeated
transactions'' portion of the definition were: (1) Whether the
product is something that consumers would most likely not purchase
in multiples, (2) whether the line of credit is established for the
purpose of purchasing a designated item, (3) the amount of the
initial purchase relative to the credit limit, (4) the extent to
which the creditor reasonably solicits customers to make additional
purchases, and (5) whether the creditor has information on consumers
with the credit line showing that they have made repeat purchases.
The proposed revisions also would have provided that a line of
credit generally is not self-replenishing if the initial line of
credit is less than, or not much more than, the amount of the item
purchased to open the credit line (or the minimum monthly payments
are so low that the credit line is not reusable for an extended
period of time). See 62 FR 64,769, December 9, 1997.
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As discussed further in the section-by-section analysis to Sec.
226.16, the Board proposes to address potential ``spurious'' open-end
credit transactions through improved advertising disclosures. The Board
believes this to be a more targeted and effective approach than
revising the definition of open-end credit. One of the major problems
with ``spurious'' open-end credit highlighted by commenters is that
creditors advertise a low minimum monthly payment which can mislead
consumers, who may not be aware of the total amount of payments they
would be required to make, or the term over which they would be
obligated to make those payments. As discussed below in the section-by-
section analysis to Sec. 226.16(b), the proposed rule would require a
creditor that states a minimum monthly payment in an advertisement also
to state the term that it will take to repay the debt at that minimum
payment level, as well as the total amount of the payments. The
proposed rule would require that disclosure of the term and total
amount of payments be equally prominent to the advertisement of the
minimum payment. The Board believes that disclosure of the term and
total of payments in advertisements will help to improve consumer
understanding about the cost of credit products for which a low monthly
payment is advertised, addressing one of the major concerns regarding
``spurious'' open-end credit.
``Open-end'' plans comprised of closed-end features. The Board also
is concerned that, under current guidance in the commentary, some
credit products are treated as open-end plans, with open-end
disclosures given to consumers, when such products would more
appropriately be treated as closed-end transactions. Closed-end
disclosures are more appropriate than open-end disclosures when the
credit being extended is individual loans that are individually
approved and underwritten. The Board is particularly concerned about
certain credit plans, where each individual credit transaction is
separately evaluated.
For example, under certain so-called multifeatured open-end plans,
creditors may offer loans to be used for the purchase of an automobile.
These automobile loan transactions are approved and underwritten
separately from other credit made available on the plan. (In addition,
the consumer typically has no right to borrow additional amounts on the
automobile loan ``feature'' as the loan is repaid.) If the consumer
repays the entire automobile loan, he or she may have no right to take
further advances on that ``feature,'' and must separately reapply if he
or she wishes to obtain another automobile loan, or use that aspect of
the plan for similar purchases. Typically, while the consumer may be
able to obtain additional advances under the plan as a whole, the
creditor separately evaluates each request.
Currently, some creditors may be treating such plans as open-end
credit, in light of several sections in the current commentary. Current
comment 2(a)(20)-2 provides that if a program as a whole meets the
definition of open-end credit, such a program may be considered a
single multifeatured plan, notwithstanding the fact that certain
features might be used infrequently. In addition, current comment
2(a)(20)-3 indicates that, for a multifeatured open-end plan, a
creditor need not believe a consumer will reuse a particular feature of
the plan. Also, current comment 2(a)(20)-5 indicates that a creditor
may verify credit information such as a consumer's continued income and
employment status or information for security purposes.
The Board believes that in certain circumstances treating such
credit as open-end is inappropriate under Regulation Z, and accordingly
proposes a number of revisions to Sec. 226.2(a)(20) and the
accompanying commentary. Closed-end disclosures are more appropriate
than open-end disclosures unless the consumer's credit line generally
replenishes to the extent that he or she repays outstanding balances so
that the consumer may continue to borrow and take advances under the
plan without having to obtain separate approval for each subsequent
advance. Replenishment of the amount of credit available to a consumer
in good standing without the need for separate underwriting or approval
of each advance distinguishes open-end credit from a series of advances
made pursuant to separate closed-end loan commitments, such as the
automobile loan described above. For example, if a consumer makes two
payments of $500 that reduce the outstanding principal balance on the
line of credit, the consumer generally should be able to obtain an
additional $1,000 of credit under the open-end plan without having a
creditor separately underwriting or evaluating whether the consumer can
borrow the $1,000.
The Board proposes to revise comment 2(a)(20)-2 to clarify that
while a consumer's account may contain different sub-accounts, each
with different minimum payment or other payment options, each sub-
account must meet the self-replenishing criterion. In particular,
proposed comment 2(a)(20)-2 would provide that repayments of an advance
for any sub-account must generally replenish a single credit line for
that sub-account so that the consumer may continue to borrow and take
advances under the plan to the extent that he or she repays outstanding
balances without having to obtain separate approval for each subsequent
advance.
Due to the concerns noted above regarding closed-end automobile
loans being characterized as features of so-called open-end plans, the
Board proposes to delete comment 2(a)(20)-3.ii. While there may be
circumstances under which it would be more reasonable for a financial
institution to make advances from an open-end line of credit for the
purchase of an automobile than for an automobile dealer to sell a car
under an open-end plan, the Board believes that the current example
places inappropriate emphasis on the identity of the creditor rather
than the type of credit being extended by that creditor.
TILA Section 103(i) provides that a plan can be an open-end credit
plan even if the creditor verifies credit information from time to
time. 15 U.S.C. 1602(i). The Board believes this provision is not
intended to permit a creditor to separately underwrite each advance
made to a consumer under an open-end plan or account. Such a process
could result in closed-end credit being deemed open-end credit. The
Board proposes to clarify in comment 2(a)(20)-5 that in general, a
credit line is self-replenishing if a consumer can obtain further
advances or funds without being required to separately
[[Page 32962]]
apply for those additional advances, and without undergoing a separate
review by the creditor of that consumer's credit information, in order
to obtain approval for each such additional advance.
Notwithstanding this proposed change, a creditor could verify
credit information to ensure that the consumer's creditworthiness has
not deteriorated (and could revise the consumer's credit limit or
account terms accordingly). However, to perform such an inquiry for
each specific credit request would go beyond verification and would
more closely resemble underwriting of closed-end credit. The Board
recognizes that a creditor may need to review, and as appropriate,
decrease the amount of credit available to a consumer from time to time
to address safety and soundness and other concerns. Such a review would
not be affected by the proposed changes, as explained in proposed
comment 2(a)(20)-5.
These revisions are not intended to impact home-equity lines of
credit (HELOCs), which may have a fixed draw period (during which time
a consumer may continue to take advances to the extent that he or she
repays the outstanding balance) followed by a repayment period where
the consumer may no longer draw against the line, as closed-end credit.
The Board seeks comment regarding the proposed rule's impact on HELOCs.
Comment 2(a)(20)-5.ii. currently notes that a creditor may reduce a
credit limit or refuse to extend new credit due to changes in the
economy, the creditor's financial condition, or the consumer's
creditworthiness. The Board's proposal would delete the reference to
changes in the economy to simplify this provision.
The Board also proposes a technical update to comment 2(a)(20)-4 to
delete a reference to ``china club plans,'' which may no longer be very
common. No substantive change is intended.
2(a)(24) Residential Mortgage Transaction
Comment 2(a)(24)-1, which identifies key provisions affected by the
term ``residential mortgage transaction,'' is revised to include a
reference to Sec. 226.32, correcting an inadvertent omission.
Section 226.3 Exempt Transactions
Section 226.3 implements TILA Section 104 and provides exemptions
for certain classes of transactions specified in the statute. 15 U.S.C.
1603.
The Board proposes a number of substantive and technical revisions
to Sec. 226.3 as described below. The substance of footnote 4 is moved
to the commentary. See comment 3-1.
3(a) Business, Commercial, Agricultural, or Organizational Credit
Section 226.3(a) provides, in part, that the regulation does not
apply to extensions of credit primarily for business, commercial or
agricultural purposes. The Board received no comments regarding this
exemption in regard to the December 2004 ANPR. Questions have arisen
from time to time, however, regarding whether transactions made for
business purposes on a consumer purpose credit card are exempt from
TILA. The Board seeks to provide clarification regarding this question.
The determination as to whether a credit card account is primarily for
consumer purposes or business purposes is best made when the account is
opened, rather than on a transaction-by-transaction basis, and thus the
Board is proposing to add a new comment 3(a)-2 to clarify that
transactions made for business purposes on a consumer-purpose credit
card are covered by TILA (and, conversely, that purchases made for
consumer purposes on a business-purpose credit card are exempt from
TILA). Other sections of the commentary regarding Sec. 226.3(a) would
be renumbered accordingly. A new comment 3(a)-7 would provide guidance
on card renewals, consistent with proposed comment 3(a)-2.
3(b) Credit Over $25,000 Not Secured by Real Property or a Dwelling
Section 226.3(b) exempts from Regulation Z extensions of credit not
secured by real property or a dwelling, in which the amount financed
exceeds $25,000 or in which there is an express written commitment to
extend credit in excess of $25,000. The $25,000 threshold in Sec.
226.3(b) is the same as the statutory threshold set in TILA Section
104(3). 15 U.S.C. 1603(3).
In the December 2004 ANPR, the Board solicited comment as to
whether the rules implementing TILA Section 104 needed to be updated.
Q58. The Board received several comments regarding the $25,000
threshold. One consumer group noted that the $25,000 figure is outdated
due to inflation and should be increased. One bank noted that the
threshold remains appropriate for unsecured credit but suggested that
the Board might consider at a later stage of the Regulation Z review
whether the $25,000 figure should be raised for secured credit, such as
automobile loans. The Board agrees that the Sec. 226.3(b) threshold
would be more appropriately considered in connection with its planned
review of the closed-end credit provisions of Regulation Z and is not
proposing to take any action at the present time. In delaying
consideration of the $25,000 threshold to the closed-end Regulation Z
review, the Board expresses no view on whether the $25,000 threshold is
appropriate for open-end (not home-secured) credit. Rather, the Board
proposes to review the threshold for all credit covered by TILA at the
same time.
3(c) Public Utility Credit
Section 226.3(c) exempts from Regulation Z extensions of credit
involving public utility services provided through pipe, wire, other
connected facilities, or radio or similar transmission, if the charges
for service, delayed payment, or any discounts for prompt payment are
filed with or regulated by any government unit. 15 U.S.C. 1603(4).
The Board received no comments on the December 2004 ANPR regarding
the applicability and scope of Sec. 226.3(c). However, the Board has
received inquiries from time to time regarding the applicability of
Regulation Z to service plans for cellular telephones. In addition, in
light of the deregulation in recent years by some states of utilities
such as gas and electric services, the Board believes that it may be
appropriate to reconsider the scope of the public utility credit
exemption more generally. The Board also notes that due to
technological advances, there may be additional types of services, such
as certain Internet services, for which exemption from Regulation Z may
be appropriate. The Board is not proposing to take any action at the
present time, however, because these issues would be better considered
in the context of the Board's upcoming rulemaking regarding the closed-
end credit provisions of Regulation Z.
3(g) Employer-Sponsored Retirement Plans
The Board has received questions from time to time regarding the
applicability of TILA to loans taken against employer-sponsored
retirement plans. Pursuant to TILA Section 104(5), the Board has the
authority to exempt transactions for which it determines that coverage
is not necessary in order to carry out the purposes of TILA. 15 U.S.C.
1603(5). The Board also has the authority pursuant to TILA Section
105(a) to provide adjustments and exceptions for any class of
transactions, as in the judgment of the Board are necessary or proper
to effectuate the purposes of TILA. 15 U.S.C. 1604(a). The Board
proposes to add to the regulation a new Sec. 226.3(g), which
[[Page 32963]]
would exempt loans taken by employees against their employer-sponsored
retirement plans qualified under Section 401(a) of the Internal Revenue
Code and tax-sheltered annuities under Section 403(b) of the Internal
Revenue Code, provided that the extension of credit is comprised of
fully-vested funds from such participant's account and is made in
compliance with the Internal Revenue Code. 26 U.S.C. 1 et seq.; 26
U.S.C. 401(a); 26 U.S.C. 403(b).
The Board believes that an exemption for loans taken against funds
invested in such types of employer-sponsored retirement plans is
appropriate for the following reasons. The consumer's interest and
principal payments on such a loan are reinvested in the consumer's own
account, and there is no third-party creditor imposing finance charges
on the consumer. Also, TILA disclosures would be of very limited, if
any, value. The costs of a loan taken against assets invested in a
401(k) plan, for example, are not comparable to the costs of a third
party loan product, because a consumer pays the interest on a 401(k)
loan to himself or herself rather than to a third party. Moreover, plan
administration fees must be disclosed under Department of Labor
regulations. See 29 CFR 2520.1023(1).
Family Trusts
The Board also has from time to time received inquiries regarding
TILA coverage of family trusts created for estate planning purposes.
Because most of these questions pertain to real-estate secured loans,
the applicability of the exemptions in Sec. 226.3 to these types of
estate planning arrangements would be better considered in the context
of the Board's upcoming closed-end Regulation Z review.
Section 226.4 Finance Charge
Various provisions of TILA and Regulation Z specify how and when
the cost of consumer credit as a dollar amount, the ``finance charge,''
is to be disclosed. The rules for determining which charges make up the
finance charge are set forth in TILA Section 106 and Regulation Z Sec.
226.4. 15 U.S.C. 1605. Some rules apply only to open-end credit and
others apply only to closed-end credit, while some apply to both. With
limited exceptions discussed below, the Board is not proposing to
change Sec. 226.4 for either closed-end credit or open-end credit.
The Board is aware of longstanding criticisms that the definition
of the ``finance charge'' in Sec. 226.4, as interpreted in the
regulation and the related commentary, is too narrow, too broad, or too
vague. In a 1998 report to Congress, the Board discussed these
concerns, and proposed solutions, in the context of closed-end mortgage
loans.\7\ In this proposal, the Board addresses concerns about the
definition of the ``finance charge'' in the context of open-end (not
home-secured) plans through changes to Sec. 226.5, Sec. 226.6, and
Sec. 226.7 to simplify disclosure of charges on such plans. The Board
is not proposing to address these concerns through changes to Sec.
226.4, with limited exceptions. The Board proposes to revise Sec.
226.4 and related commentary to address (1) transaction charges imposed
by credit card issuers, such as charges for obtaining cash advances
from ATMs and for making purchases in foreign currencies, and (2)
charges for credit insurance, debt cancellation coverage, and debt
suspension coverage.
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\7\ Board of Governors of the Federal Reserve System and
Department of Housing and Urban Development, Joint Report to the
Congress Concerning Reform to the Truth in Lending Act and the Real
Estate Settlement Procedures Act, July 1998.
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4(a) Definition
Under the definition of ``finance charge'' in TILA Section 106 and
Regulation Z Sec. 226.4(a), a charge specific to a credit transaction
is ordinarily a finance charge. 15 U.S.C. 1605. See also Sec.
226.4(b)(2). However, also under Section 106 and Sec. 226.4(a), the
finance charge does not include any charge of a type payable in a
``comparable cash transaction.'' Under the staff commentary to Sec.
226.4(a), in determining whether a charge associated with a credit
transaction is a finance charge, the creditor should compare the credit
transaction in question with a ``similar'' cash transaction, if one
exists. See comment 4(a)-1. The commentary states a general principle
for applying this rule in the case of credit that finances the sale of
property or services: the creditor should compare charges with those
that would be payable if the services or property were purchased using
cash rather than a loan. Thus, for example, if an escrow agent charges
the same fee regardless of whether real estate is bought in cash or
with a mortgage loan, then the agent's fee is not a finance charge.
In other cases, however, particularly in cases involving credit
cards, determining which, if any, transaction is a ``similar'' or
``comparable'' cash transaction for purposes of Sec. 226.4(a) can be
difficult. For example, when consumers became able to take cash
advances on credit card accounts using ATMs, a question arose as to
whether a fee charged by a card issuer for the transaction was a
finance charge if the issuer charged the same fee for using a debit
card to withdraw cash from an asset account. The Board solicited
comment on this question in 1983 and adopted staff comment 4(a)-4 in
1984. 48 FR 54,642; December 6, 1983 and 49 FR 40,560; October 17,
1984. That comment indicates that the fee is not a finance charge to
the extent that it does not exceed the charge imposed by the card
issuer on its cardholders for using the ATM to withdraw cash from a
consumer asset account, such as a checking or savings account. Another
comment indicates that the fee is an ``other charge.'' See current
comment 6(b)-1(vi). Accordingly, the fee must be disclosed at account
opening and on the periodic statement, but it is not labeled as a
``finance charge'' nor included in the effective APR.
Since comment 4(a)-4 was adopted, questions have been raised about
its scope and application. For example, the comment does not address
whether it applies when an affiliate of the card issuer, but not the
card issuer itself, issues a debit card. Even in the seemingly simple
case where the credit card issuer itself issues a debit card, a variety
of complexities arise. The issuer may assess an ATM fee for one kind of
deposit account (for example, an account with a low minimum balance)
but not for another. The comment does not indicate which account is the
proper basis for comparison.
Questions have also been raised about whether disclosure of the
charge pursuant to comments 4(a)-4 and 6(b)-1.iv. is meaningful to
consumers. Under the comment, the disclosure a consumer receives after
incurring a fee for taking a cash advance through an ATM depends on the
structure of the institution that issued the credit card. If the credit
card issuer does not provide asset accounts and is not affiliated with
an institution that does, then it must disclose the charge as a finance
charge. If the credit card issuer provides asset accounts and offers
debit cards on those accounts, then, depending on the circumstances,
the issuer must not disclose the charge as a finance charge. It is not
clear that the distinction is meaningful to consumers.
Recently, a question has arisen about the proper disclosure of
another kind of transaction fee imposed on credit cards. The question
is whether fees that credit cardholders are assessed for making
purchases in a foreign currency or outside the United States--for
example, when the cardholder travels abroad-- are finance charges. The
question has arisen in litigation between consumers
[[Page 32964]]
and major card issuers.\8\ Some card issuers have argued by analogy to
comment 4(a)-4 that a foreign transaction fee is not a finance charge
if the fee does not exceed the issuer's fee for using a debit card for
the same purchase. Some card issuers disclose the foreign transaction
fee as a finance charge and include it in the effective APR, but others
do not.
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\8\ See Third Consolidated Amended Class Action Complaint at 47-
48, In re Currency Conversion Fee Antitrust Litigation, MDL Docket
No. 1409 (S.D.N.Y.). The court approved a settlement on a
preliminary basis on November 8, 2006.
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The uncertainty about proper disclosure of charges for foreign
transactions and for cash advances from ATMs reflects the inherent
complexity of seeking to distinguish transactions that are ``comparable
cash transactions'' to credit card transactions from transactions that
are not. The Board believes that clearer guidance may result from a new
and simpler approach that treats as a finance charge any fee charged by
credit card issuers for transactions on their credit card plans. This
guidance may be helpful to creditors in determining which charges must
be included in the computation of the effective APR, if the Board
retains the effective APR. See section-by-section analysis to Sec.
226.7(b)(7). Such an approach would also provide more meaningful
disclosures to consumers by assuring a consistent approach to the
disclosure of transaction fees.
The current approach of providing guidance on a case-by-case (fee-
by-fee) basis, such as for ATM fees, has not provided sufficient
certainty for many creditors about how to disclose transaction charges
on credit cards. Moreover, to the extent creditors have adopted
different disclosure practices in the face of regulatory uncertainty,
consumers may have had difficulty understanding the disclosures, since,
for example, one creditor might disclose an ATM fee as a finance charge
while another creditor may disclose the fee as an ``other'' charge.
Thus, while the Board could adopt guidance specific to fees as they
arise, such as the Board did in 1984 for the ATM fee and could do for
the foreign transaction fee, it is not clear that fee-by-fee guidance
is sufficient to both facilitate compliance by credit card issuers and
promote understanding by consumers.
It is also not clear that an attempt to adopt general rules for
distinguishing comparable transactions from non-comparable
transactions, in the case of credit cards, would adequately facilitate
compliance by credit card issuers and promote understanding by
cardholders. One major difficulty in formulating such rules would be
deciding whether to adopt the perspective of the card issuer or that of
the cardholder. For example, a transaction on an asset account with a
card issuer may be comparable to a credit card transaction from the
perspective of the card issuer, but not from the perspective of a
cardholder who does not have an asset account with the issuer. A rule
based on the issuer's perspective may confuse consumers; it may not be
reasonable to expect a consumer to understand that one transaction fee
is a finance charge and the other is not because one card issuer issues
a debit card and the other does not. Yet a rule based on the
cardholder's perspective may not be practicable for the issuer to
implement; the issuer may not be able to determine whether a particular
consumer has an asset account with another institution and, if so, the
amount of the fee charged on the account. As explained above in the
context of the fee for cash advances from ATMs, even when a rule is
based on the card issuer's perspective, the card issuer may have
difficulty determining which asset account, precisely, is the relevant
basis for comparison. The difficulty of determining which perspective
to adopt increases in a case such as a fee for a purchase conducted in
a foreign currency. From the perspective of the consumer, the debit
card is not the only alternative to the credit card; the consumer may
also pay in cash.
Thus, having considered alternative approaches, the Board is
proposing to adopt a simple interpretive rule that any transaction fee
on a credit card plan is a finance charge, regardless of whether the
issuer in its capacity as a depository institution imposes the same or
lesser charge on withdrawals of funds from an asset account such as a
checking or savings account. This proposal would be implemented by
removing staff comment 4(a)-4 and replacing it with a new comment of
the same number re