On November 12, 2009, the Board issued a final rule under Regulation E prohibiting institutions from charging fees for overdrafts on ATM and one-time debit card transactions, unless the institution:
The opt-in and notice requirements do not apply if an institution has a policy and practice of declining ATM or one-time debit card transactions when the institution has a reasonable belief that the consumer has insufficient funds to cover the transaction when authorization is requested. However, the institution still must obtain the consumer's opt-in if it wishes to impose a fee when an overdraft occurred despite the institution's policy and procedures.
The mandatory compliance deadline is July 1, 2010. For accounts opened before July 1, 2010, financial institutions cannot assess overdraft fees on or after August 15, 2010 for paying an ATM or one-time debit card transaction under an overdraft service unless the institution has complied with the opt-in and notice requirements and obtained the consumer's affirmative consent. For accounts opened on or after July 1, 2010, the financial institution must comply with the opt-in and notice requirements and obtain the consumer's affirmative consent before it can impose overdraft fees for paying an ATM or one-time debit card transaction under an overdraft service. The final rule also prohibits institutions from discriminating against consumers who do not opt in for an overdraft service.
The Board's December 2008 proposal also included a provision prohibiting financial institutions from imposing overdraft fees resulting solely from a hold placed on a debit card. This rule was not adopted because a more comprehensive approach involving financial institutions, card networks, and merchants may be needed to address this issue. The Board will continue to monitor this issue and determine whether additional action is necessary.
The Board' announcement and the final rule are available on the Board's website .
On November 9, 2009, the Board issued Consumer Affairs Letter1 09-12: Short-Term Balloon Loans and Regulation Z Repayment Ability Requirement for Higher-Priced Mortgage Loans (CA 09-12). The letter provides answers to frequently asked questions about Regulation Z's repayment ability rule for balloon mortgage loans with terms of less than seven years that qualify as higher-priced mortgage loans (HPML). The repayment ability rule became effective for mortgage loan applications received on or after October 1, 2009, and is part of the Board's final Regulation Z rule for home mortgage loans.
A creditor has a presumption of compliance with the repayment ability rule if the creditor follows certain procedures. However, the presumption does not apply when the "term of the loan is less than seven years and the regular periodic payments when aggregated do not fully amortize the outstanding principal balance." For example, balloon loans with terms of less than seven years (short-term balloon loans) would be excluded from the compliance presumption. Creditors making short-term balloon loans have sought guidance on this issue, and the Board has responded with a "Questions and Answers."
Q: Does the rule prohibit short-term balloon loans that are higher-priced mortgage loans?
A: No. However, the creditor must use prudent underwriting standards and, after considering consumers' income, employment, obligations, and assets other than the collateral, the creditor should determine that the value of the collateral (the home) is not the basis for repaying the obligation (including the balloon payment).
Q: Does that mean the creditor must verify that the consumer has assets and/or income at the time of consummation that would be sufficient to pay the balloon payment when it comes due?
A: No. Such a requirement would effectively ban short-term balloon loans. If the Board had intended to ban these products, it would have done so explicitly.
Q: What must the creditor do, then, to verify the borrower's ability to repay a short-term balloon loan?
A: In addition to verifying the consumer's ability to make regular monthly payments, a creditor should verify that the consumer would likely be able to satisfy the balloon payment obligation by refinancing the loan or through income or assets other than the collateral.
Q: How does the creditor verify, when it originates a short-term balloon loan, whether the consumer could qualify for a refinancing before the balloon payment is due?
A: The creditor has an affirmative duty to engage in prudent underwriting. Thus, the creditor should consider factors such as the loan-to-value ratio and the borrower's debt-to-income ratio or residual income â€” all as of the time of consummation. A borrower with a high debt-to-income ratio and/or with little or no equity in the property will be less likely to be able to refinance the loan before the balloon payment comes due than a borrower with lower debt-to-income and loan-to-value ratios. The creditor is not required to predict the consumer's future financial circumstances, interest rate environment, and home value.
CA 09-12 is available on the Board's website .
On September 29, 2009, the Board proposed rules amending Regulation Z to implement the second phase of the CARD Act, which becomes effective on February 22, 2010. The rulemaking also includes changes to the Board's January 2009 final regulations under Regulations AA and Z to prohibit unfair and deceptive credit card practices and to improve consumer disclosures for open-end (not home-secured) credit, respectively. Amendments were necessary to the January 2009 regulations to conform them to the CARD Act.
The consumer protections under the implementing rules for the CARD Act proposal include:
One important issue on which the Board is soliciting comment is whether to change the effective date of the January 2009 final rules for Regulations AA and Z from July 1, 2010 to February 22, 2010 to coincide with the effective date for the new implementing regulations for the CARD Act. In the alternative, the Board is considering retaining the July 1, 2010 date for certain disclosures requiring a tabular format because of operational burdens on card issuers.
Comments on this latest proposal were due by November 20, 2009. The Board's press release and the rulemaking proposal can be found on the Board's website .
The Board will issue another rulemaking proposal at a later date to implement the final phase of the CARD Act that becomes effective on August 22, 2010.
On November 6, 2009, President Obama signed into law H.R. 3606, the Credit CARD Technical Corrections Act of 2009, which amends §106(b) of the CARD Act. The original version of §106(b) required financial institutions offering open-end consumer credit plans, including home equity lines of credit (HELOCs), to establish procedures to ensure that periodic statements are mailed not later than 21 days before the payment due date. This requirement created operational challenges for financial institutions offering HELOCs and other non-credit-card open-end products. Congress responded by amending §106(b) to limit the rule to credit card accounts and not open-end credit in general. However, Congress left intact §106(b)'s requirement that periodic statements generally be mailed at least 21 days before the expiration of any time period within which the consumer may repay credit extended without incurring additional finance charges.
The change is not retroactive and became effective on November 6, 2009. The Board will be issuing a rulemaking proposal to amend §226.5(b)(2)(ii) of Regulation Z, where the 21-day rule is implemented, to conform to the CARD Act amendment. A copy of H.R. 3606 is available online .
Complete Issue (1.75 MB, 20 pages)
Kenneth Benton, Editor
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