Consumer Compliance Outlook: Second Quarter 2009

The Regulation Z Amendments for Open-End Credit Disclosures: Part Two

This article is the second installment of Outlook's review of the December 2008 amendments to Regulation Z's open-end credit sections made by the Board of Governors of the Federal Reserve System (Board).1 In the First Quarter 2009 issue, we reviewed the extensive changes to credit card application and solicitation disclosures. In this issue, we review the remaining changes for account-opening disclosures, periodic statements, change-interms notices, and advertising. Other changes involving convenience checks and payment cut-off times are also discussed.

ACCOUNT-OPENING DISCLOSURES

The Board's final rule amends §226.6 of Regulation Z regarding account-opening disclosures that creditors must provide for open-end consumer credit products (excluding home-secured open-end credit). The amendments respond to the problem of information overload, whereby creditors provide consumers with account disclosures that are lengthy, dense, and complex. The Board found through consumer testing that the Schumer box disclosures currently required for solicitation and application of credit cards are very effective in combating information overload by succinctly disclosing critical information about the terms and fees of credit card products in a one-page table format. The final rule requires creditors to disclose critical information at account opening in a table similar to the Schumer box. This requirement to provide certain information in a table at account opening applies not only to credit card accounts but also to other types of open-end plans. The information required to be disclosed in the account-opening table is similar to the information required to be disclosed in the Schumer box for credit card applications and solicitations, including annual percentage rates (APRs), fees for issuance or availability of credit, minimum or fixed finance charges, transaction fees, and penalty fees. A creditor is permitted to disclose additional account information outside the account-opening table but is not required to do so. Model form G-17(D) on page 3 provides an example of an account-opening table for an open-end plan not involving a credit card.

Form G-17(D) Account-Opening Sample
Interest Rate and Interest Charges
APR for Cash Advances18.00%
Minimum Interest ChargeIf you are charged interest, the charge will be no less than $1.50.
Paying InterestYou will be charged interest from the transaction date.
Fees
Annual Fee$20
Penalty Fees
  • Late Payment
  • Over-the-Credit Limit

$10
$29

How We Will Calculate Your Balance: We use a method called "average daily balance (including new purchases)." See your account agreement for more details.

Billing Rights: Information on your rights to dispute transactions and how to exercise those rights is provided in your account agreement.

Section 226.6 currently requires creditors to disclose finance charges and other charges in the account-opening disclosures. Certain fees do not have to be disclosed under Regulation Z because they are not considered finance charges or other charges. However, it is not always clear when a charge falls within the category of finance charge or other charge or is not subject to disclosure under Regulation Z. To address this issue, the final rule identifies the charges that must be included in the account-opening table.

The account-opening table must be given in writing and before the first transaction under the plan. For charges not required to be disclosed in the account-opening table, creditors are given the option of disclosing those charges before the first transaction or later, as long as they are disclosed before the cost is imposed. These disclosures can be made orally or in writing. For example, a fee to receive a copy of an old periodic statement is not required to be disclosed in the account-opening table. Thus, a creditor could either disclose that fee at account opening or a relevant later time, such as when the consumer requests the old periodic statement.

The Board's rationale for this change is that many years can pass between the time a consumer receives initial account disclosures and the time the consumer requests a service subject to a fee listed in the account disclosures. Few consumers can recall the details of initial account disclosures provided to them many years ago. By allowing creditors the option of not disclosing certain fees in the initial account-opening disclosures but allowing those fees to be disclosed when the consumer requests the service that is subject to a fee, the final rule permits disclosures that are much more timely and relevant for consumers.

Finally, to help consumers who have applied for a subprime credit card without realizing it involves a low credit limit and substantial fees to open the account, the final rule requires issuers to provide a notice to consumers at account opening of their right to reject the card when account-opening fees have been charged to the account but the consumer has not used the card. Consumers exercising this right would not be responsible for the fees.

PERIODIC STATEMENT DISCLOSURES

The final rule makes significant changes to §226.7's disclosure requirements for periodic statements. Consumer testing revealed that consumers better understand the information disclosed on a periodic statement about interest and fees when the items in each category are grouped together. Accordingly, the final rule requires creditors to itemize separately all interest charges according to transaction type (e.g., interest on purchases or interest on cash advances) and to group all fees together and separately identify them (e.g., over-the-credit-limit fee).

Testing also showed that consumers more easily understand the cost of credit during the billing cycle when the total dollar amounts incurred for fees and interest are each disclosed. Therefore, the final rule requires periodic statements to provide separate listings of the total fees and total interest incurred, both for the period covered by the periodic statement and for the year-to-date. Model form G-18(A) on page 17 provides an example of how these disclosures would appear on the periodic statement.

Example from Form G-18(A) Periodic Statement Transactions; Interest Charges; Fees Sample
Transactions
Reference Number Trans Date Post Date Description of Transaction or Credit Amount
5884186PS0388W6YM2/222/23Store #1
$2.05
0544400060ZLV72VL2/242/25Store #2
$12.11
854338203FS8000Z52/252/25Pymt Thank You
-$450.00
55541860705RDYDOX2/252/26Store #3
$4.63
Fees
9525156489SFD4545Q2/232/23Late Fee
$35.00
56415615647OJSNDS2/262/26Cash Advance Fee
$5.00
84151564SADS8745H2/272/27Balance Transfer Fee
$23.55
256489156189451516L2/282/28Cash Advance Fee
$5.90
TOTAL FEES FOR THIS PERIOD
$69.45
Interest Charged
 Interest Charge on Purchases
$6.31
 Interest Charge on Cash Advances
$4.58
 TOTAL INTEREST FOR THIS PERIOD
$10.89
2012 Totals Year-to-Date
Total fees charged in 2012
$90.14
Total interest charged in 2012
$18.27

Another important change to the periodic statement is that the Board eliminated the effective APR disclosure (also referred to as the historical APR). The effective APR was intended to disclose to consumers their total annualized cost of credit during each billing cycle. In the proposed rulemaking notice, the Board solicited comment on whether to eliminate this disclosure because it is not well understood by consumers. During the rulemaking period, the Board attempted to improve consumer understanding of the effective APR by testing modified versions of this disclosure, but most consumers still did not understand it. However, testing revealed that consumer comprehension of the total cost of credit increased significantly when information about fees and interest charges were separately listed in the periodic statement for both the period and for the year-to-date, as the final rule requires and as shown on the following page in model form G-18(A). The Board, therefore, eliminated the requirement for the effective APR disclosure.

Another important change concerns two new warnings that must appear on periodic statements as a result of amendments to the Truth in Lending Act (TILA) in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).2 Section 1305 of BAPCPA requires a warning about the possible consequences of making a late payment, while §1301 requires a warning about the consequences of making only the minimum payment.

For the late payment warning, the final rule requires creditors to disclose on the front of the periodic statement the due date and, in close proximity, the late fee and the penalty APR that could be triggered by a late payment.

For the minimum payment warning, the final rule requires three new disclosures on periodic statements for credit cards only: 3 (1) a warning that making only the minimum payment will increase the interest paid and the time it takes to repay the 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 number consumers can call to obtain an estimate of how long it would take to repay their account balance using minimum payments. The minimum payment disclosure must be grouped together with the due date and late payment disclosure above. Model form G-18(D) below provides an example of how the hypothetical warning could be displayed along with the late payment warning.

Form G-18(D) Periodic Statement: New Balance, Due Date, Late Payment, and Minimum Payment Sample (Credit Cards)
Payment Information
New Balance
$1,784.53
Minimum Payment Due
$48.00
Payment Due Date
4/20/12
Late Payment Warning: If we do not receive your minimum payment by the date listed above, you may have to pay a $35 late fee and your APRs may be increased up to the Penalty APR of 28.99%.
Minimum Payment Warning: If you make only the minimum payment each period, you will pay more interest and it will take you longer to pay off your balance. For example, if you had a balance of $1,000 at an interest rate of 17% and always paid only the minimum required, it would take over 7 years to repay this balance. For an estimate of the time it would take to repay your actual balance making only minimum payments, call 1-800-XXX-XXXX.

Testing revealed that consumers better understand the consequences of making only minimum payments when the disclosure is based on their actual account balance instead of a hypothetical balance. The final rule therefore encourages card issuers to make the minimum payment disclosures based on cardholders' actual balances instead of a hypothetical balance. As an incentive, the final rule provides that if card issuers use actual balances, they do not have to disclose the warning, the hypothetical example, or a toll-free number on the periodic statement. Instead, the issuer must disclose how long it will take to pay off the current balance if only minimum payments are made.

CHANGE-IN-TERMS NOTICE

Regulation Z currently requires creditors to provide a 15-day notice for changes to most account terms required to be disclosed on the initial account-opening disclosures. However, if the change resulted from a customer's default or delinquency, creditors do not have to provide the 15-day notice, although they still have to provide written notice. Certain other events require no notice at all, including late payment charges, over-the-credit-limit charges, and changes that were disclosed in the initial account disclosures, such as an increase in the APR if the customer makes late payments. Testing revealed that consumers typically did not read change-in-terms notices because they were in small print and used dense text. As a result, consumers are often surprised to learn that important account terms have changed. The Board also determined that for some changes, such as an increase in the purchase APR, 15 days was an insufficient amount of time to allow the consumer to respond to the change.

The final rule addresses these problems in several ways. First, if the change-in-terms notice pertained to a key term that must be disclosed in the account-opening table, the change-in-terms notice must use a similar tabular format. Many creditors send change-in-terms notices along with the periodic statement. Because testing revealed that consumers tend to disregard notices sent with the periodic statement, the notice included with a periodic statement must appear on the front of the periodic statement, though not necessarily on the first page. Model form G-20 below shows a change-in-terms notice.

Form G-20 Change-in-Terms Sample
Payment Information

The following is a summary of changes that are being made to your account terms. You have the right to opt out of these changes. For more detailed information, please refer to the booklet enclosed with this statement.

These changes will impact your account as follows:

Transactions made on or after 4/2/12: As of 5/10/12, any changes to APRs described below will apply to these transactions.

Transactions made before 4/2/12: Current APRs will continue to apply to these transactions.

If you are already being charged a higher Penalty APR for purchases: In this case, any changes to APRs described below will not go into effect at this time. These changes go into effect when the Penalty APR no longer applies to your account.

Revised Terms, as of 5/10/12
APR for Purchases16.99%
Late Payment Fee$32 if your balance is less than or equal to $1,000;
$39 if your balance is more than $1,000

The final rule also requires creditors to send a change-in-terms notice 45 days in advance of the change instead of the current 15 days and expands the circumstances triggering a notice. When a creditor increases an APR because of a default or delinquency, it will have to send a notice 45 days before the change, even if it had disclosed this possible change in the initial account disclosures. The purpose of this change is to allow consumers adequate time to shop for new credit before the rate increase takes effect or to stop making purchases with the card to avoid increasing the balance that will be subject to a higher APR.

Another important amendment for the change-in-terms rules concerns reductions in credit limits. Under new §226.9(c)(2)(v) External Link, a creditor who decreases a consumer's credit limit must provide 45 days' notice of the decrease before the creditor can apply an over-the-credit-limit fee or penalty rate that resulted solely because the consumer exceeded the decreased credit limit.

Card issuers should also be aware that §227.24(b)(3) External Link of Regulation AA prohibits issuers from raising rates during the first year an account is open, unless another rate increase exception applies, such as failing to make a payment within 30 days of the due date.

ADVERTISING PROVISIONS

The final rule contains two new restrictions on advertisements for open-end credit. The first concerns advertisements offering financing for products or services that mention a periodic payment amount (such as a minimum monthly payment) if financing is selected. The final rule requires creditors to disclose, in equal prominence to the periodic payment amount, the time period required to pay the balance if only the periodic payments are made and the total dollar amount of payments assuming only the periodic payments are made.

The second restriction applies to advertisers using the term fixed rate. Under the final rule, if the advertiser uses the term fixed rate, it must identify the period during which the rate is fixed and cannot be increased. If a time period is not identified, the advertiser cannot use the term fixed rate unless the rate cannot increase while the credit plan is open.

OTHER CHANGES

The final rule contains two other significant changes to Regulation Z. The first concerns disclosures for convenience checks, that is, checks creditors provide to consumers who access a credit card account. The final rule requires creditors to disclose in a tabular format on the front of the page containing convenience checks the following information: (1) any discounted initial rate and when that rate will expire, if applicable; (2) the type of rate that applies to the checks after expiration of any discounted initial rate and the applicable APR; (3) any transaction fees; (4) whether a grace period applies to the checks and, if one does not apply, that interest will be charged immediately; and (5) any date by which the consumer must use the checks in order to receive any discounted initial rate offered on the checks.

The Board noted that creditors typically send out convenience checks to consumers during the life of a credit account. As a result, significant time can elapse between the time consumers receive initial account disclosures about rates and fees applicable to convenience checks and the time customers receive the convenience checks. The new disclosures ensure that consumers will receive the critical information about the checks at the time they are mailed to the consumer so that consumers can make an informed choice about whether to use them.

The second change concerns the cut-off times and due dates for mailing payments. Regulation Z currently permits creditors to specify reasonable cut-off times for receiving mailed payments on the due date. The final rule defines reasonable and describes a 5 p.m. cut-off time for mailed payments as an example of a reasonable cut-off time for payments. In addition, if the payment date falls on a weekend, holiday, or other day on which the creditor does not receive payments, a payment received on the next business day must be deemed timely.

CONCLUSION

The Board's final rule on Regulation Z open-end credit was a significant undertaking. Because of the considerable changes to the regulation, banks should begin now to review the amendments and work on updating and testing their systems so that they are in compliance by the July 1, 2010, effective date. Readers interested in more details can consult the rulemaking notice. Specific issues and questions should be raised with the consumer compliance contact at your Reserve Bank or with your primary regulator.