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Compliance Corner: Second Quarter 2003

Regulation Z Update: Recent Commentary Revisions and Review of Public Comments

On November 26, 2002, the Board of Governors of the Federal Reserve System (the Board) published for comment proposed changes to the Official Staff Commentary to Regulation Z, which implements the Truth in Lending Act.1,2 The proposed revisions discussed the status of certain credit card-related fees and the rules for replacing an accepted credit card with one or more cards. The proposed revisions also discussed the disclosure of private mortgage insurance premiums and the selection of Treasury security yields for determining whether a mortgage loan is covered by provisions in Regulation Z that implement the Home Ownership and Equity Protection Act (HOEPA). In addition, the Board requested comment on so-called bounce protection or overdraft courtesy services.

On March 28, 2003, the Board issued final revisions to the Official Staff Commentary, based on its review and analysis of the comments received.3 The revisions, which became effective April 1, 2003 and become mandatory on October 1, 2003, addressed both open-end and closed-end credit.

Open-End Commentary Final Revisions
The primary revisions to the Official Staff Commentary related to open-end credit address the disclosure of fees to expedite a credit card payment or delivery of a credit card under §226.6(b).

Expedited Credit Card Payment. As noted in the Board's March 28, 2003, press release, credit card issuers have increasingly offered expedited payment services to card holders as an alternative to mailing a credit card payment that might not reach the card issuer by the due date. Under such arrangements, cardholders request expedited payment service, usually by telephone or through other electronic means, for a fee or a charge that is less than the late payment fee imposed by the credit card issuer.

The Board has decided that fees imposed for expedited payment services are not finance charges or "other charges" under the Truth In Lending Act and Regulation Z because the cardholder or consumer has a reasonable means for making payment without paying a fee to the creditor. Nevertheless, the Board has said that creditors should continue the current industry practice of informing consumers of the amount of the charge at the time the service is requested. Also, creditors should be aware that §226.7 of Regulation Z stipulates that when a fee for expedited payment is imposed and charged to the credit account, creditors must show the cost or amount of the fee on the periodic statement for the billing cycle.

Expedited Credit Card Delivery. In addition to fees imposed for expedited payments, card issuers may impose a fee for expedited delivery of a credit card upon request by a consumer. Such a request is usually made when a consumer seeks to replace a lost or stolen credit card in a more expedient manner. The Board's final revisions to the Commentary reflect the view that a fee imposed for the expedited delivery of a credit card, at the consumer's request, is not incidental to the extension of credit and thus is not a finance charge. In addition, the Board has said that the fee does not appear to be an "other charge" for purposes of Regulation Z.

Closed-End Commentary Final Revisions
The primary revisions to the Official Staff Commentary related to closed-end credit address the inclusion of private mortgage insurance premiums in the payment schedule disclosure and the selection of the appropriate Treasury yield when determining if a mortgage loan is covered by the Home Ownership and Equity Protection Act (HOEPA).

Private Mortgage Insurance Premiums. Under the Homeowners Protection Act of 1998, private mortgage insurance, which protects a creditor against a consumer's default, must generally terminate before the term of a loan expires. The Board's revisions to the Official Staff Commentary to §226.18(g) provide additional guidance on how mortgage premiums should be disclosed on a payment schedule on a Truth in Lending disclosure when some premiums are collected and escrowed at the time the loan is closed. In particular, consistent with the requirement of Regulation Z that a disclosed payment schedule be based on a borrower's legal obligation, the revised Commentary provides an example to facilitate compliance. Also, the text of the revised Commentary was modified to clarify that the revisions in no way affect a creditor's compliance with aggregate accounting rules under the Real Estate Settlement Procedures Act (RESPA).

Treasury Yields and HOEPA. The Home Ownership and Equity Protection Act (HOEPA) requires additional disclosures and provides substantial protections for consumers who receive comparatively high-priced loans secured by their home. HOEPA disclosures apply if the annual percentage rate of the loan exceeds the yield on U.S. Treasury securities with a comparable maturity by a specified number of percentage points—8 percentage points for first-lien loans and 10 percentage points for subordinate-lien loans.

To ensure uniform application of HOEPA, the Board clarified that all creditors must use the constant maturity yields published daily in the Board's Selected Interest Rates (statistical release H-15) as the basis for the rate-based trigger calculations.4 The Board also clarified that creditors should compare the APR on loans of 20 or more years with the yield reported on the H-15 for a 20-year constant maturity. In addition, the final revisions clarify that, for purposes of determining a loan's maturity under HOEPA's rate-based trigger, creditors may rely on rules in §226.17(c)(4). Under this section, creditors may ignore the effect of first payment periods that are slightly longer or shorter than other scheduled payment periods.

Areas Requiring Additional Review
The Board received many comments from consumer groups and financial institutions in two areas — replacement of accepted credit cards and overdraft courtesy programs. Based on the comments, the Board plans to further study these areas before issuing additional guidance.

Replacing an Accepted Credit Card. As a result of recent technological advances, some card issuers now seek to issue credit cards in different sizes and formats. For example, card issuers may issue a physically smaller credit card designed to attach to a personal key chain in addition to a full-size card that may be issued for the same credit card account. However, the two differently sized cards are not interchangeable, since it is the merchant's actual card reading apparatus that determines whether or not a consumer can use a full-size or special-size card. Accordingly, some card issuers have requested guidance on issuing new cards that are intended to supplement but not necessarily replace a full-size or existing card.

Generally, with the issuance of a credit card of any type, card issuers send inactivated cards and employ security procedures requiring the consumer to verify receipt of the card. However, some consumer groups have opposed the unsolicited issuance of more than one card on an existing account (unless renewal or substitution is involved) without more stringent notification and security requirements.

Based on the substance and extent of comments received regarding the issuance of credit cards, Board staff plans to recommend that the Board consider amending §226.12(a) to allow the unsolicited issuance of additional cards on an existing account outside of renewal or substitution under certain conditions.

Overdraft Courtesy Programs. The Board received approximately 300 comment letters in response to its request for public comment on the design, operation, and implementation of overdraft courtesy programs or overdraft privilege programs.5 The comment letters described overdraft programs that vary in design and structure between vendors and implementation programs that appear to vary among financial institutions. Board staff is continuing to gather information on these services and will determine at a later date whether additional guidance for financial institutions is warranted under Regulation Z or other laws.

Please contact Robert Snarr at (215) 574-3460 with any questions regarding the final revisions to the Board's Official Staff Commentary to Regulation Z, or questions or comments regarding overdraft courtesy programs.

The views expressed in this article are those of the author and are not necessarily those of this Reserve Bank or the Federal Reserve System.