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5 May 2009
[Federal Register: May 5, 2009 (Volume 74, Number 85)]
[Proposed Rules]
[Page 20803-20832]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05my09-30]
[[Page 20803]]
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Part III
Federal Reserve System
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Department of the Treasury
Office of Thrift Supervision
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National Credit Union Administration
12 CFR Part 227, 535, and 706
Unfair or Deceptive Acts or Practices; Clarifications; Proposed Rule
[[Page 20804]]
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FEDERAL RESERVE SYSTEM
12 CFR Part 227
[Regulation AA; Docket No. R-1314]
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 535
[Docket ID OTS-2009-0006]
RIN 1550-AC17
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 706
RIN 3133-AD62
Unfair or Deceptive Acts or Practices; Clarifications
AGENCIES: Board of Governors of the Federal Reserve System (Board);
Office of Thrift Supervision, Treasury (OTS); and National Credit Union
Administration (NCUA).
ACTION: Proposed rule; request for public comment.
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SUMMARY: In December 2008, the Board, OTS, and NCUA (collectively, the
Agencies) exercised their authority under the Federal Trade Commission
Act to issue a final rule prohibiting institutions from engaging in
specific acts or practices in connection with consumer credit card
accounts. The Agencies understand that clarification is needed
regarding certain aspects of the final rule. Accordingly, in order to
facilitate compliance, the Agencies propose to amend specific portions
of the regulations and official staff commentary.
DATES: Comments must be received on or before June 4, 2009.
ADDRESSES: Because paper mail in the Washington DC area and at the
Agencies is subject to delay, we encourage commenters to submit
comments by e-mail, if possible. We also encourage commenters to use
the title ``Unfair or Deceptive Acts or Practices'' to facilitate our
organization and distribution of the comments. Comments submitted to
one or more of the Agencies will be made available to all of the
Agencies. Interested parties are invited to submit comments as follows:
Board: You may submit comments, identified by Docket No. R-1314, by
any of the following methods:
Agency Web site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: regs.comments@federalreserve.gov. Include the
docket number in the subject line of the message.
Facsimile: (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 form 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.
OTS: You may submit comments, identified by OTS-2009-0006, by any
of the following methods:
Federal eRulemaking Portal-``Regulations.gov'': Go to
http://www.regulations.gov, under the ``more Search Options'' tab click
next to the ``Advanced Docket Search'' option where indicated, select
``Office of Thrift Supervision'' from the agency drop-down menu, then
click ``Submit.'' In the ``Docket ID'' column, select ``OTS-2009-0006''
to submit or view public comments and to view supporting and related
materials for this proposed rulemaking. The ``How to Use This Site''
link on the Regulations.gov home page provides information on using
Regulations.gov, including instructions for submitting or viewing
public comments, viewing other supporting and related materials, and
viewing the docket after the close of the comment period.
Mail: Regulation Comments, Chief Counsel's Office, Office
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552,
Attention: OTS-2009-0006.
Facsimile: (202) 906-6518.
Hand Delivery/Courier: Guard's Desk, East Lobby Entrance,
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention:
Regulation Comments, Chief Counsel's Office, Attention: OTS-2009-0006.
Instructions: All submissions received must include the
agency name and docket number for this rulemaking. All comments
received will be entered into the docket and posted on Regulations.gov
without change, including any personal information provided. Comments,
including attachments and other supporting materials received are part
of the public record and subject to public disclosure. Do not enclose
any information in your comment or supporting materials that you
consider confidential or inappropriate for public disclosure.
Viewing Comments Electronically: Go to http://
www.regulations.gov, select ``Office of Thrift Supervision'' from the
agency drop-down menu, then click ``Submit.'' Select Docket ID ``OTS-
2009-0006'' to view public comments for this notice of proposed
rulemaking.
Viewing Comments On-Site: You may inspect comments at the
Public Reading Room, 1700 G Street, NW., by appointment. To make an
appointment for access, call (202) 906-5922, send an e-mail to
public.info@ots.treas.gov, or send a facsimile transmission to (202)
906-6518. (Prior notice identifying the materials you will be
requesting will assist us in serving you.) We schedule appointments on
business days between 10 a.m. and 4 p.m. In most cases, appointments
will be available the next business day following the date we receive a
request.
NCUA: You may submit comments, identified by number RIN 3133-AD62,
by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
NCUA Web site: http://www.ncua.gov/news/proposed_regs/
proposed_regs.html. Follow the instructions for submitting comments.
E-mail: Address to regcomments@ncua.gov. Include ``[Your
name] Comments on Proposed Rule Part 706'' in the e-mail subject line.
Facsimile: (703) 518-6319. Use the subject line described
above for e-mail.
Mail: Address to Mary Rupp, Secretary of the Board,
National Credit Union Administration, 1775 Duke Street, Alexandria, VA
22314-3428.
Hand Delivery/Courier: Same as mail address.
Public Inspection: All public comments are available on
the agency's Web site at http://www.ncua.gov/RegulationsOpinionsLaws/
comments as submitted, except as may not be possible for technical
reasons. Public comments will not be edited to remove any identifying
or contact information. Paper copies of comments may be inspected in
NCUA's law library at 1775 Duke Street, Alexandria, Virginia 22314, by
appointment, weekdays between 9 a.m. and 3 p.m. To make an appointment,
call (703) 518-6540 or send an e-mail to OGCMail@ncua.gov.
FOR FURTHER INFORMATION CONTACT:
[[Page 20805]]
Board: Benjamin K. Olson, Attorney, or Ky Tran-Trong, Counsel,
Division of Consumer and Community Affairs, at (202) 452-2412 or (202)
452-3667, Board of Governors of the Federal Reserve System, 20th and C
Streets, NW., Washington, DC 20551. For users of Telecommunications
Device for the Deaf (TDD) only, contact (202) 263-4869.
OTS: April Breslaw, Director, Consumer Regulations, (202) 906-6989;
Suzanne McQueen, Consumer Regulations Analyst, Compliance and Consumer
Protection Division, (202) 906-6459; or Richard Bennett, Senior
Compliance Counsel, Regulations and Legislation Division, (202) 906-
7409, at Office of Thrift Supervision, 1700 G Street, NW., Washington,
DC 20552.
NCUA: Matthew J. Biliouris, Program Officer, Office of Examination
and Insurance, (703) 518-6360; or Moisette I. Green, Staff Attorney,
Office of General Counsel, (703) 518-6540, National Credit Union
Administration, 1775 Duke Street, Alexandria, VA 22314-3428.
SUPPLEMENTARY INFORMATION:
I. Background
In December 2008, the Federal Reserve Board (Board), the Office of
Thrift Supervision (OTS), and the National Credit Union Administration
(NCUA) (collectively, the Agencies) adopted a final rule under the
Federal Trade Commission Act (FTC Act) to protect consumers from unfair
acts or practices with respect to consumer credit card accounts. This
rule was published in the Federal Register on January 29, 2009. See 74
FR 5498 (January 2009 Rule). On that same date, the Board published a
final rule amending the provisions regarding open-end credit (not home
secured) in Regulation Z, which implements the Truth in Lending Act
(TILA). See 74 FR 5244 (January 2009 Regulation Z Rule). The effective
date for both rules is July 1, 2010. See 74 FR 5548; 74 FR 5388-5390.
Since publication of the two rules, the Agencies have become aware
that clarification is needed to resolve confusion regarding how
institutions will comply with particular aspects of those rules.
Accordingly, in order to provide guidance and facilitate compliance
with the January 2009 Rule by the effective date, the Agencies propose
to amend portions of the rule and the accompanying staff commentary.
These proposed amendments are discussed in detail in section III of
this SUPPLEMENTARY INFORMATION. Similarly, elsewhere in today's Federal
Register, the Board has proposed to amend certain aspects of the
January 2009 Regulation Z Rule.
Although comment is requested on the proposed amendments, the
Agencies emphasize that the purpose of these rulemakings is to clarify
and facilitate compliance with the final rule, not to reconsider the
need for--or the extent of--the protections that the rule affords
consumers. Thus, commenters are encouraged to limit their submissions
accordingly.
In addition, because the Agencies do not intend to extend the
effective date for the January 2009 Rule, any amendments must be
adopted in final form with sufficient time for institutions to
implement the amended rule on or prior to July 1, 2010. The Agencies
emphasize that, because this rulemaking focuses on clarifications to
discrete aspects of the January 2009 Rule, institutions should continue
their efforts to come into compliance with that rule as soon as
practicable and, in any event, prior to July 1, 2010. In order to
ensure that final clarifications can be provided as soon as possible,
the Agencies are requiring that comments on this proposal be submitted
within 30 days from publication in the Federal Register.\1\
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\1\ Generally, NCUA gives the public 60 days to comment on
proposed rules; however, a shorter comment period is appropriate in
this instance to ensure compliance with the January 2009 Rule. See
IRPS 87-2, 52 FR 35231 (Sept. 18, 1987).
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II. Statutory Authority
Section 18(f)(1) of the FTC Act provides that the Board (with
respect to banks), OTS (with respect to savings associations), and the
NCUA (with respect to federal credit unions) are responsible for
prescribing ``regulations defining with specificity * * * unfair or
deceptive acts or practices, and containing requirements prescribed for
the purpose of preventing such acts or practices.'' 15 U.S.C.
57a(f)(1). In the SUPPLEMENTARY INFORMATION for the January 2009 Rule,
the Agencies set forth the standards codified by Congress or adopted by
the Federal Trade Commission for determining whether an act or practice
is unfair or deceptive and applied those standards to the practices
prohibited by the final rule. See 74 FR 5501 et seq. In addition, the
OTS relied on its authority under the Home Owners' Loan Act (HOLA) as a
secondary basis for its final rule. See, e.g., 74 FR 5505-5506. For
purposes of this rulemaking, the Agencies continue to rely on this
legal authority and analysis.
III. Section-by-Section Analysis
The final rules adopted by the Board, OTS, and NCUA under the FTC
Act are located in, respectively, parts 227, 535, and 706 of title 12
of the Code of Federal Regulations. For purposes of the discussion in
this SUPPLEMENTARY INFORMATION, the Agencies use the shared numerical
suffix for each provision. For example, Sec. --.21 refers to the
Board's 12 CFR 227.21, the OTS's 12 CFR 535.21, and the NCUA's 12 CFR
706.21.
Section --.21--Definitions
Subpart C to the Agencies' rules contains the provisions addressing
consumer credit card accounts. Section --.21 defines certain terms used
in Subpart C.
Section --.21(a) Annual Percentage Rate
Section --.21(a) defines ``annual percentage rate'' as the product
of multiplying each periodic rate for a balance or transaction on a
consumer credit card account by the number of periods in a year. In the
text of the regulations and in the commentary, the Agencies sometimes
use the term ``rate'' in place of ``annual percentage rate'' to
conserve space and avoid repetition. To avoid possible confusion, the
Agencies propose to add a new comment 21(a)-1, clarifying that, for
purposes of Subpart C, ``rate'' has the same meaning as ``annual
percentage rate'' unless otherwise specified. Furthermore, for clarity
and consistency, the Agencies propose to substitute ``rate'' for
``annual percentage rate'' in the titles to certain comments. See
comments 23-3, 23-6, 24(b)(2)-5, 24(b)(5)-2, 24(c)(1)(i)-2.
Section --.21(c) Consumer Credit Card Account
The provisions of Subpart C apply to ``consumer credit card
accounts,'' which are defined in Sec. --.21(c) as accounts provided to
a consumer primarily for personal, family, or household purposes under
an open-end credit plan that is accessed by a credit or charge card.
Based on questions received following issuance of the January 2009
Rule, the Agencies understand that clarification is needed regarding
whether an outstanding balance on a consumer credit card account
remains subject to Subpart C when the account is closed, when the
account is acquired by another institution, and when the balance is
transferred to another credit account. In particular, concerns have
been raised that permitting institutions to apply an increased rate to
an outstanding balance in these circumstances could lead to
[[Page 20806]]
circumvention of the general prohibition in Sec. --.24 on such
increases.
To address these concerns, the Agencies propose to add comments
21(c)-1 through 3, which would clarify that, as a general matter, the
protections in Subpart C continue to apply to an outstanding balance
following the closure or acquisition of the account or the transfer of
the balance to another credit account issued by the same institution
(or its affiliate or subsidiary). Accordingly, in these circumstances,
an institution must, for example, continue to provide consumers a
reasonable amount of time to make payment on such balances pursuant to
Sec. --.22; allocate payments in excess of the required minimum
periodic payment among such balances consistent with Sec. --.23; and
increase the annual percentage rates that apply to such balances only
to the extent permitted by Sec. --.24.
Because the protections in Subpart C cannot be waived or forfeited,
the proposed comments do not distinguish between closures or transfers
initiated by the institution and closures or transfers initiated by the
consumer. In the January 2009 Rule, the Agencies determined that,
because many of the prohibited practices cannot be effectively
disclosed, consumers are unable to reasonably avoid the harm caused by
those practices. Thus, as discussed below, allowing institutions to
engage in the prohibited practices by obtaining the consumer's
agreement could undercut the purpose of the rule.
Although there may be circumstances in which individual consumers
could make informed choices about the benefits and costs of waiving the
protections in Subpart C, an exception for those circumstances would
create a significant loophole that could be used to deny the
protections to other consumers. For example, if an institution offered
to transfer its cardholder's outstanding balance to a credit product
that would reduce the rate on the balance for a period of time in
exchange for the cardholder accepting a higher rate after that period,
the cardholder would have to determine whether the savings created by
the temporary reduction would offset the cost of the subsequent
increase, which would depend on the amount of the balance, the amount
and length of the reduction, the amount of the increase, and the length
of time it would take the consumer to pay off the balance at the
increased rate. Based on extensive consumer testing conducted during
the preparation of the January 2009 Rule (and the Board's January 2009
Regulation Z Rule), the Agencies believe that it would be very
difficult to ensure that institutions disclose this information in a
manner that will enable most consumers to make informed decisions about
whether to accept the increase in rate. Although some approaches to
disclosure may be effective, others may not and it would be impossible
to distinguish among such approaches in a way that would provide clear
guidance for institutions. Furthermore, consumers might be presented
with choices that are not meaningful (such as a choice between
accepting a higher rate on an outstanding balance or losing credit
privileges on the account). Thus, the proposed commentary to Sec.
--.21(c) would clarify that, as a general matter, the protections in
Subpart C do not depend on whether the consumer agrees to the closure
of an account or the transfer of a balance.
Accordingly, proposed comment 21(c)-1 states that, if a consumer
credit card account with an outstanding balance is closed by the
consumer or the institution, the account continues to be the same
consumer credit card account for purposes of Subpart C with respect to
that balance. Thus, in these circumstances, the institution could not
increase the rate that applies to the outstanding balance (except to
the extent permitted by Sec. --.24).
Proposed comment 21(c)-2 addresses circumstances in which an
institution acquires a consumer credit card account with an outstanding
balance by, for example, merging with or acquiring another institution
or by purchasing another institution's credit card portfolio. In some
cases, the acquiring institution may elect to close the acquired
account and replace it with its own credit card account. See 12 CFR
226.12 comment 12(a)(2)-3. The acquisition of an account does not
involve any choice on the part of consumers, and the Agencies believe
that consumers whose accounts are acquired should receive the same
level of protection after acquisition as they did beforehand.
Accordingly, the proposed comment states that an institution that
acquires a consumer credit card account remains subject to the
provisions of Subpart C with respect to any outstanding balances on the
account. For example, the institution would generally be prohibited
from increasing the annual percentage rate on an outstanding purchase
balance to the rate that the institution applies to purchases on its
accounts.\2\
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\2\ Thus, the acquiring institution would not be permitted to
substitute a new index for the index applicable to an acquired
variable rate balance if the change could result in an increase in
the applicable annual percentage rate. See comment 24(b)(2)-1. An
institution that does not utilize the index used to determine the
variable rate for an acquired balance may, however, convert that
rate to an equal or lower non-variable rate, subject to the notice
requirements of 12 CFR 226.9(c). See comment 24(b)(2)-5.
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Finally, proposed comment 21(c)-3 addresses balance transfers
between accounts issued by the same institution (or its affiliate or
subsidiary) and balance transfers between accounts issued by different
institutions. Balances may be transferred from one consumer credit card
account issued by an institution to another consumer credit card
account issued by the same institution when, for example, the
consumer's account is converted from a retail credit card that may only
be used at a single retailer or affiliated group of retailers to a co-
branded general purpose credit card which may be used at a wider number
of merchants. Because of the concerns discussed above regarding
circumvention and informed consumer choice and for consistency with the
issuance rules regarding card renewals or substitutions for accepted
credit cards under Regulation Z, 12 CFR 226.12(a)(2), the Agencies
believe--and proposed comment 21(c)-3 states--that these transfers
should be treated as a continuation of the existing account
relationship rather than the creation of a new account relationship.
See 12 CFR 226.12 comment 12(a)(2)-2. Similarly, proposed comment
21(c)-3 would apply to circumstances where a balance is transferred to
a line of credit accessed solely by an account number or another type
of credit account issued by the same institution or its affiliate or
subsidiary (except for an open-end credit plan secured by the
consumer's dwelling).\3\ Accordingly, under these circumstances, an
institution could not, for example, apply an increased rate to an
existing balance in a manner prohibited by Sec. --.24.
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\3\ Proposed comment 21(c)-3 clarifies that Subpart C would not
apply to balances transferred from a consumer credit card account
issued by an institution to an open-end credit plan secured by the
consumer's dwelling issued by the same institution (or its affiliate
or subsidiary) because these plans provide protections that are
similar to--and, in some cases, more stringent than--the protections
in Subpart C. For example, a creditor may not change the annual
percentage rate on a home-equity plan unless the change is based on
an index that is not under the creditor's control and is available
to the general public. See 12 CFR 226.5a(f)(1).
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In contrast, proposed comment 21(c)-3 also states that, when a
consumer chooses to transfer a balance to a consumer credit card
account issued by a different institution, Subpart C does not prohibit
the institution to which the balance is transferred from applying its
[[Page 20807]]
account terms to that balance, provided those terms comply with Subpart
C. For example, if a consumer credit card account issued by institution
A has a $1,000 purchase balance at an annual percentage rate of 15% and
the consumer transfers that balance to a consumer credit card account
with a purchase rate of 17% issued by institution B, institution B may
apply the 17% rate to the $1,000 balance. However, institution B may
not subsequently increase the rate that applies to that balance unless
permitted by one of the exceptions in Sec. --.24(b).
Although balance transfers from one institution to another raise
some of the same concerns as balance transfers involving the same
institution, the Agencies believe that transfers between institutions
are not contrary to Subpart C because the institution to which the
balance is transferred is not increasing the cost of credit it
previously extended to the consumer. For example, assume that
institution A has extended a consumer $1,000 of credit at a rate of
15%. Because Sec. --.24 generally prohibits institution A from
increasing the rate that applies to that balance, it would be
inconsistent with Sec. --.24 to allow institution A to reprice that
balance simply by transferring it to another account. In contrast, in
order for the $1,000 balance to be transferred to institution B,
institution B must provide the consumer with a new $1,000 extension of
credit in an arms-length transaction and should be permitted to price
that new extension consistent with its evaluation of prevailing market
rates, the risk presented by the consumer, and other factors. Thus, the
transfer from institution A to institution B does not appear to raise
concerns about circumvention of Sec. --.24 because institution B is
not increasing the cost of credit it previously extended.
The Agencies understand that drawing this distinction between
balance transfers involving the same institution and balance transfers
involving different institutions may limit an institution's ability to
offer its existing cardholders the same terms that it would offer
another institution's cardholders. Currently, however, the Agencies
understand that institutions generally do not make promotional balance
transfer offers available to their existing cardholders for balances
held by the institution because it is not cost-effective to do so.
Furthermore, although many institutions do offer existing cardholders
the opportunity to upgrade to accounts offering different terms or
features (such as upgrading to an account that offers a particular type
of rewards), the Agencies understand that these offers generally are
not conditioned on a balance transfer, which indicates that it may be
cost-effective for institutions to make these offers without repricing
an outstanding balance. Nevertheless, the Agencies solicit comment on
the extent to which proposed comment 21(c)-3 would affect institutions'
ability to make offers to existing cardholders.
Section --.22--Unfair Acts or Practices Regarding Time To Make Payment
Section --.22(a) provides that an institution must not treat a
payment on a consumer credit card account as late for any purpose
unless the consumer has been provided a reasonable amount of time to
make the payment. Section --.22(b)(1) states that an institution must
be able to demonstrate that it has complied with this requirement, and
Sec. --.22(b)(2) provides a safe harbor for institutions that have
adopted reasonable procedures designed to ensure that periodic
statements specifying the payment due date are mailed or delivered to
consumers at least 21 days before the payment due date.
Comment 22(b)-3 offers an example of an alternative method of
complying with Sec. --.22(a). In this example, an institution that
only provides periodic statements electronically and only accepts
payments electronically for a particular type of consumer credit card
account could comply with Sec. --.22(a) even if it does not provide
periodic statements 21 days before the payment due date. The Agencies
understand that, although the example states that this type of account
must also comply with ``applicable law and regulatory guidance,'' an
explicit reference to the consumer notice and consent procedures of the
Electronic Signatures in Global and National Commerce Act (E-Sign Act),
15 U.S.C. 7001 et seq., may be helpful to avoid confusion. Accordingly,
the Agencies propose to add an explicit reference to the E-Sign Act in
comment 22(b)-3.
Section --.23--Unfair Acts or Practices Regarding Allocation of
Payments
When different annual percentage rates apply to different balances
on a consumer credit card account, Sec. --.23 requires institutions to
allocate any amount paid by the consumer in excess of the required
minimum periodic payment (the excess payment) among the balances using
one of two methods. The institution may apply the excess payment first
to the balance with the highest annual percentage rate and any
remaining portion to the other balances in descending order based on
the applicable rate (the high-to-low method). Alternatively, the
institution may allocate the excess payment among the balances in the
same proportion as each balance bears to the total balance (the pro
rata method).
When the Agencies originally proposed to address payment
allocation, the proposed rule contained provisions specifically
addressing accounts with a balance subject to a deferred interest
program.\4\ One of these proposed provisions would have permitted (but
not required) an existing practice by some institutions of allocating
excess payments first to a balance on which interest is deferred during
the last two billing cycles of the deferred interest period so that
consumers could pay off that balance and avoid assessment of the
accrued interest. See proposed Sec. --.23(b)(1)(ii), 73 FR 28916,
28942 (May 19, 2008). Some industry commenters supported this aspect of
the proposal, while others argued that it would require burdensome
changes to their systems. Some consumer group commenters argued that,
rather than allowing institutions to choose whether to apply excess
payments to deferred interest balances in the last two billing cycles,
this allocation method should be mandatory. Due to other concerns about
deferred interest plans, however, the January 2009 Rule did not include
this provision. See 74 FR 5519, 5527-5528.
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\4\ Many creditors offer deferred interest programs under which
consumers are not obligated to pay interest on purchases if those
purchases are paid in full by the end of a specified period. If the
purchases are not paid in full when the period ends, these programs
generally require the consumer to pay interest that has accrued on
the purchases during the period.
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As discussed in greater detail below with respect to Sec. --.24,
the Agencies propose to clarify that--so long as consumers receive
sufficient protections--institutions may continue to provide
promotional programs under which a consumer will not be obligated to
pay interest that accrues on a balance if that balance is paid in full
prior to a specified date or expiration of a specified period of time
(deferred or waived interest programs).\5\ One area in which
clarification is needed with respect to such programs is payment
allocation. Under the current version of Sec. --.23, if the deferred
or waived interest balance is not the only balance on the account, the
consumer would generally be required to pay off the entire outstanding
balance in order to avoid interest charges on the deferred or
[[Page 20808]]
waived interest balance.\6\ If the consumer is unaware of the need to
pay off the entire balance, the consumer would be charged interest on
the deferred or waived interest balance and thus would not obtain the
benefits of the promotional program.
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\5\ For purposes of this SUPPLEMENTARY INFORMATION, a waived
interest program includes a promotional program where interest is
refunded if a balance is paid in full within a specified period of
time.
\6\ For example, assume that a consumer credit card account has
a $2,000 purchase balance with a 20% annual percentage rate and a
$1,000 balance on which interest accrues at a 15% annual percentage
rate, but the consumer will not be obligated to pay that interest if
that balance is paid in full by a specified date. Regardless of
whether the institution uses the high-to-low allocation method or
the pro rata allocation method, the consumer would be required to
pay $3,000 in order to avoid interest charges on the $1,000 balance.
Indeed, under the current version of Sec. --.23, the only
circumstance in which the consumer could pay off the $1,000 balance
without also paying off the $2,000 purchase balance would be if the
$1,000 balance had a higher annual percentage rate than the $2,000
purchase balance and the institution chose to use the high-to-low
method.
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To ensure that consumers are adequately protected, the Agencies
propose to amend Sec. --.23 to require institutions to allocate excess
payments first to deferred or waived interest balances during the last
two billing cycles of the promotional period. As noted above, this is
consistent with the current practice of many institutions with respect
to deferred interest plans and is generally beneficial to consumers
insofar as it enables them to avoid interest charges by paying off the
accrued interest balance in full prior to expiration without paying off
all other balances on the account.\7\ Accordingly, the Agencies propose
to move the provisions in the current version of Sec. --.23 to Sec.
--.23(a), to place the new provision for deferred or waived programs in
Sec. --.23(b), and to renumber the existing commentary accordingly.
The Agencies also propose to add a new example in comment 23(a)-1
(proposed comment 23(a)(1)-1) illustrating the application of proposed
Sec. --.23(b). In addition, elsewhere in today's Federal Register, the
Board has proposed to amend the disclosure requirements for periodic
statements in Regulation Z, 12 CFR 226.7, to ensure that consumers are
informed of the amount of interest accrued on the deferred or waived
balance and the date by which that balance must be paid in full to
avoid those accrued interest charges.\8\
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\7\ As discussed above, for purposes of this proposal, the
Agencies continue to rely on the legal authority and analysis
contained in the January 2009 Rule. In particular, with respect to
the proposed amendment to Sec. --.23, the Agencies rely on the
legal analysis regarding unfair payment allocation practices at 74
FR 5514-5517. In addition, the Agencies note that failing to
allocate excess payments first to deferred or waived interest
balances during the last two billing cycles of the promotional
period appears to cause substantial consumer injury insofar as a
different allocation method would result in the assessment of
accrued interest (unless the consumer pays off all balances on the
account). Because one of the intended purposes of a credit card
account is to finance purchases over multiple billing cycles, it
would be unreasonable to expect consumers to avoid accrued interest
charges on a deferred or waived interest balance by paying off all
balances on the account. Finally, failing to comply with the
proposed amendment does not appear to create any benefits for
consumers that would outweigh the injury. Indeed, the Agencies
understand that the payment allocation practices of many
institutions offering deferred or waived interest programs already
comply with the proposed amendment.
\8\ Specifically, the Board is proposing to amend 12 CFR 226.7
comment 7(b)-1 to require creditors offering deferred or waived
interest programs to disclose on the periodic statement the balance
subject to the program and the amount of interest that has accrued
on that balance. In addition, the Board is proposing to add a new 12
CFR 226.7(b)(14) that would require creditors to state on the front
of the periodic statement for the two billing cycles immediately
preceding expiration of the promotional period the date on which the
period expires and that the deferred or waived interest balance must
be paid in full by a specific date in order to avoid accrued
interest charges.
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Furthermore, the Agencies propose to amend comment 23-6 to clarify
that, for purposes of Sec. --.23, a balance on which interest will not
be charged if the balance is paid in full prior to expiration of a
specified period should be treated as a balance with an annual
percentage rate of zero rather than a balance with the rate at which
interest accrues during the promotional period (the accrual rate). As
an initial matter, treating the rate as zero is consistent with the
nature of the deferred or waived interest program insofar as the
consumer will not be obligated to pay any accrued interest if the
balance is paid in full prior to expiration. In addition, because Sec.
--.23 only applies when different annual percentage rates apply to
different balances on the account, using the accrual rate for purposes
of Sec. --.23 could significantly narrow the protections of the
payment allocation rules. Specifically, when the accrual rate for a
deferred or waived interest balance is the same as the rate that
applies to purchases (which the Agencies understand is often the case)
and there are no other balances on the account, Sec. --.23 would not
apply if the accrual rate was used. For example, if an account has a
$1,000 purchase balance with an annual percentage rate of 15% and a
$2,000 balance on which interest accrues at 15% but will not be charged
if that balance is paid in full within a specific period of time, Sec.
--.23 would not apply if the accrual rate of 15% was the applicable
rate for the $2,000 balance for purposes of payment allocation. The
Agencies believe that, in these circumstances, consumers should be
afforded the protections in Sec. --.23 (and, in particular, the
protections in proposed Sec. --.23(b)).
In addition, for purposes of the high-to-low allocation method in
Sec. --.23(a)(1), treating the rate on this type of promotional
balance as zero during the accrued interest period ensures that excess
payments will be applied first to balances on which interest is being
charged, which will generally result in lower interest charges if the
consumer pays the deferred or waived interest balance in full prior to
expiration of the promotional period. Thus, using the above example,
the amendments to comment 23-6 would clarify that an institution using
the high-to-low method would allocate excess payments to the $1,000
purchase balance before the $2,000 balance until the last two billing
cycles of the accrued interest period (when proposed Sec. --.24(b)
would require that excess payments be applied first to any remaining
portion of the $2,000 balance). Although treating the rate on the
deferred or waived interest balance as zero could prevent consumers who
wish to pay off that balance in installments over the course of the
promotional period from doing so, the Agencies believe that, on
balance, this treatment produces the best overall outcome for consumers
when the high-to-low allocation method is used.\9\
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\9\ The Agencies note that, if the institution uses the pro rata
allocation method, a proportionate amount of the excess payment will
be applied to the deferred or waived interest balance each month
during the promotional period.
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Finally, proposed comment 23(b)-1 would clarify that Sec. --.23(b)
applies to promotional programs under which the consumer is not
obligated to pay interest that accrues on a balance if that balance is
paid in full prior to the expiration of a specified period of time, not
to grace periods offered by the institution.
Requests for Comment
The Agencies request comment on:
Whether the provision in proposed Sec. --.23(b) regarding
balances on which interest will not be charged if the balance is paid
in full by a specified date should apply during the last two billing
cycles of the deferred or waived interest period or during a longer or
shorter time period.
Whether proposed Sec. --.23(b) should apply to a grace
period offered by the institution. In particular, the Agencies request
comment on whether institutions offer grace periods that only require
consumers to pay certain balances in full each billing cycle (rather
than the entire balance) and, if so, whether proposed Sec. --.23(b)
should
[[Page 20809]]
permit institutions to apply excess payments to those balances first.
Section --.24--Unfair Acts or Practices Regarding Increases in Annual
Percentage Rates
Section --.24(a) requires institutions to disclose, at account
opening, the annual percentage rates that will apply to each category
of transactions on a consumer credit card account. In addition, Sec.
--.24(a) prohibits institutions from increasing those rates unless
specifically permitted by one of the exceptions in Sec. --.24(b).
As an initial matter, the Agencies understand that clarification is
needed regarding the meaning of ``category of transactions'' for
purposes of Sec. --.24. Accordingly, the Agencies propose to add a new
comment 24-3 to clarify that, for purposes of Sec. --.24, a ``category
of transactions'' is a type or group of transactions to which an annual
percentage rate applies that is different than the annual percentage
rate that applies to other transactions. For example, purchase
transactions, cash advance transactions, and balance transfer
transactions are separate categories of transactions for purposes of
Sec. --.24 if an institution applies different annual percentage rates
to each. Furthermore, if, for example, the institution applies
different annual percentage rates to different types of purchase
transactions (such as one rate for purchases of gasoline and a
different rate for all other purchases), each type constitutes a
separate category of transactions for purposes of Sec. --.24.\10\
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\10\ As noted below, the Agencies request comment on whether
institutions establish separate categories of transactions based on
factors other than annual percentage rates and, if so, for what
reasons.
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In addition, the Agencies understand there is some confusion
regarding whether certain changes to a consumer credit card account
constitute an ``account opening'' for purposes of Sec. --.24 generally
and, in particular, the general prohibition on increasing rates during
the first year after account opening. Accordingly, the Agencies propose
to add a new comment 24-4 clarifying that, when a consumer has a credit
card account with an institution and the consumer opens a new credit
card account with the same institution (or its affiliate or
subsidiary), the opening of the new account constitutes an ``account
opening'' for purposes of Sec. --.24 if the consumer retains the
ability to obtain additional extensions of credit on both accounts.
Thus, for example, if a consumer opens a credit card account with an
institution on January 1 of year one and opens a second credit card
account with that institution on July 1 of year one, the opening of the
second account constitutes an account opening for purposes of Sec.
--.24 so long as the consumer can engage in transactions using either
account. This is the case even if the consumer transfers a balance from
the first account to the second. Thus, because the institution has two
separate account relationships with the consumer, the general
prohibition in Sec. --.24 on increasing rates during the first year
after account opening would apply to the opening of the second account.
In contrast, the comment would clarify that an account has not been
opened for purposes of Sec. --.24 when an institution replaces one
consumer credit card account with another consumer credit card account
(such as when a retail credit card is replaced with a cobranded general
purpose card that can be used at a wider number of merchants) or when
an institution consolidates or combines a credit card account with one
or more other credit card accounts into a single credit card account.
As discussed above, the Agencies believe that these transfers should be
treated as a continuation of the existing account relationship rather
than the creation of a new account relationship. Similarly, the comment
would also clarify that the replacement of an acquired credit card
account does not constitute an ``account opening'' for purposes of
Sec. --.24. Thus, in these circumstances, the general prohibition in
Sec. --.24 on increasing rates during the first year after account
opening would not apply. However, when a replacement or consolidation
occurs during the first year after account opening, proposed comment
24-4 would clarify that the institution may not increase an annual
percentage rate in a manner otherwise prohibited by Sec. --.24.\11\
Similarly, the other protections in Sec. --.24 (such as the
limitations on repayment of protected balances in Sec. --.24(c)) would
still apply following the replacement or consolidation.
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\11\ For example, assume that, on January 1 of year one, a
consumer opens a consumer credit card account with a purchase rate
of 15%. On July 1 of year one, the account is replaced with a
consumer credit card account issued by the same institution, which
offers different features (such as rewards on purchases). Under
these circumstances, the institution could not increase the annual
percentage rate for purchases to a rate that is higher than 15%
pursuant to Sec. --.24(b)(3) until January 1 of year two (which is
one year after the first account was opened).
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Finally, the Agencies understand that the replacement of one
consumer credit card account with another generally is not
instantaneous. If, for example, a consumer requests that a credit card
account with a $1,000 balance be upgraded to a credit card account that
offers rewards on purchases, the second account may be opened
immediately or within a few days but, for operational reasons, there
may be a delay before the $1,000 balance can be transferred and the
first account can be closed.\12\ Accordingly, the Agencies solicit
comment on whether the appropriate amount of time for the replacement
of one consumer credit card account with another is 15 days, 30 days,
or a different period.\13\
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\12\ As discussed above, the proposed commentary to Sec. --.21
would clarify that, in these circumstances, the institution could
not increase the annual percentage rate that applies to the $1,000
balance unless otherwise permitted by Sec. --.24.
\13\ Proposed comment 24-4 provides 15 days and 30 days as
alternatives.
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Section --.24(a) General Rule
The Agencies also understand that there is some confusion regarding
the relationship between comment 24(a)-1 and Regulation Z, 12 CFR
226.6(b)(2)(i)(D) with respect to the disclosure of penalty rates.
Specifically, comment 24(a)-1 states that institutions cannot satisfy
the disclosure requirements in Sec. --.24(a) by disclosing a range of
annual percentage rates or that a rate will be ``up to'' a particular
amount. In contrast, when more than one penalty rate may apply, 12 CFR
226.6(b)(2)(i)(D) permits creditors to disclose ``the highest rate that
could apply, instead of disclosing the specific rates or the range of
rates that could apply.'' Because the disclosure requirements in Sec.
--.24(a) are intended to ensure that consumers receive notice at
account opening of the specific annual percentage rates that will apply
to the categories of transactions on the account, those requirements do
not apply to rates that may or may not apply depending on a particular
event or occurrence (such as penalty rates) or rates that may be
applied at the institution's discretion. Therefore, the Agencies
propose to amend comment 24(a)-1 accordingly. The Agencies note,
however, that this clarification is limited to the disclosure
requirements in Sec. --.24(a) and does not alter Sec. --.24(a)'s
general prohibition on applying penalty rates or other contingent rates
unless specifically permitted by Sec. --.24(b).
The Agencies also propose the following clarifications and
technical corrections to the commentary to Sec. --.24(a):
Amend the example in comment 24(a)-2.i to clarify that the
institution
[[Page 20810]]
disclosed a penalty rate at account opening.
Amend the example in comment 24(a)-2.iii to clarify that
the 12 CFR 226.9(g) notice states that, if the consumer becomes more
than 30 days late on the account, the penalty rate will apply to all
balances on the account.
Amend the example in comment 24(a)-2.iii.C to correct a
typographical error.
Section --.24(b)(1) Account Opening Disclosure Exception
Section --.24(b)(1) provides that an annual percentage rate for a
category of transactions may be increased to a rate disclosed at
account opening upon expiration of a period of time disclosed at
account opening. Under this exception, if, for example, an institution
discloses at account opening that a 5% rate will apply to purchases for
six months and that a 15% rate will apply thereafter, the institution
can increase the rate on the existing purchase balance and on new
purchases to 15% after six months. These plans are sometimes referred
to as ``stepped rates.''
Comment 24(b)(1)-1 states that, because Sec. --.24(b)(1) is
limited to increased rates that will apply after a specified period of
time, the exception does not permit application of increased rates that
are disclosed at account opening but are contingent on a particular
event or occurrence or may be applied at the institution's discretion.
For example, as illustrated in comment 24(b)(1)-1.i, Sec. --.24(b)(1)
does not permit an institution to apply an increased penalty rate when
a consumer makes a late payment even if the institution disclosed that
rate at account opening. For clarity, the Agencies propose to move this
language into the text of Sec. --.24(b)(1). The Agencies also propose
to amend comment 24(b)(1)-1 to clarify that the examples illustrate the
application of Sec. --.24, rather than just Sec. --.24(a).
Comment 24(b)(1)-2 clarifies that nothing in Sec. --.24 prohibits
an institution from assessing interest due to the loss of a grace
period to the extent consistent with the prohibition on two-cycle
billing in Sec. --.25. Because the Agencies understand that there is
some confusion regarding the relationship between Sec. --.24 and the
provision of a grace period, the Agencies propose to add language to
this comment clarifying that an institution has not reduced an annual
percentage rate on a consumer credit card account for purposes of Sec.
--.24 if the institution does not charge interest on a balance when the
consumer pays that balance in full prior to the expiration of a grace
period. In addition, for organizational purposes, the Agencies propose
to redesignate this comment as 24-2 and renumber comment 24(b)(1)-3
accordingly.
Finally, the Agencies understand that there is some confusion as to
whether an institution waives the right to impose an increased rate
pursuant to Sec. --.24(b)(1) if it does not do so immediately upon
expiration of the specified time period. As a general matter, because
Sec. --.24 is intended to increase predictability and transparency for
consumers, the exceptions in Sec. --.24(b) do not permit institutions
to retain the right to increase a rate indefinitely and at their
discretion. For example, if at account opening an institution discloses
a stepped rate of 15% on purchases for one year and 20% thereafter, the
institution can apply a lower rate of 17% at the end of the year but,
if it wants to retain its right under Sec. --.24(b)(1) to apply the
20% rate to purchases made during the first year, it must disclose to
the consumer (pursuant to 12 CFR 226.9(c)) how long the 17% rate will
apply and that the 20% rate will apply thereafter so that the consumer
can make informed decisions when using the card. See comment 24(b)(1)-3
(proposed comment 24(b)(1)-2)).
The Agencies understand, however, that applying an increased rate
on a specific date can present operational difficulties when that date
falls in the middle of a billing cycle. Accordingly, to address this
concern, the Agencies propose to add a new comment 24(b)-1 clarifying
that, if Sec. --.24(b) permits an institution to apply an increased
annual percentage rate on a date that is not the first day of a billing
cycle, the institution may delay application of the increased rate
until the first day of the following billing cycle without
relinquishing the ability to apply that rate.\14\
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\14\ For example, assume that, at account opening on January 1,
an institution discloses that a 10% rate will apply to purchases for
six months and a 15% rate will apply thereafter. The first day of
the billing cycle for the account is the fifteenth of the month. If
the six-month period expires on July 1, the institution may delay
application of the 15% rate until July 15 without relinquishing its
ability to apply that rate under Sec. --.24(b)(1).
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Section --.24(b)(3) Advance Notice Exception
Section --.24(b)(3) provides that an annual percentage rate for a
category of transactions may be increased pursuant to a notice under 12
CFR 226.9(c) or (g) for transactions that occur more than seven days
after provision of the notice. The Agencies understand that there has
been some confusion regarding the interaction between this seven-day
period in Sec. --.24(b)(3) and the requirement in 12 CFR 226.9(c) and
(g) that notice of an increased rate be provided at least 45 days prior
to imposition of the increased rate. As illustrated in the examples in
comment 24(b)(3)-3, the distinction is that the institution may apply
the increased rate to any transaction that occurs after the seventh day
following provision of the notice, but it must wait 45 days to begin
accruing interest at that rate. The reason for this distinction is that
the two time periods serve different purposes. The seven-day period is
intended to ensure that the consumer receives the notice and is aware
of the increased rate before engaging in transactions to which that
increased rate will eventually apply (unless the consumer transfers or
pays off the balance). See 74 FR 5531. In contrast, the 45-day period
is intended to give the consumer sufficient time to evaluate whether to
continue using the credit card account at the increased rate or whether
better terms can be obtained elsewhere. See 74 FR 5344-5356. For
additional clarity, the Agencies propose to amend comment 24(b)(3)-2 to
state that, when calculating interest charges, Sec. --.24(b)(3) does
not permit an institution to reach back to days before the effective
date of the rate increase under 12 CFR 226.9(c) or (g)--in other words,
the date 45 days after provision of the notice.
The Agencies also propose to amend comment 24(b)(3)-2 to clarify
when a transaction is deemed to have occurred for purposes of Sec.
--.24(b)(3). Specifically, the current version of comment 24(b)(3)-2
states that an institution may apply a rate increased pursuant to Sec.
--.24(b)(3) to transactions that are authorized within seven days--but
are settled more than seven days--after provision of the notice. The
Agencies understand, however, that this distinction has created some
confusion because, for example, authorization may not be obtained for
all transactions and because the term ``settled'' could refer to
different points in the payment process, including settlement between
the acquirer and the merchant or settlement between the consumer and
the card issuer. Accordingly, for consistency and clarity, the Agencies
propose to amend comment 24(b)(3)-2 to clarify that when a transaction
occurred for purposes of Sec. --.24(b)(3) is determined by the date of
the transaction (without regard to when the transaction is authorized,
settled, or posted to the consumer's account). In addition, the
Agencies would clarify that, when a merchant places a ``hold''
[[Page 20811]]
on the available credit on an account for an estimated transaction
amount when the actual transaction amount will not be known until a
later date, the date of the transaction for purposes of Sec.
--.24(b)(3) is the date on which the merchant determines the actual
transaction amount. The Agencies also propose to amend the examples in
comment 24(b)(3)-3 for consistency with these proposed changes.
In addition, the Agencies propose to amend Sec. --.24(b)(3) and
its commentary to reflect that notice of an increased rate may be
provided under 12 CFR 226.9(b), which applies to supplemental access
devices (such as convenience checks) and additional features added to
the account after account opening. 12 CFR 226.9(b) requires creditors
to disclose the rates and other key terms applicable to the device or
feature before the consumer uses the device or feature for the first
time. For example, 12 CFR 226.9(b)(3)(A) requires that creditors
providing convenience checks to which a temporary promotional rate
applies disclose key terms on the front of the page containing the
checks, including the promotional rate, the period during which the
promotional rate will be in effect, and the rate that will apply after
the promotional rate expires. Thus, unlike rates increased pursuant to
a 12 CFR 226.9(c) and (g) notice, the seven-day period is not necessary
for rate increases disclosed pursuant to 12 CFR 226.9(b) because the
device or feature will not be used before the consumer has received
notice of the applicable rates and terms. Accordingly, the Agencies
propose to amend Sec. --.24(b)(3) to provide that increased rates
disclosed pursuant to 12 CFR 226.9(b) must not be applied to
transactions that occurred prior to provision of the notice. Section
--.24(b)(3) would continue to provide that increased rates disclosed
pursuant to 12 CFR 226.9(c) or (g) must not be applied to transactions
that occurred within seven days after provision of the notice. The
Agencies would also clarify in comment 24(b)(3)-2 that, if a rate
increase is disclosed pursuant to both 12 CFR 226.9(b) and 12 CFR
226.9(c), that rate may only be applied to transactions that occur more
than seven days after provision of the 12 CFR 226.9(c) notice. In
addition, the Agencies would add an illustrative example in new comment
24(b)(3)-4.iv.
Finally, the Agencies understand that clarification is needed
regarding the application of discounted promotional rates to existing
accounts. As discussed above, Sec. --.24(b)(1) permits stepped rates
disclosed at account opening. In addition, comment 24(b)(3)-3 provides
some examples of how a stepped rate could be provided pursuant to a 12
CFR 226.9(c) notice. The Agencies did not, however, specifically
address circumstances in which a discounted promotional stepped rate is
offered after account opening. Consistent with comment 24(b)(3)-3, the
Agencies believe that, if the consumer receives advance notice of the
term of the discounted rate and the rate that will apply after that
term expires, a promotional stepped rate offer on an existing account
can provide the same benefits to consumers as a promotional stepped
rate offer at account opening so long as the offer cannot be used to
increase the rate that applies to pre-existing balances.
Accordingly, to clarify that such offers are permitted, the
Agencies propose to add a new comment 24(b)(3)-4 stating that nothing
in Sec. --.24 prohibits an institution from lowering the annual
percentage rate that applies to an existing balance or to new
transactions. The comment would further state, however, that, if a
lower rate is applied to an existing balance, the institution cannot
subsequently increase the rate on that balance unless it has provided
the consumer with advance notice of the increase pursuant to 12 CFR
226.9(b) or (c). This notice must state the period of time during which
the lower rate will apply (or the date until which that rate will
apply) and the rate that will apply after expiration of that period.
Furthermore, to ensure that the consumer receives notice of the offer
before engaging in transactions that are subject to that offer (and
will therefore eventually be taken to a higher rate), the comment would
clarify that, when an institution applies a decreased rate to
transactions that occurred prior to provision of the notice (or, in the
case of a 12 CFR 226.9(c) or (g) notice, transactions that occurred
within seven days after provision of the notice), the institution may
not subsequently increase the rate that applies to those transactions
to a rate that is higher than the rate that applied prior to the
decrease.\15\ Finally, the comment would provide illustrative examples
of stepped rate offers that would comply with these requirements.\16\
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\15\ For example, assume that the annual percentage rate for
purchases on an account is 15% and that, pursuant to 12 CFR
226.9(c), the institution provides notice on July 1 that a rate of
5% will apply to purchases until December 31, after which a rate of
17% will apply. If the institution applies the 5% rate to purchases
made on or before July 8, the institution may only increase the rate
on those purchases to a maximum of 15% on December 31.
\16\ For the same reasons, the Agencies propose to amend comment
24(b)(1)-3 (proposed comment 24(b)(1)-2) to clarify that
institutions may offer discounted stepped rates during the first
year after account opening so long as the rate that applies after
expiration of the discounted rate does not exceed the rate disclosed
at account opening for that category of transactions.
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Section --.24(b)(5) Workout Arrangement Exception
Section --.24(b)(5) provides that an annual percentage rate may be
increased due to the consumer's failure to comply with the terms of a
workout arrangement between the institution and the consumer, provided
that the annual percentage rate applicable to a category of
transactions following any such increase does not exceed the rate that
applied to that category of transactions prior to commencement of the
workout arrangement. This exception is intended to encourage
institutions to continue offering workout arrangements that reduce
rates for consumers in serious default, while also ensuring that a
consumer who enters into such an arrangement but is unable to comply
with its terms is not charged a rate that exceeds the rate that applied
prior to the arrangement. See 74 FR 5532.
Because the term ``workout'' has been used by the Agencies in other
contexts,\17\ the Agencies understand that there is some confusion as
to whether this exception also applies to temporary hardship
arrangements that assist consumers in overcoming financial difficulties
by lowering the annual percentage rate for a period of time. For
example, if an account becomes seriously delinquent because of a loss
of employment, the institution may reduce the rate that applies to the
outstanding balance from the penalty rate to a rate of zero on the
condition that the consumer make payments that will cure the
delinquency within a specified period of time. If the arrangement is
successful, the institution may choose to return the annual percentage
rate to the rate that applied prior to commencement of the temporary
hardship arrangement. Because such arrangements can provide important
benefits to consumers, the Agencies propose to amend Sec. --.24(b)(5)
and its commentary to clarify that this exception also applies to
temporary hardship arrangements and when the consumer completes a
workout or temporary hardship arrangement.
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\17\ See, e.g., Board Supervisory Letter SR 03-1 on Account
Management and Loss Allowance Methodology for Credit Card Lending
(Jan. 8, 2003) (available at http://www.federalreserve.gov/
boarddocs/srletters/2003/sr0301.htm); OTS Regulatory Bulletin RB 37-
16 on Examination Handbook, Asset Quality Section 218, Credit Card
Lending (May 8, 2006) (available at http://files.ots.treas.gov/
74827.pdf).
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[[Page 20812]]
Proposed Sec. --.24(b)(6) Servicemembers Civil Relief Act Exception
The Agencies understand that clarification is required regarding
the relationship between Sec. --.24 and certain provisions of the
Servicemembers Civil Relief Act (SCRA), 50 U.S.C. app. 501 et seq.
Specifically, 50 U.S.C. app. 527(a)(1) provides that ``[a]n obligation
or liability bearing interest at a rate in excess of 6 percent per year
that is incurred by a servicemember, or the servicemember and the
servicemember's spouse jointly, before the servicemember enters
military service shall not bear interest at a rate in excess of 6
percent. * * *'' With respect to consumer credit card accounts, this
restriction applies during the period of military service. See 50
U.S.C. app. 527(a)(1)(B).\18\
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\18\ 50 U.S.C. app. 527(a)(1)(B) applies to obligations or
liabilities that do not consist of a mortgage, trust deed, or other
security in the nature of a mortgage.
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Under the current version of Sec. --.24, an institution that
complies with the SCRA by lowering the rate that applies to an existing
balance on a consumer credit card account when the consumer enters
military service would not be permitted to increase the rate for that
balance once the period of military service ends and the protections of
the SCRA no longer apply. The Agencies did not intend this result,
which appears to be inconsistent with the plain language of the SCRA.
Accordingly, the Agencies propose to add a new exception in Sec.
--.24(b)(6) stating that an annual percentage rate that has been
decreased pursuant to 50 U.S.C. app. 527 may be increased once that
provision no longer applies, provided that the increased rate does not
exceed the rate that applied prior to the period of military service.