Skip to Content

Rule

Truth in Lending

Document Details

Information about this document as published in the Federal Register.

Published Document

This document has been published in the Federal Register. Use the PDF linked in the document sidebar for the official electronic format.

Start Preamble Start Printed Page 5244

AGENCY:

Board of Governors of the Federal Reserve System.

ACTION:

Final rule.

SUMMARY:

The Board is amending Regulation Z, which implements the Truth in Lending Act (TILA), and the staff commentary to the regulation, following a comprehensive review of TILA's rules for open-end (revolving) credit that is not home-secured. Consumer testing was conducted as a part of the review.

Except as otherwise noted, the changes apply solely to open-end credit. Disclosures accompanying credit card applications and solicitations must highlight fees and reasons penalty rates might be applied, such as for paying late. Creditors are required to summarize key terms at account opening and when terms are changed. Specific fees are identified that must be disclosed to consumers in writing before an account is opened, and creditors are given flexibility regarding how and when to disclose other fees imposed as part of the open-end plan. Costs for interest and fees are separately identified for the cycle and year to date. Creditors are required to give 45 days' advance notice prior to certain changes in terms and before the rate applicable to a consumer's account is increased as a penalty. Rules of general applicability such as the definition of open-end credit, dispute resolution procedures, and payment processing limitations apply to all open-end plans, including home-equity lines of credit. Rules regarding the disclosure of debt cancellation and debt suspension agreements are revised for both closed-end and open-end credit transactions. Loans taken against employer-sponsored retirement plans are exempt from TILA coverage.

DATES:

The rule is effective July 1, 2010.

Start Further Info

FOR FURTHER INFORMATION CONTACT:

Benjamin K. Olson, Attorney, Amy Burke or Vivian Wong, Senior Attorneys, or Krista Ayoub, Ky Tran-Trong, or John Wood, Counsels, Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System, at (202) 452-3667 or 452-2412; for users of Telecommunications Device for the Deaf (TDD) only, contact (202) 263-4869.

End Further Info End Preamble Start Supplemental Information

SUPPLEMENTARY INFORMATION:

I. Background on TILA and Regulation Z

Congress enacted the Truth in Lending Act (TILA) based on findings that economic stability would be enhanced and competition among consumer credit providers would be strengthened by the informed use of credit resulting from consumers' awareness of the cost of credit. The purposes of TILA are (1) to provide a meaningful disclosure of credit terms to enable consumers to compare credit terms available in the marketplace more readily and avoid the uninformed use of credit; and (2) to protect consumers against inaccurate and unfair credit billing and credit card practices.

TILA's disclosures differ depending on whether consumer credit is an open-end (revolving) plan or a closed-end (installment) loan. TILA also contains procedural and substantive protections for consumers. TILA is implemented by the Board's Regulation Z. An Official Staff Commentary interprets the requirements of Regulation Z. By statute, creditors that follow in good faith Board or official staff interpretations are insulated from civil liability, criminal penalties, or administrative sanction.

II. Summary of Major Changes

The goal of the amendments to Regulation Z is to improve the effectiveness of the disclosures that creditors provide to consumers at application and throughout the life of an open-end (not home-secured) account. The changes are the result of the Board's review of the provisions that apply to open-end (not home-secured) credit. The Board is adopting changes to format, timing, and content requirements for the five main types of open-end credit disclosures governed by Regulation Z: (1) Credit and charge card application and solicitation disclosures; (2) account-opening disclosures; (3) periodic statement disclosures; (4) change-in-terms notices; and (5) advertising provisions. The Board is also adopting additional protections that complement rules issued by the Board and other federal banking agencies published elsewhere in today's Federal Register regarding certain credit card practices.

Applications and solicitations. Format and content changes are adopted to make the credit and charge card application and solicitation disclosures more meaningful and easier for consumers to use. The changes include:

  • Adopting new format requirements for the summary table, including rules regarding: type size and use of boldface type for certain key terms, and placement of information.
  • Revising content, including: a requirement that creditors disclose the duration that penalty rates may be in effect, a shorter disclosure about variable rates, new descriptions when a grace period is offered on purchases or when no grace period is offered, and a reference to consumer education materials on the Board's Web site.

Account-opening disclosures. Requirements for cost disclosures provided at account opening are adopted to make the information more conspicuous and easier to read. The changes include:

  • Disclosing certain key terms in a summary table at account opening, in order to summarize for consumers key information that is most important to informed decision-making. The table is substantially similar to the table required for credit and charge card applications and solicitations.
  • Adopting a different approach to disclosing fees, to provide greater clarity for identifying fees that must be disclosed. In addition, creditors would have flexibility to disclose charges (other than those in the summary table) in writing or orally.

Periodic statement disclosures. Revisions are adopted to make disclosures on periodic statements more understandable, primarily by making changes to the format requirements, such as by grouping fees and interest charges together. The changes include:

  • Itemizing interest charges for different types of transactions, such as purchases and cash advances, grouping interest charges and fees separately, and providing separate totals of fees and interest for the month and year-to-date.
  • Eliminating the requirement to disclose an “effective APR.”
  • Requiring disclosure of the effect of making only the minimum required payment on the time to repay balances, as required by the Bankruptcy Act.

Changes in consumer's interest rate and other account terms. The final rule expands the circumstances under which consumers receive written notice of changes in the terms (e.g., an increase in the interest rate) applicable to their accounts, and increase the amount of time these notices must be sent before the change becomes effective. The changes include:

  • Increasing advance notice before a changed term can be imposed from 15 to 45 days, to better allow consumers to obtain alternative financing or change their account usage.
  • Requiring creditors to provide 45 days' prior notice before the creditor increases a rate either due to a change in the terms applicable to the consumer's account or due to the consumer's delinquency or default or as a penalty.
  • When a change-in-terms notice accompanies a periodic statement, requiring Start Printed Page 5245a tabular disclosure on the front side of the periodic statement of the key terms being changed.

Advertising provisions. Rules governing advertising of open-end credit are revised to help ensure consumers better understand the credit terms offered. These revisions include:

  • Requiring advertisements that state a periodic payment amount on a plan offered to finance the purchase of goods or services to state, in equal prominence to the periodic payment amount, the time period required to pay the balance and the total of payments if only periodic payments are made.
  • Permitting advertisements to refer to a rate as “fixed” only if the advertisement specifies a time period for which the rate is fixed and the rate will not increase for any reason during that time, or if a time period is not specified, if the rate will not increase for any reason while the plan is open.

Additional protections. Rules are adopted that provide additional protections to consumers. These include:

  • In setting reasonable cut-off hours for mailed payments to be received on the due date and be considered timely, deeming 5 p.m. to be a reasonable time.
  • Requiring creditors that do not accept mailed payments on the due date, such as on weekends or holidays, to treat a mailed payment received on the next business day as timely.
  • Clarifying that advances that are separately underwritten are generally not open-end credit, but closed-end credit for which closed-end disclosures must be given.

III. The Board's Review of Open-end Credit Rules

A. Advance Notices of Proposed Rulemaking

December 2004 ANPR. The Board began a review of Regulation Z in December 2004.[1] The Board initiated its review of Regulation Z by issuing an advance notice of proposed rulemaking (December 2004 ANPR). 69 FR 70925, December 8, 2004. At that time, the Board announced its intent to conduct its review of Regulation Z in stages, focusing first on the rules for open-end (revolving) credit accounts that are not home-secured, chiefly general-purpose credit cards and retailer credit card plans. The December 2004 ANPR sought public comment on a variety of specific issues relating to three broad categories: the format of open-end credit disclosures, the content of those disclosures, and the substantive protections provided for open-end credit under the regulation. The December 2004 ANPR solicited comment on the scope of the Board's review, and also requested commenters to identify other issues that the Board should address in the review. A summary of the comments received in response to the December 2004 ANPR is contained in the supplementary information to proposed revisions to Regulation Z published by the Board in June 2007 (June 2007 Proposal). 72 FR 32948, 32949, June 14, 2007.

October 2005 ANPR. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the Bankruptcy Act) primarily amended the federal bankruptcy code, but also contained several provisions amending TILA. Public Law 109-8, 119 Stat. 23. The Bankruptcy Act's TILA amendments principally deal with open-end credit accounts and require new disclosures on periodic statements, on credit card applications and solicitations, and in advertisements.

In October 2005, the Board published a second ANPR to solicit comment on implementing the Bankruptcy Act amendments (October 2005 ANPR). 70 FR 60235, October 17, 2005. In the October 2005 ANPR, the Board stated its intent to implement the Bankruptcy Act amendments as part of the Board's ongoing review of Regulation Z's open-end credit rules. A summary of the comments received in response to the October 2005 ANPR also is contained in the supplementary information to the June 2007 Proposal. 72 FR 32948, 32950, June 14, 2007.

B. Notices of Proposed Rulemakings

June 2007 Proposal. The Board published proposed amendments to Regulation Z's rules for open-end plans that are not home-secured in June 2007. 72 FR 32948, June 14, 2007. The goal of the proposed amendments to Regulation Z was to improve the effectiveness of the disclosures that creditors provide to consumers at application and throughout the life of an open-end (not home-secured) account. In developing the proposal, the Board conducted consumer research, in addition to considering comments received on the two ANPRs. Specifically, the Board retained a research and consulting firm (Macro International) to assist the Board in using consumer testing to develop proposed model forms, as discussed in C. Consumer Testing of this section, below. The proposal would have made changes to format, timing, and content requirements for the five main types of open-end credit disclosures governed by Regulation Z: (1) Credit and charge card application and solicitation disclosures; (2) account-opening disclosures; (3) periodic statement disclosures; (4) change-in-terms notices; and (5) advertising provisions.

For credit and charge card application and solicitation disclosures, the June 2007 Proposal included new format requirements for the summary table, such as rules regarding type size and use of boldface type for certain key terms, placement of information, and the use of cross-references. Content revisions included requiring creditors to disclose the duration that penalty rates may be in effect and a shorter disclosure about variable rates.

For disclosures provided at account opening, the June 2007 Proposal called for creditors to disclose certain key terms in a summary table that is substantially similar to the table required for credit and charge card applications and solicitations. A different approach to disclosing fees was proposed, to provide greater clarity for identifying fees that must be disclosed, and to provide creditors with flexibility to disclose charges (other than those in the summary table) in writing or orally.

The June 2007 Proposal also included changes to the format requirements for periodic statements, such as by grouping fees, interest charges, and transactions together and providing separate totals of fees and interest for the month and year-to-date. The proposal also modified the provisions for disclosing the “effective APR,” including format and terminology requirements to make it more understandable. Because of concerns about the disclosure's effectiveness, however, the Board also solicited comment on whether this rate should be required to be disclosed. The proposal required card issuers to disclose the effect of making only the minimum required payment on repayment of balances, as required by the Bankruptcy Act.

For changes in consumer's interest rate and other account terms, the June 2007 Proposal expanded the circumstances under which consumers receive written notice of changes in the terms (e.g., an increase in the interest rate) applicable to their accounts to include increases of a rate due to the consumer's delinquency or default, and increased the amount of time (from 15 to 45 days) these notices must be sent before the change becomes effective.

For advertisements that state a minimum monthly payment on a plan offered to finance the purchase of goods or services, the June 2007 Proposal required additional information about Start Printed Page 5246the time period required to pay the balance and the total of payments if only minimum payments are made. The proposal also limited the circumstances under which an advertisement may refer to a rate as “fixed.”

The Board received over 2,500 comments on the June 2007 Proposal. About 85% of these were from consumers and consumer groups, and of those, nearly all (99%) were from individuals. Of the approximately 15% of comment letters received from industry representatives, about 10% were from financial institutions or their trade associations. The vast majority (90%) of the industry letters were from credit unions and their trade associations. Those latter comments mainly concerned a proposed revision to the definition of open-end credit that could affect how many credit unions currently structure their consumer loan products.

In general, commenters generally supported the June 2007 Proposal and the Board's use of consumer testing to develop revisions to disclosure requirements. There was opposition to some aspects of the proposal. For example, industry representatives opposed many of the format requirements for periodic statements as being overly prescriptive. They also opposed the Board's proposal to require creditors to provide at least 45 days' advance notice before certain key terms change or interest rates are increased due to default or delinquency or as a penalty. Consumer groups opposed the Board's proposed alternative that would eliminate the effective annual percentage rate (effective APR) as a periodic statement disclosure. Consumers and consumer groups also believed the Board's proposal was too limited in scope and urged the Board to provide more substantive protections and prohibit certain card issuer practices. Comments on specific proposed revisions are discussed in VI. Section-by-Section Analysis, below.

May 2008 Proposal. In May 2008, the Board published revisions to several disclosures in the June 2007 Proposal (May 2008 Proposal). 73 FR 28866, May 19, 2008. In developing these revisions, the Board considered comments received on the June 2007 Proposal and worked with its testing consultant, Macro International, to conduct additional consumer research, as discussed in C. Consumer Testing of this section, below. In addition, the May 2008 Proposal contained proposed amendments to Regulation Z that complemented a proposal published by the Board, along with the Office of Thrift Supervision and the National Credit Union Administration, to adopt rules prohibiting specific unfair acts or practices with respect to consumer credit card accounts under their authority under the Federal Trade Commission Act (FTC Act). See 15 U.S.C. 57a(f)(1). 73 FR 28904, May 19, 2008.

The May 2008 Proposal would have, among other things, required changes for the summary table provided on or with application and solicitations for credit and charge cards. Specifically, it would have required different terminology than the term “grace period” as a heading that describes whether the card issuer offers a grace period on purchases, and added a de minimis dollar amount trigger of more than $1.00 for disclosing minimum interest or finance charges.

Under the May 2008 Proposal, creditors assessing fees at account opening that are 25% or more of the minimum credit limit would have been required to provide in the account-opening summary table a notice of the consumer's right to reject the plan after receiving disclosures if the consumer has not used the account or paid a fee (other than certain application fees).

Currently, creditors may require consumers to comply with reasonable payment instructions. The May 2008 Proposal would have deemed a cut-off hour for receiving mailed payments before 5 p.m. on the due date to be an unreasonable instruction. The proposal also would have prohibited creditors that set due dates on a weekend or holiday but do not accept mailed payments on those days from considering a payment received on the next business day as late for any reason.

For deferred interest plans that advertise “no interest” or similar terms, the May 2008 Proposal would have added notice and proximity requirements to require advertisements to state the circumstances under which interest is charged from the date of purchase and, if applicable, that the minimum payments required will not pay off the balance in full by the end of the deferral period.

The Board received over 450 comments on the May 2008 Proposal. About 88% of these were from consumers and consumer groups, and of those, nearly all (98%) were from individuals. Six comments (1%) were from government officials or organizations, and the remaining 11% represented industry, such as financial institutions or their trade associations and payment system networks.

Commenters generally supported the May 2008 Proposal, although like the June 2007 Proposal, some commenters opposed aspects of the proposal. For example, operational concerns and costs for system changes were cited by industry representatives that opposed limitations on when creditors may consider mailed payments to be untimely. Regarding revised disclosure requirements, some industry and consumer group commenters opposed proposed heading descriptions for accounts offering a grace period, although these commenters were split between those that favor retaining the current term (“grace period”) and those that suggested other heading descriptions. Consumer groups opposed the May 2008 proposal to permit card issuers and creditors to omit charges in lieu of interest that are $1.00 or less from the table provided with credit or charge card applications and solicitations and the table provided at account opening. Some retailers opposed the proposed advertising rules for deferred interest offers. Comments on specific proposed revisions are discussed in VI. Section-by-Section Analysis, below.

C. Consumer Testing

Developing the June 2007 Proposal. A principal goal for the Regulation Z review was to produce revised and improved credit card disclosures that consumers will be more likely to pay attention to, understand, and use in their decisions, while at the same time not creating undue burdens for creditors. In April 2006, the Board retained a research and consulting firm (Macro International) that specializes in designing and testing documents to conduct consumer testing to help the Board review Regulation Z's credit card rules. Specifically, the Board used consumer testing to develop model forms that were proposed in June 2007 for the following credit card disclosures required by Regulation Z:

  • Summary table disclosures provided in direct-mail solicitations and applications;
  • Disclosures provided at account opening;
  • Periodic statement disclosures; and
  • Subsequent disclosures, such as notices provided when key account terms are changed, and notices on checks provided to access credit card accounts.

Working closely with the Board, Macro International conducted several tests. Each round of testing was conducted in a different city throughout the United States. In addition, the consumer testing groups contained participants with a range of ethnicities, ages, educational levels, and credit card behavior. The consumer testing groups also contained participants likely to have subprime credit cards as well as those likely to have prime credit cards.Start Printed Page 5247

Initial research and design of disclosures for testing. In advance of testing a series of revised disclosures, the Board conducted research to learn what information consumers currently use in making decisions about their credit card accounts, and how they currently use disclosures that are provided to them. In May and June 2006, the Board worked with Macro International to conduct two sets of focus groups with credit card consumers. Through these focus groups, the Board gathered information on what credit terms consumers usually consider when shopping for a credit card, what information they find useful when they receive a new credit card in the mail, and what information they find useful on periodic statements. In August 2006, the Board worked with Macro International to conduct one-on-one discussions with credit card account holders. Consumers were asked to view existing sample credit card disclosures. The goals of these interviews were: (1) To learn more about what information consumers read when they receive current credit card disclosures; (2) to research how easily consumers can find various pieces of information in these disclosures; and (3) to test consumers' understanding of certain credit card-related words and phrases. In the fall of 2006, the Board worked with Macro International to develop sample credit card disclosures to be used in the later rounds of testing, taking into account information learned through the focus groups and the one-on-one interviews.

Additional testing and revisions to disclosures. In late 2006 and early 2007, the Board worked with Macro International to conduct four rounds of one-on-one interviews (seven to nine participants per round), where consumers were asked to view new sample credit card disclosures developed by the Board and Macro International. The rounds of interviews were conducted sequentially to allow for revisions to the testing materials based on what was learned from the testing during each previous round.

Several of the model forms contained in the June 2007 Proposal were developed through the testing. A report summarizing the results of the testing is available on the Board's public Web site: http://www.federalreserve.gov (May 2007 Macro Report).[2] See also VI. Section-by-Section Analysis, below. To illustrate by example:

  • Testing participants generally read the summary table provided in direct-mail credit card solicitations and applications and ignored information presented outside of the table. The June 2007 Proposal would have required that information about events that trigger penalty rates and about important fees (late-payment fees, over-the-credit-limit fees, balance transfer fees, and cash advance fees) be placed in the table. Currently, this information may be placed outside the table.
  • With respect to the account-opening disclosures, consumer testing indicates that consumers commonly do not review their account agreements, which currently are often in small print and dense prose. The June 2007 Proposal would have required creditors to include a table summarizing the key terms applicable to the account, similar to the table required for credit card applications and solicitations. The goal of setting apart the most important terms in this way is to better ensure that consumers are apprised of those terms.
  • With respect to periodic statement disclosures, many consumers more easily noticed the number and amount of fees when the fees were itemized and grouped together with interest charges. Consumers also noticed fees and interest charges more readily when they were located near the disclosure of the transactions on the account. The June 2007 Proposal would have required creditors to group all fees together and describe them in a manner consistent with consumers' general understanding of costs (“interest charge” or “fee”), without regard to whether the fees would be considered “finance charges,” “other charges” or neither under the regulation.
  • With respect to change-in-terms notices, creditors commonly provide notices about changes to terms or rates in the same envelope with periodic statements. Consumer testing indicates that consumers may not typically look at the notices if they are provided as separate inserts given with periodic statements. In such cases under the June 2007 Proposal, a table summarizing the change would have been required on the periodic statement directly above the transaction list, where consumers are more likely to notice the changes.

Developing the May 2008 Proposal. In early 2008, the Board worked with a testing consultant, Macro International, to revise model disclosures published in the June 2007 Proposal in response to comments received. In March 2008, the Board conducted an additional round of one-on-one interviews on revised disclosures provided with applications and solicitations, on periodic statements, and with checks that access a credit card account. A report summarizing the results of the testing is available on the Board's public Web site: http://www.federalreserve.gov (December 2008 Macro Report on Qualitative Testing).[3]

With respect to the summary table provided in direct-mail credit card solicitations and applications, participants who read the heading “How to Avoid Paying Interest on Purchases” on the row describing a grace period generally understood what the phrase meant. The May 2008 Proposal would have required issuers to use that phrase, or a substantially similar phrase, as the row heading to describe an account with a grace period for purchases, and the phrase “Paying Interest,” or a substantially similar phrase, if no grace period is offered. (The same row headings were also proposed for tables provided at account-opening and with checks that access credit card accounts.)

Prior to the May 2008 Proposal, the Board also tested a disclosure of a use-by date applicable to checks that access a credit card account. The responses given by testing participants indicated that they generally did not understand prior to the testing that there may be a use-by date applicable to an offer of a promotional rate for a check that accesses a credit card account. However, the participants that saw and read the tested language understood that a standard cash advance rate, not the promotional rate, would apply if the check was used after the date disclosed. Thus, in May 2008 the Board proposed to require that creditors disclose any use-by date applicable to an offer of a promotional rate for access checks.

Testing conducted after May 2008. In July and August 2008, the Board worked with Macro International to conduct two additional rounds of one-on-one interviews. See the December 2008 Macro Report on Qualitative Testing, which summarizes the results of these interviews. The results of this consumer testing were used to develop the final rule, and are discussed in more detail in VI. Section-by-Section Analysis.

For example, these rounds of interviews examined, among other things, whether consumers understand the meaning of a minimum interest charge disclosed in the summary table provided in direct-mail credit card solicitations and applications. Most participants could correctly explain the meaning of a minimum interest charge, and most participants indicated that a minimum interest charge would not be important to them because it is a relatively small sum of money ($1.50 on the forms tested). The final rule accordingly establishes a threshold of $1.00; if the minimum interest charge is $1.00 or less it is not required to be disclosed in the table.

Consumers also were asked to review periodic statements that disclosed an impending rate increase, with a tabular summary of the change appearing on statement, as proposed by the Board in Start Printed Page 5248June 2007. This testing was used in the development of final Samples G-20 and G-21, which give creditors guidance on how advance notice of impending rate increases or changes in terms should be presented.

Quantitative testing. In September 2008, the Board worked with Macro International to develop a survey to conduct quantitative testing. The goal of quantitative testing was to measure consumers' comprehension and the usability of the newly-developed disclosures relative to existing disclosures and formats. A report summarizing the results of the testing is available on the Board's public Web site: http://www.federalreserve.gov (December 2008 Macro Report on Quantitative Testing).[4]

The quantitative consumer testing conducted for the Board consisted of mall-intercept interviews of a total of 1,022 participants in seven cities: Dallas, TX; Detroit, MI; Los Angeles, CA; Seattle, WA; Springfield, IL; St. Louis, MO; and Tallahassee, FL. Each interview lasted approximately fifteen minutes and consisted of showing the participant models of the summary table provided in direct-mail credit card solicitations and applications and the periodic statement and asking a series of questions designed to assess the effectiveness of certain formatting and content requirements proposed by the Board or suggested by commenters.

With regard to the summary table provided in direct-mail credit card solicitations and applications, consumers were asked questions intended to gauge the impact of (i) combining rows for APRs applicable to different transaction types, (ii) the inclusion of cross-references in the table, and (iii) the impact of splitting the table onto two pages instead of presenting the table entirely on a single page. More details about the specific forms used in the testing as well as the questions asked are available in the December 2008 Macro Report on Quantitative Testing.

The results of the testing demonstrated that combining the rows for APRs applicable to different transaction types that have the same applicable rate did not have a statistically significant impact on consumers' ability to identify those rates. Thus, the final rule permits creditors to combine rows disclosing the rates for different transaction types to which the same rate applies.

Similarly, the testing indicated that the inclusion of cross-references in the table did not have a statistically significant impact on consumers' ability to identify fees and rates applicable to their accounts. As a result, the Board has not adopted the proposed requirement that certain cross-references between certain rates and fees be included in the table.

Finally, the testing demonstrated that consumers have more difficulty locating fees applicable to their accounts when the table is split on two pages and the fee appears on the second page of the table. As discussed further in VI. Section-by-Section Analysis, the Board is not requiring that creditors use a certain paper size or present the entire table on a single page, but is requiring creditors that split the table onto two or more pages to include a reference indicating that additional important information regarding the account is presented on a separate page.

The Board also tested whether consumers' understanding of payment allocation practices could be improved through disclosure. The testing showed that a disclosure, even of the relatively simple payment allocation practice of applying payments to lower-interest balances before higher-interest balances,[5] improved understanding for very few consumers. The disclosure also confused some consumers who had understood payment allocation based on prior knowledge before reviewing the disclosure. Based on this result, and because of substantive protections adopted by the Board and other federal banking agencies published elsewhere in this Federal Register, the Board is not requiring a payment allocation disclosure in the summary table provided in direct-mail solicitations and applications or at account-opening.

With regard to periodic statements, the Board's testing consultant examined (i) the effectiveness of grouping transactions and fees on the periodic statement, (ii) consumers' understanding of the effective APR disclosure, (iii) the formatting and location of change-in-terms notices included with periodic statements, and (iv) the formatting and grouping of various payment information, including warnings about the effect of late payments and making only the minimum payment.

The testing demonstrated that grouping of fees and transactions, by type, separately on the periodic statement improved consumers' ability to find fees that were charged to the account and also moderately improved consumers' ability to locate transactions. Grouping fees separately from transactions made it more difficult for some consumers to match a transaction fee to the relevant transaction, although most consumers could successfully match the transaction and fee regardless of how the transaction list was presented. As discussed in more detail in VI. Section-by-Section Analysis, the final rule requires grouping of fees and interest separate from transactions on the periodic statement, but the Board has provided flexibility for issuers to disclose transactions on the periodic statement.

With regard to the effective APR, testing overwhelmingly showed that few consumers understood the disclosure and that some consumers were less able to locate the interest rate applicable to cash advances when the effective APR also was disclosed on the periodic statement. Accordingly, and for the additional reasons discussed in more detail in VI. Section-by-Section Analysis, the final rule eliminates the requirement to disclose an effective APR for open-end (not home-secured) credit.

When a change-in-terms notice for the APR for purchases was included with the periodic statement, disclosure of a tabular summary of the change on the front of the statement moderately improved consumers' ability to identify the rate that would apply when the changes take effect. However, whether the tabular summary was presented on page one or page two of the statement did not have an effect on the ability of participants to notice or comprehend the disclosure. Thus, the final rule requires a tabular summary of key changes on the periodic statement, when a change-in-terms notice is included with the periodic statement, but permits creditors to disclose that summary on the front of any page of the statement.

The formatting of certain grouped information regarding payments, including the amount of the minimum payment, due date, and warnings regarding the effect of making late or minimum payments did not have an effect on consumers' ability to notice or comprehend these disclosures. Thus, while the final rule requires that this Start Printed Page 5249information be grouped, creditors are not required to format this information in any particular manner.

D. Other Outreach and Research

Throughout the Board's review of Regulation Z's rules affecting open-end (not home-secured) plans, the Board solicited input from members of the Board's Consumer Advisory Council on various issues. During 2005 and 2006, for example, the Council discussed the feasibility and advisability of reviewing Regulation Z in stages, ways to improve the summary table provided on or with credit card applications and solicitations, issues related to TILA's substantive protections (including dispute resolution procedures), and issues related to the Bankruptcy Act amendments. In 2007 and 2008, the Council discussed the June 2007 and May 2008 Proposals, respectively, and comments received by the Board in response to the proposals. In addition, Board met or conducted conference calls with various industry and consumer group representatives throughout the review process leading to the June 2007 and May 2008 Proposals. Consistent with the Bankruptcy Act, the Board also met with the other federal banking agencies, the National Credit Union Administration (NCUA), and the Federal Trade Commission (FTC) regarding the clear and conspicuous disclosure of certain information required by the Bankruptcy Act. The Board also reviewed disclosures currently provided by creditors, consumer complaints received by the federal banking agencies, and surveys on credit card usage to help inform the June 2007 Proposal.[6]

E. Reviewing Regulation Z in Stages

The Board is proceeding with a review of Regulation Z in stages. This final rule largely contains revisions to rules affecting open-end plans other than home-equity lines of credit (HELOCs) subject to § 226.5b. Possible revisions to rules affecting HELOCs will be considered in the Board's review of home-secured credit, currently underway. To minimize compliance burden for creditors offering HELOCs as well as other open-end credit, many of the open-end rules have been reorganized to delineate clearly the requirements for HELOCs and other forms of open-end credit. Although this reorganization increases the size of the regulation and commentary, the Board believes a clear delineation of rules for HELOCs and other forms of open-end credit pending the review of HELOC rules provides a clear compliance benefit to creditors.

In addition, as discussed elsewhere in this section and in VI. Section-by-Section Analysis, the Board has eliminated the requirement to disclose an effective annual percentage rate for open-end (not home-secured) credit. For a home-equity plan subject to § 226.5b, under the final rule a creditor has the option to disclose an effective APR (according to the current rules in Regulation Z for computing and disclosing the effective APR), or not to disclose an effective APR. The Board notes that the rules for computing and disclosing the effective APR for HELOCs could be the subject of comment during the review of rules affecting HELOCs.

IV. The Board's Rulemaking Authority

TILA mandates that the Board prescribe regulations to carry out the purposes of the act. TILA also specifically authorizes the Board, among other things, to do the following:

  • Issue regulations that contain such classifications, differentiations, or other provisions, or that provide for such adjustments and exceptions for any class of transactions, that in the Board's judgment are necessary or proper to effectuate the purposes of TILA, facilitate compliance with the act, or prevent circumvention or evasion. 15 U.S.C. 1604(a).
  • Exempt from all or part of TILA any class of transactions if the Board determines that TILA coverage does not provide a meaningful benefit to consumers in the form of useful information or protection. The Board must consider factors identified in the act and publish its rationale at the time it proposes an exemption for comment. 15 U.S.C. 1604(f).
  • Add or modify information required to be disclosed with credit and charge card applications or solicitations if the Board determines the action is necessary to carry out the purposes of, or prevent evasions of, the application and solicitation disclosure rules. 15 U.S.C. 1637(c)(5).
  • Require disclosures in advertisements of open-end plans. 15 U.S.C. 1663.

In adopting this final rule, the Board has considered the information collected from comment letters submitted in response to its ANPRs and the June 2007 and May 2008 Proposals, its experience in implementing and enforcing Regulation Z, and the results obtained from testing various disclosure options in controlled consumer tests. For the reasons discussed in this notice, the Board believes this final rule is appropriate to effectuate the purposes of TILA, to prevent the circumvention or evasion of TILA, and to facilitate compliance with the act.

Also as explained in this notice, the Board believes that the specific exemptions adopted are appropriate because the existing requirements do not provide a meaningful benefit to consumers in the form of useful information or protection. In reaching this conclusion, the Board considered (1) the amount of the loan and whether the disclosure provides a benefit to consumers who are parties to the transaction involving a loan of such amount; (2) the extent to which the requirement complicates, hinders, or makes more expensive the credit process; (3) the status of the borrower, including any related financial arrangements of the borrower, the financial sophistication of the borrower relative to the type of transaction, and the importance to the borrower of the credit, related supporting property, and coverage under TILA; (4) whether the loan is secured by the principal residence of the borrower; and (5) whether the exemption would undermine the goal of consumer protection. The rationales for these exemptions are explained in VI. Section-by-Section Analysis, below.

V. Discussion of Major Revisions

The goal of the revisions adopted in this final rule is to improve the effectiveness of the Regulation Z disclosures that must be provided to consumers for open-end accounts. A summary of the key account terms must accompany applications and solicitations for credit card accounts. For all open-end credit plans, creditors must disclose costs and terms at account opening, generally before the first transaction. Consumers must receive periodic statements of account activity, and creditors must provide notice before certain changes in the account terms may become effective.

To shop for and understand the cost of credit, consumers must be able to identify and understand the key terms of open-end accounts. However, the terms and conditions that impact credit card account pricing can be complex. The revisions to Regulation Z are intended to provide the most essential information to consumers when the information would be most useful to them, with content and formats that are clear and conspicuous. The revisions are expected to improve consumers' ability to make informed credit decisions and enhance competition among credit card issuers. Many of the changes are based on the consumer testing that was conducted in Start Printed Page 5250connection with the review of Regulation Z.

In considering whether to adopt the revisions, the Board has also sought to balance the potential benefits for consumers with the compliance burdens imposed on creditors. For example, the revisions seek to provide greater certainty to creditors in identifying what costs must be disclosed for open-end plans, and when those costs must be disclosed. The Board has adopted the proposal that fees must be grouped on periodic statements, but has withdrawn from the final rule proposed requirements that would have required additional formatting changes to the periodic statement, such as the grouping of transactions, for which the burden to creditors may exceed the benefit to consumers. More effective disclosures may also reduce customer confusion and misunderstanding, which may also ease creditors' costs relating to consumer complaints and inquiries.

A. Credit Card Applications and Solicitations

Under Regulation Z, credit and charge card issuers are required to provide information about key costs and terms with their applications and solicitations.[7] This information is abbreviated, to help consumers focus on only the most important terms and decide whether to apply for the credit card account. If consumers respond to the offer and are issued a credit card, creditors must provide more detailed disclosures at account opening, generally before the first transaction occurs.

The application and solicitation disclosures are considered among the most effective TILA disclosures principally because they must be presented in a standardized table with headings, content, and format substantially similar to the model forms published by the Board. In 2001, the Board revised Regulation Z to enhance the application and solicitation disclosures by adding rules and guidance concerning the minimum type size and requiring additional fee disclosures.

Proposal. The proposal added new format requirements for the summary table,[8] including rules regarding type size and use of boldface type for certain key terms, placement of information, and the use of cross-references. Content revisions included a requirement that creditors disclose the duration that penalty rates may be in effect, a shorter disclosure about variable rates, and a reference to consumer education materials available on the Board's Web site.

Summary of final rule.

Penalty pricing. The final rule makes several revisions that seek to improve consumers' understanding of default or penalty pricing. Currently, credit card issuers must disclose inside the table the APR that will apply in the event of the consumer's “default.” Some creditors define a “default” as making one late payment or exceeding the credit limit once. The actions that may trigger the penalty APR are currently required to be disclosed outside the table.

Consumer testing indicated that many consumers did not notice the information about penalty pricing when it was disclosed outside the table. Under the final rule, card issuers are required to include in the table the specific actions that trigger penalty APRs (such as a late payment), the rate that will apply and the circumstances under which the penalty rate will expire or, if true, the fact that the penalty rate could apply indefinitely. The regulation requires card issuers to use the term “penalty APR” because the testing demonstrated that some consumers are confused by the term “default rate.”

Similarly, the final rule requires card issuers to disclose inside (rather than outside) the table the fees for paying late, exceeding a credit limit, or making a payment that is returned. Cash advance fees and balance transfer fees also must be disclosed inside the table. This change is also based on consumer testing results; fees disclosed outside the table were often not noticed. Requiring card issuers to disclose returned-payment fees, required credit insurance, debt suspension, or debt cancellation coverage fees, and foreign transaction fees are new disclosures.

Variable-rate information. Currently, applications and solicitations offering variable APRs must disclose inside the table the index or formula used to make adjustments and the amount of any margin that is added. Additional details, such as how often the rate may change, must be disclosed outside the table. Under the final rule, information about variable APRs is reduced to a single phrase indicating the APR varies “with the market,” along with a reference to the type of index, such as “Prime.” Consumer testing indicated that few consumers use the variable-rate information when shopping for a card. Moreover, participants were distracted or confused by details about margin values, how often the rate may change, and where an index can be found.

Subprime accounts. The final rule addresses a concern that has been raised about subprime credit cards, which are generally offered to consumers with low credit scores or credit problems. Subprime credit cards often have substantial fees associated with opening the account. Typically, fees for the issuance or availability of credit are billed to consumers on the first periodic statement, and can substantially reduce the amount of credit available to the consumer. For example, the initial fees on an account with a $250 credit limit may reduce the available credit to less than $100. Consumer complaints received by the federal banking agencies state that consumers were unaware when they applied for subprime cards of how little credit would be available after all the fees were assessed at account opening.

The final rule requires additional disclosures if the card issuer requires fees or a security deposit to issue the card that are 15 percent or more of the minimum credit limit offered for the account. In such cases, the card issuer is required to include an example in the table of the amount of available credit the consumer would have after paying the fees or security deposit, assuming the consumer receives the minimum credit limit.

Balance computation methods. TILA requires creditors to identify their balance computation method by name, and Regulation Z requires that the disclosure be inside the table. However, consumer testing demonstrates that these names hold little meaning for consumers, and that consumers do not consider such information when shopping for accounts. The final rule requires creditors to place the name of the balance computation method outside the table, so that the disclosure does not detract from information that is more important to consumers.

Description of grace period. The final rule requires card issuers to use the heading “How to Avoid Paying Interest on Purchases” on the row describing a grace period offered on all purchases, and the phrase “Paying Interest” if a grace period is not offered on all purchases. Consumer testing indicates consumers do not understand the term “grace period” as a description of actions consumers must take to avoid paying interest.

B. Account-Opening Disclosures

Regulation Z requires creditors to disclose costs and terms before the first transaction is made on the account. The disclosures must specify the Start Printed Page 5251circumstances under which a “finance charge” may be imposed and how it will be determined. A “finance charge” is any charge that may be imposed as a condition of or an incident to the extension of credit, and includes, for example, interest, transaction charges, and minimum charges. The finance charge disclosures include a disclosure of each periodic rate of interest that may be applied to an outstanding balance (e.g., purchases, cash advances) as well as the corresponding annual percentage rate (APR). Creditors must also explain any grace period for making a payment without incurring a finance charge. In addition, they must disclose the amount of any charge other than a finance charge that may be imposed as part of the credit plan (“other charges”), such as a late-payment charge. Consumers' rights and responsibilities in the case of unauthorized use or billing disputes must also be explained. Currently, there are few format requirements for these account-opening disclosures, which are typically interspersed among other contractual terms in the creditor's account agreement.

Proposal. Certain key terms were proposed to be disclosed in a summary table at account opening, which would be substantially similar to the table required for applications and solicitations. A different approach to disclosing fees was proposed, including providing creditors with flexibility to disclose charges (other than those in the summary table) in writing or orally after the account is opened, but before the charge is imposed.

Summary of final rule.

Account-opening summary table. Account-opening disclosures have often been criticized because the key terms TILA requires to be disclosed are often interspersed within the credit agreements, and such agreements are long and complex. To address this concern and make the information more conspicuous, the final rule requires creditors to provide at account-opening a table summarizing key terms. Creditors may continue, however, to provide other account-opening disclosures, aside from the fees and terms specified in the table, with other terms in their account agreements.

The new table provided at account opening is substantially similar to the table provided with direct-mail credit card applications and solicitations. Consumer testing indicates that consumers generally are aware of the table on applications and solicitations. Consumer testing also indicates that consumers may not typically read their account agreements, which are often in small print and dense prose. Thus, setting apart the most important terms in a summary table will better ensure that consumers are aware of those terms.

The table required at account opening includes more information than the table required at application. For example, it includes a disclosure whether or not there is a grace period for all features of an account. For subprime credit cards, to give consumers the opportunity to avoid fees, the final rule also requires issuers to provide consumers at account opening, a notice about the right to reject a plan when fees have been charged but the consumer has not used the plan. However, to reduce compliance burden for creditors that provide account-opening disclosures at application, the final rule allows creditors to provide the more specific and inclusive account-opening table at application in lieu of the table otherwise required at application.

How charges are disclosed. Under the current rules, a creditor must disclose any “finance charge” or “other charge” in the account-opening disclosures. A subsequent notice is required if one of the fees disclosed at account opening increases or if certain fees are newly introduced during the life of the plan. The terms “finance charge” and “other charge” are given broad and flexible meanings in the regulation and commentary. This ensures that TILA adapts to changing conditions, but it also creates uncertainty. The distinctions among finance charges, other charges, and charges that do not fall into either category are not always clear. As creditors develop new kinds of services, some find it difficult to determine if associated charges for the new services meet the standard for a “finance charge” or “other charge” or are not covered by TILA at all. This uncertainty can pose legal risks for creditors that act in good faith to comply with the law. Examples of included or excluded charges are in the regulation and commentary, but these examples cannot provide definitive guidance in all cases. Creditors are subject to civil liability and administrative enforcement for under-disclosing the finance charge or otherwise making erroneous disclosures, so the consequences of an error can be significant. Furthermore, over-disclosure of rates and finance charges is not permitted by Regulation Z for open-end credit.

The fee disclosure rules also have been criticized as being outdated. These rules require creditors to provide fee disclosures at account opening, which may be months, and possibly years, before a particular disclosure is relevant to the consumer, such as when the consumer calls the creditor to request a service for which a fee is imposed. In addition, an account-related transaction may occur by telephone, when a written disclosure is not feasible.

The final rule is intended to respond to these criticisms while still giving full effect to TILA's requirement to disclose credit charges before they are imposed. Accordingly, the rules are revised to (1) specify precisely the charges that creditors must disclose in writing at account opening (interest, minimum charges, transaction fees, annual fees, and penalty fees such as for paying late), which must be listed in the summary table, and; (2) permit creditors to disclose other less critical charges orally or in writing before the consumer agrees to or becomes obligated to pay the charge. Although the final rule permits creditors to disclose certain costs orally for purposes of TILA, the Board anticipates that creditors will continue to identify fees in the account agreement for contract or other reasons.

Under the final rule, some charges are covered by TILA that the current regulation, as interpreted by the staff commentary, excludes from TILA coverage, such as fees for expedited payment and expedited delivery. It may not have been useful to consumers to cover such charges under TILA when such coverage would have meant only that the charges were disclosed long before they became relevant to the consumer. The Board believes it will be useful to consumers to cover such charges under TILA as part of a rule that permits their disclosure at a time and in a manner that consumers would be likely to notice the disclosure of the charge. Further, as new services (and associated charges) are developed, the proposal minimizes risk of civil liability as well as inconsistency among creditors associated with the determination as to whether a fee is a finance charge or an other charge, or is not covered by TILA at all.

C. Periodic Statements

Creditors are required to provide periodic statements reflecting the account activity for the billing cycle (typically, about one month). In addition to identifying each transaction on the account, creditors must identify each “finance charge” using that term, and each “other charge” assessed against the account during the statement period. When a periodic interest rate is applied to an outstanding balance to compute the finance charge, creditors must disclose the periodic rate and its corresponding APR. Creditors must also disclose an “effective” or “historical” Start Printed Page 5252APR for the billing cycle, which, unlike the corresponding APR, includes not just interest but also finance charges imposed in the form of fees (such as cash advance fees or balance transfer fees). Periodic statements must also state the time period a consumer has to pay an outstanding balance to avoid additional finance charges (the “grace period”), if applicable.

Proposal. Interest charges for different types of transactions, such as purchases and cash advances would be itemized, and separate totals of fees and interest for the month and year-to-date would be disclosed. The proposal offered two approaches regarding the “effective APR.” One modified the provisions for disclosing the “effective APR,” including format and terminology requirements,[9] and the other solicited comment on whether this rate should be required to be disclosed. To implement changes required by the Bankruptcy Act, the proposal required creditors to disclose of the effect of making only the minimum required payment on repayment of balances.

Summary of final rule.

Fees and interest costs. The final rule contains a number of revisions to the periodic statement to improve consumers' understanding of fees and interest costs. Currently, creditors must identify on periodic statements any “finance charges” added to the account during the billing cycle, and creditors typically intersperse these charges with other transactions, such as purchases, chronologically on the statement. The finance charges must be itemized by type. Thus, interest charges might be described as “finance charges due to periodic rates.” Charges such as late payment fees, which are not “finance charges,” are typically disclosed individually and are interspersed among other transactions.

Consumer testing indicated that consumers generally understand that “interest” is the cost that results from applying a rate to a balance over time and distinguish “interest” from other fees, such as a cash advance fee or a late payment fee. Consumer testing also indicated that many consumers more easily determine the number and amount of fees when the fees are itemized and grouped together.

Thus, under the final rule, creditors are required to group all fees together and to separately itemize interest charges by transaction type, and describe them in a manner consistent with consumers' general understanding of costs (“interest charge” or “fee”), without regard to whether the charges are considered “finance charges,” “other charges,” or neither. Interest charges must be identified by type (for example, interest on purchases or interest on balance transfers) as must fees (for example, cash advance fee or late-payment fee).

Consumer testing also indicated that many consumers more quickly and accurately determined the total dollar cost of credit for the billing cycle when a total dollar amount of fees for the cycle was disclosed. Thus, the final rule requires creditors to disclose the (1) total fees and (2) total interest imposed for the cycle. Creditors must also disclose year-to-date totals for interest charges and fees. For many consumers, costs disclosed in dollars are more readily understood than costs disclosed as percentage rates. The year-to-date figures are intended to assist consumers in better understanding the overall cost of their credit account and are an important disclosure and an effective aid in understanding annualized costs. The Board believes these figures will better ensure consumers understand the cost of credit than the effective APR currently provided on periodic statements.

The effective APR. The “effective” APR disclosed on periodic statements reflects the cost of interest and certain other finance charges imposed during the statement period. For example, for a cash advance, the effective APR reflects both interest and any flat or proportional fee assessed for the advance.

For the reasons discussed below, the Board is eliminating the requirement to disclose the effective APR.

Consumer testing conducted prior to the June 2007 Proposal, in March 2008, and after the May 2008 Proposal demonstrates that consumers find the current disclosure of an APR that combines rates and fees to be confusing. The June 2007 Proposal would have required disclosure of the nominal interest rate and fees in a manner that is more readily understandable and comparable across institutions. The Board believes that this approach can better inform consumers and further the goals of consumer protection and the informed use of credit for all types of open-end credit.

The Board also considered whether there were potentially competing considerations that would suggest retention of the requirement to disclose an effective APR. First, the Board considered the extent to which “sticker shock” from the effective APR benefits consumers, even if the disclosure may not enable consumers to meaningfully compare costs from month to month or between different credit products. A second consideration is whether the effective APR may be a hedge against fee-intensive pricing by creditors, and if so, the extent to which it promotes transparency. On balance, however, the Board believes that the benefits of eliminating the requirement to disclose the effective APR outweigh these considerations.

The consumer testing conducted for the Board strongly supports this determination. Although in one round of testing conducted prior to the June 2007 Proposal a majority of participants evidenced some understanding of the effective APR, the overall results of the testing show that most consumers do not correctly understand the effective APR. Some consumers in the testing offered no explanation of the difference between the corresponding and effective APR, and others appeared to have an incorrect understanding. The results were similar in the consumer testing conducted in March 2008 and after the May 2008 proposal; in all rounds of the testing, a majority of participants did not offer a correct explanation of the effective APR. In quantitative testing conducted for the Board in the fall of 2008, only 7% of consumers answered a question correctly that was designed to test their understanding of the effective APR. In addition, including the effective APR on the statement had an adverse effect on some consumers' ability to identify the interest rate applicable to the account.

Even if some consumers have some understanding of the effective APR, the Board believes sound reasons support eliminating the requirement for its disclosure. Disclosure of the effective APR on periodic statements does not assist consumers in credit shopping, because the effective APR disclosed on a statement on one credit card account cannot be compared to the nominal APR disclosed on a solicitation or application for another credit card account. In addition, even for the same account, the effective APR for a given cycle is unlikely to accurately indicate the cost of credit in a future cycle, because if any of several factors (such as timing of transactions and payments) is different in the future cycle, the effective APR will be different even if the amount of the transaction is the same. As to suggestions that the effective APR for a particular billing cycle provides the consumer a rough indication that it is costly to engage in transactions that trigger transaction fees, the Board believes the requirements adopted in the final rule to disclose Start Printed Page 5253interest and fee totals for the cycle and year-to-date will better serve the same purpose. In addition, the interest and fee total disclosure requirements should address concerns that elimination of the effective APR would remove disincentives for creditors to introduce new fees.

Transactions. Currently, there are no format requirements for disclosing different types of transactions, such as purchases, cash advances, and balance transfers on periodic statements. Often, transactions are presented together in chronological order. Consumer testing indicated that participants found it helpful to have similar types of transactions grouped together on the statement. Consumers also found it helpful, within the broad grouping of fees and transactions, when transactions were segregated by type (e.g., listing all purchases together, separate from cash advances or balance transfers). Further, consumers noticed fees and interest charges more readily when they were located near the transactions. For these reasons, the final rule requires creditors to group fees and interest charges together, itemized by type, with the list of transactions. The Board has not adopted the proposed requirement that creditors group transactions by type on the periodic statement. In consumer testing, most consumers indicated that they review the transactions on their periodic statements, and grouping transactions together only moderately improved consumers' ability to locate transactions compared to when the transaction list was presented chronologically. In addition, the cost to creditors of reformatting periodic statements to group transactions by type appears to outweigh any benefit to consumers.

Late payments. Currently, creditors must disclose the date by which consumers must pay a balance to avoid finance charges. Creditors must also disclose any cut-off time for receiving payments on the payment due date; this is usually disclosed on the reverse side of periodic statements. The Bankruptcy Act amendments expressly require creditors to disclose the payment due date (or if different, the date after which a late-payment fee may be imposed) along with the amount of the late-payment fee.

Under the final rule, creditors are required to disclose the payment due date on the front side of the periodic statement. Creditors also are required to disclose, in close proximity to the due date, the amount of the late-payment fee and the penalty APR that could be triggered by a late payment, to alert consumers to the consequence of paying late.

Minimum payments. The Bankruptcy Act requires creditors offering open-end plans to provide a warning about the effects of making only minimum payments. The proposal would implement this requirement solely for credit card issuers. Under the final rule, card issuers must provide (1) a “warning” statement indicating that making only the minimum payment will increase the interest the consumer pays and the time it takes to repay the consumer's balance; (2) a hypothetical example of how long it would take to pay a specified balance in full if only minimum payments are made; and (3) a toll-free telephone number that consumers may call to obtain an estimate of the time it would take to repay their actual account balance using minimum payments. Most card issuers must establish and maintain their own toll-free telephone numbers to provide the repayment estimates. However, the Board is required to establish and maintain, for two years, a toll-free telephone number for creditors that are depository institutions having assets of $250 million or less. This number is for the customers of those institutions to call to get answers to questions about how long it will take to pay their account in full making only the minimum payment. The FTC must maintain a similar toll-free telephone number for use by customers of creditors that are not depository institutions. In order to standardize the information provided to consumers through the toll-free telephone numbers, the Bankruptcy Act amendments direct the Board to prepare a “table” illustrating the approximate number of months it would take to repay an outstanding balance if the consumer pays only the required minimum monthly payments and if no other advances are made (“generic repayment estimate”).

Pursuant to the Bankruptcy Act amendments, the final rule also allows a card issuer to establish a toll-free telephone number to provide customers with the actual number of months that it will take consumers to repay their outstanding balance (“actual repayment disclosure”) instead of providing an estimate based on the Board-created table. A card issuer that does so need not include a hypothetical example on its periodic statements, but must disclose the warning statement and the toll-free telephone number.

The final rule also allows card issuers to provide the actual repayment disclosure on their periodic statements. Card issuers are encouraged to use this approach. Participants in consumer testing who typically carry credit card balances (revolvers) found an estimated repayment period based on terms that apply to their own account more useful than a hypothetical example. To encourage card issuers to provide the actual repayment disclosure on their periodic statements, the final rule provides that if card issuers do so, they need not disclose the warning, the hypothetical example and a toll-free telephone number on the periodic statement, nor need they maintain a toll-free telephone number to provide the actual repayment disclosure.

As described above, the Bankruptcy Act also requires the Board to develop a “table” that creditors, the Board and the FTC must use to create generic repayment estimates. Instead of creating a table, the final rule contains guidance for how to calculate generic repayment estimates. Consumers that call the toll-free telephone number may be prompted to input information about their outstanding balance and the APR applicable to their account. Although issuers have the ability to program their systems to obtain consumers' account information from their account management systems, for the reasons discussed in the section-by-section analysis to Appendix M1 to part 226, the final rule does not require issuers to do so.

D. Changes in Consumer's Interest Rate and Other Account Terms

Regulation Z requires creditors to provide advance written notice of some changes to the terms of an open-end plan. The proposal included several revisions to Regulation Z's requirements for notifying consumers about such changes.

Currently, Regulation Z requires creditors to send, in most cases, notices 15 days before the effective date of certain changes in the account terms. However, creditors need not inform consumers in advance if the rate applicable to their account increases due to default or delinquency. Thus, consumers may not realize until they receive their monthly statement for a billing cycle that their late payment triggered application of the higher penalty rate, effective the first day of the month's statement.

Proposal. The proposal generally would have increased advance notice before a changed term, such as a rate increase due to a change in the contract, can be imposed from 15 to 45 days. The proposal also would have required creditors to provide 45 days' prior notice before the creditor increases a rate due to the consumer's delinquency Start Printed Page 5254or default or as a penalty. When a change-in-terms notice accompanies a periodic statement, the proposal would have required a tabular disclosure on the front of the first page of the periodic statement of the key terms being changed.

Summary of final rule.

Timing. Under the final rule, creditors generally must provide 45 days' advance notice prior to a change in any term required to be disclosed in the tabular disclosure provided at account-opening, as discussed above. This increase in the advance notice for a change in terms is intended to give consumers approximately a month to act, either to change their usage of the account or to find an alternative source of financing before the change takes effect.

Penalty rates. Currently, creditors must inform consumers about rates that are increased due to default or delinquency, but not in advance of implementation of the increase. Contractual thresholds for default are sometimes very low, and currently penalty pricing commonly applies to all existing balances, including low-rate promotional balances.

The final rule generally requires creditors to provide 45 days' advance notice before rate increases due to the consumer's delinquency or default or as a penalty, as proposed. Permitting creditors to apply the penalty rate immediately upon the consumer triggering the rate may lead to undue surprise and insufficient time for a consumer to consider alternative options regarding use of the card. Even though the final rule contain provisions intended to improve disclosure of penalty pricing at account opening, the Board believes that consumers will be more likely to notice and be motivated to act if they receive a specific notice alerting them of an imminent rate increase, rather than a general disclosure stating the circumstances when a rate might increase.

When asked which terms were the most important to them when shopping for an account, participants in consumer testing seldom mentioned the penalty rate or penalty rate triggers. Some consumers may not find this information relevant when shopping for or opening an account because they do not anticipate that they will trigger penalty pricing. As a result, they may not recall this information later, after they have begun using the account, and may be surprised when penalty pricing is subsequently imposed.

In addition, the Board believes that the notice required by § 226.9(g) is the most effective time to inform consumers of the circumstances under which penalty rates can be applied to their existing balances for the reasons discussed above and in VI. Section-by-Section Analysis.

Format. Currently, there are few format requirements for change-in-terms disclosures. As with account-opening disclosures, creditors commonly intersperse change-in-terms notices with other amendments to the account agreement, and both are provided in pamphlets in small print and dense prose. Consumer testing indicates many consumers set aside and do not read densely-worded pamphlets.

Under the final rule, creditors may continue to notify consumers about changes to terms required to be disclosed by Regulation Z, together with other changes to the account agreement. However, if a changed term is one that must be provided in the account-opening summary table, creditors must provide that change in a summary table to enhance the effectiveness of the change-in-terms notice. Consumer testing conducted for the Board suggests that consumer understanding of change in terms notices is improved by presentation of that information in a tabular format.

Creditors commonly enclose notices about changes to terms or rates with periodic statements. Under the final rule, if a notice enclosed with a periodic statement discusses a change to a term that must be disclosed in the account-opening summary table, or announces that a penalty rate will be imposed on the account, a table summarizing the impending change must appear on the periodic statement. The table must appear on the front of the periodic statement, although it is not required to appear on the first page. Consumers who participated in testing often set aside change-in-terms pamphlets that accompanied periodic statements, while participants uniformly looked at the front side of periodic statements.

E. Advertisements

Currently, creditors that disclose certain terms in advertisements must disclose additional information, to help ensure consumers understand the terms of credit being offered.

Proposal. For advertisements that state a minimum monthly payment on a plan offered to finance the purchase of goods or services, additional information must also be stated about the time period required to pay the balance and the total of payments if only minimum payments are made. The proposal also limited the circumstances under which advertisements may refer to a rate as “fixed.”

Summary of final rule.

Advertising periodic payments. Consumers commonly are offered the option to finance the purchase of goods or services (such as appliances or furniture) by establishing an open-end credit plan. The periodic payments (such as $20 a week or $45 per month) associated with the purchase are often advertised as part of the offer. Under current rules, advertisements for open-end credit plans are not required to include information about the time it will take to pay for a purchase or the total cost if only periodic payments are made; if the transaction were a closed-end installment loan, the number of payments and the total cost would be disclosed. Under the final rule, advertisements stating a periodic payment amount for an open-end credit plan that would be established to finance the purchase of goods or services must state, in equal prominence to the periodic payment amount, the time period required to pay the balance and the total of payments if only periodic payments are made.

Advertising “fixed” rates. Creditors sometimes advertise the APR for open-end accounts as a “fixed” rate even though the creditor reserves the right to change the rate at any time for any reason. Consumer testing indicated that many consumers believe that a “fixed rate” will not change, and do not understand that creditors may use the term “fixed” as a shorthand reference for rates that do not vary based on changes in an index or formula. Under the final rule, an advertisement may refer to a rate as “fixed” if the advertisement specifies a time period the rate will be fixed and the rate will not increase during that period. If a time period is not specified, the advertisement may refer to a rate as “fixed” only if the rate will not increase while the plan is open.

F. Other Disclosures and Protections

“Open-end” plans comprised of closed-end features. Some creditors give open-end credit disclosures on credit plans that include closed-end features, that is, separate loans with fixed repayment periods. These creditors treat these loans as advances on a revolving credit line for purposes of Regulation Z even though the consumer's credit information is separately evaluated, the consumer may have to complete a separate application for each “advance,” and the consumer's payments on the “advance” do not replenish the line. Provisions in the commentary lend support to this approach.

Proposal. The proposal would have revised these provisions to indicate Start Printed Page 5255closed-end disclosures rather than open-end disclosures are appropriate when advances that are individually approved and underwritten are being extended, or if payments made on a particular sub-account do not replenish the credit line available for that sub-account.

Summary of final rule. The final rule generally adopts the proposal that would clarify that credit is not properly characterized as open-end credit if individual advances are separately underwritten. The proposed revision that would have required that payments on a sub-account of an open-end credit plan replenish that sub-account has been withdrawn, because of concerns that this revision would have had unintended consequences for credit cards and HELOCs that the Board believes are appropriately treated as open-end credit.

Checks that access a credit card account. Many credit card issuers provide accountholders with checks that can be used to obtain cash, pay the outstanding balance on another account, or purchase goods and services directly from merchants. The solicitation letter accompanying the checks may offer a low promotional APR for transactions that use the checks. The proposed revisions would require the checks mailed by card issuers to be accompanied by cost disclosures.

Currently, creditors need not disclose costs associated with using the checks if the finance charges that would apply (that is, the interest rate and transaction fees) have been previously disclosed, such as in the account agreement. If the check is sent 30 days or more after the account is opened, creditors must refer consumers to their account agreements for more information about how the rate and fees are determined.

Consumers may receive these checks throughout the life of the credit card account. Thus, significant time may elapse between the time account-opening disclosures are provided and the time a consumer considers using the check. In addition, consumer testing indicates that consumers may not notice references to other documents such as the account-opening disclosures or periodic statements for rate information because they tend to look for rates and dollar figures when reviewing the information accompanying access checks.

Proposal. Under the proposal, checks that can access credit card accounts would have been required to be accompanied by information about the rates and fees that will apply if the checks are used, about whether a grace period exists, and any date by which the consumer must use the checks in order to receive any discounted initial rate offered on the checks. This information would have been required to be presented in a table, on the front side of the page containing the checks.

Summary of final rule. The final rule requires the following key terms to be disclosed in a summary table on the front of the page containing checks that access credit card accounts: (1) Any discounted initial rate, and when that rate will expire, if applicable; (2) the type of rate that will apply to the checks after expiration of any discounted initial rate (such as whether the purchase or cash advance rate applies) and the applicable APR; (3) any transaction fees applicable to the checks; (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 final rule requires that the tabular disclosure accompanying checks that access a credit card account include a disclosure of the actual rate or rates applicable to the checks. While the actual post-promotional rate disclosed at the time the checks are sent to a consumer may differ from the rate disclosed by the time it becomes applicable to the consumer's account (if it is a variable rate tied to an index), disclosure of the actual post-promotional rate in effect at the time that the checks are sent to the consumer is an important piece of information for the consumer to use in making an informed decision about whether to use the checks. Consumer testing suggests that a disclosure of the actual rate, rather than a toll-free number, also will help to enhance consumer understanding regarding the rate that will apply when the promotional rate expires.

Cut-off times and due dates for mailing payments. TILA generally requires that payments be credited to a consumer's account as of the date of receipt, provided the payment conforms to the creditor's instructions. Under Regulation Z, creditors are permitted to specify reasonable cut-off times for receiving payments on the due date. Some creditors use different cut-off times depending on the payment method. Consumer groups and others have raised concerns that the use of certain cut-off times may effectively result in a due date that is one day earlier than the due date disclosed. In addition, in response to the June 2007 Proposal, consumer commenters urged the Board to address creditors' practice of using due dates on days that the creditor does not accept payments, such as weekends or holidays.

Proposal. The May 2008 Regulation Z Proposal provided that it would be unreasonable for a creditor to require that mailed payments be received earlier than 5 p.m. on the due date in order to be considered timely. In addition, the proposal would have provided that if a creditor does not receive and accept mailed payments on the due date (e.g., a Sunday or holiday), a payment received on the next business day is timely.

Recommendation. The draft final rule adopts the proposal regarding weekend and holiday due dates. In addition, the draft final rule adopts a modified version of the 5 p.m. cut-off time proposal to provide that a 5 p.m. cut-off time is an example of a reasonable requirement for payments.

Credit insurance, debt cancellation, and debt suspension coverage. Under Regulation Z, premiums for credit life, accident, health, or loss-of-income insurance are considered finance charges if the insurance is written in connection with a credit transaction. However, these costs may be excluded from the finance charge and APR (for both open-end and closed-end credit transactions), if creditors disclose the cost and the fact that the coverage is not required to obtain credit, and the consumer signs or initials an affirmative written request for the insurance. Since 1996, the same rules have applied to creditors' “debt cancellation” agreements, in which a creditor agrees to cancel the debt, or part of it, on the occurrence of specified events.

Proposal and summary of final rule. As proposed, the existing rules for debt cancellation coverage were applied to “debt suspension” coverage (for both open-end credit and closed-end transactions). “Debt suspension” products are related to, but different from, debt cancellation products. Debt suspension products merely defer consumers' obligation to make the minimum payment for some period after the occurrence of a specified event. During the suspension period, interest may continue to accrue, or it may be suspended as well. Under the proposal, to exclude the cost of debt suspension coverage from the finance charge and APR, creditors would have been required to inform consumers that the coverage suspends, but does not cancel, the debt.

Under the current rules, charges for credit insurance and debt cancellation coverage are deemed not to be finance charges if a consumer requests coverage after an open-end credit account is opened or after a closed-end credit Start Printed Page 5256transaction is consummated because the coverage is deemed not to be “written in connection” with the credit transaction. Since the charges are defined as non-finance charges in such cases, Regulation Z does not require a disclosure or written evidence of consent to exclude them from the finance charge. The proposal would have implemented a broader interpretation of “written in connection” with a credit transaction and required creditors to provide disclosures, and obtain evidence of consent, on sales of credit insurance or debt cancellation or suspension coverage during the life of an open-end account. If a consumer requests the coverage by telephone, creditors would have been permitted to provide the disclosures orally, but in that case they would have been required to mail written disclosures within three days of the call.[10] The final rule is unchanged from the proposal.

VI. Section-by-Section Analysis

In reviewing the rules affecting open-end credit, the Board proposed in June 2007 to reorganize some provisions to make the regulation easier to use. Rules affecting home-equity lines of credit (HELOCs) subject to § 226.5b would have been separately delineated in § 226.6 (account-opening disclosures), § 226.7 (periodic statements), and § 226.9 (subsequent disclosures). Rules contained in footnotes would have been moved to the text of the regulation or commentary, as appropriate, and the footnotes designated as reserved. Commenters generally supported this approach. One commenter questioned retaining the footnotes as reserved and suggested deleting references to the footnotes entirely. The final rule is organized, and rules currently stated in footnotes have been moved, as proposed. These revisions are identified in a table below. See X. Redesignation Table. The Board retains footnotes as “reserved” to preserve the current footnote numbers in provisions of Regulation Z that will be the subject of future rulemakings. When rules contained in all footnotes have been moved to the regulation or commentary, as appropriate, references to the footnotes will be removed.

Introduction

The official staff commentary to Regulation Z begins with an Introduction. Comment I-6 discusses reference materials published at the end of each section of the commentary adopted in 1981. 46 FR 50288, Oct. 9, 1981. The references were intended as a compliance aid during the transition to the 1981 revisions to Regulation Z. In June 2007, the Board proposed to delete provisions addressing references and transition rules applicable to 1981 revisions to Regulation Z. No comments were received. Thus, the Board deletes the references and comments I-3, I-4(b), I-6, and I-7, as obsolete and renumbers the remaining comments accordingly.

Section 226.1 Authority, Purpose, Coverage, Organization, Enforcement, and Liability

Section 226.1(c) generally outlines the persons and transactions covered by Regulation Z. Comment 1(c)-1 provides, in part, that the regulation applies to consumer credit extended to residents (including resident aliens) of a state. In June 2007, technical revisions were proposed for clarity, and comment was requested if further guidance on the scope of coverage would be helpful. No comments were received and the comment is adopted with technical revisions for clarity.

Section 226.1(d)(2), which summarizes the organization of the regulation's open-end credit rules (Subpart B), is amended to reinsert text inadvertently deleted in a previous rulemaking, as proposed. See 54 FR 24670, June 9, 1989. Section 226.1(d)(4), which summarizes miscellaneous provisions in the regulation (Subpart D), is updated to describe amendments made in 2001 to Subpart D relating to disclosures made in languages other than English, as proposed. See 66 FR 17339, Mar. 30, 2001. The substance of Footnote 1 is deleted as unnecessary, as proposed.

In July 2008, the Board revised Subpart E to address certain mortgage practices and disclosures. These changes are reflected in § 226.1(d)(5), as amended in the July 2008 Final HOEPA Rule. In addition, transition rules for the July 2008 rulemaking are added as comment 1(d)(5)-1. 73 FR 44522, July 30, 2008.

Section 226.2 Definitions and Rules of Construction

2(a) Definitions

2(a)(2) Advertisement

In the June 2007 Proposal, the Board proposed technical revisions to the commentary to § 226.2(a)(2), with no intended change in substance or meaning. No changes were proposed for the regulatory text. The Board received no comments on the proposed changes, and the changes are adopted as proposed.

2(a)(4) Billing Cycle or Cycle

Section 226.2(a)(4) defines “billing cycle” as the interval between the days or dates of regular periodic statements, and requires that billing cycles be equal (with a permitted variance of up to four days from the regular day or date) and no longer than a quarter of a year. Comment 2(a)(4)-3 states that the requirement for equal cycles does not apply to transitional billing cycles that occur when a creditor occasionally changes its billing cycles to establish a new statement day or date. The Board proposed in June 2007 to revise comment 2(a)(4)-3 to clarify that this exception also applies to the first billing cycle that occurs when a consumer opens an open-end credit account.

Few commenters addressed this provision. One creditor requested that the Board clarify that the proposed revision applies to the time period between the opening of the account and the generation of the first periodic statement (as opposed to the period between the generation of the first statement and the generation of the second statement). The comment has been revised to provide the requested clarification.

The same commenter also requested clarification that the same exception would apply when a previously closed account is reopened. The reopening of a previously closed account is no different, for purposes of comment 2(a)(4)-3, from the original opening of an account; therefore, this clarification is unnecessary. A consumer group suggested that an irregular first billing cycle should be limited to no longer than twice the length of a regular billing cycle, and that irregular billing cycles should permitted no more than once per year. The Board believes that these limitations might unduly restrict creditors' operations. Although it would be unlikely for a creditor to utilize a billing cycle more than twice the length of the regular cycle, or an irregular billing cycle more often than once per year, such cycles might need to be used on rare occasions for operational reasons.

2(a)(6) Business Day

Section 226.2(a)(6) and comment 2(a)(6)-2, as reprinted, reflect revisions adopted in the Board's July 2008 Final HOEPA Rule to address certain Start Printed Page 5257mortgage practices and disclosures. 73 FR 44522, 44599, 44605, July 30, 2008.

2(a)(15) Credit Card

TILA defines “credit card” as “any card, plate, coupon book or other credit device existing for the purpose of obtaining money, property, labor, or services on credit.” TILA Section 103(k); 15 U.S.C. 1602(k). In addition, Regulation Z currently provides that a credit card is a “card, plate, coupon book, or other single credit device that may be used from time to time to obtain credit.” See § 226.2(a)(15).

Checks that access credit card accounts. Credit card issuers sometimes provide cardholders with checks that access a credit card account (access checks), which can be used to obtain cash, purchase goods or services or pay the outstanding balance on another account. These checks are often mailed to cardholders on an unsolicited basis, sometimes with their monthly statements. When a consumer uses an access check, the amount of the check is billed to the consumer's credit card account.

Historically, checks that access credit card accounts have not been treated as “credit cards” under TILA because each check can be used only once and not “from time to time.” See comment 2(a)(15)-1. As a result, TILA's protections involving merchant disputes, unauthorized use of the account, and the prohibition against unsolicited issuance, which apply only to “credit cards,” do not apply to transactions involving these checks. See § 226.12. Nevertheless, billing error rights apply with to these check transactions. See § 226.13. In the June 2007 Proposal, the Board declined to extend TILA's protections for credit cards to access checks.

While industry commenters generally supported the Board's approach, consumer groups asserted that excluding access checks from treatment as credit cards does not adequately protect consumers, particularly insofar as consumers would not be able to assert unauthorized use claims under § 226.12(b). Consumer groups thus observed that the current rules lead to an anomalous result where a consumer would be protected from unauthorized use under § 226.12(b) if a thief used the consumer's credit card number to initiate a credit card transaction by telephone or on-line, but would not be similarly protected if the thief used the consumer's access check to complete the same transaction. Consumer groups also observed that consumers would be unable to assert a merchant claim or defense under § 226.12(c) in connection with a good or service purchased with an access check, nor would they be protected by the unsolicited issuance provisions in § 226.12(a).

As stated in the proposal, the Board believes that existing provisions under state law governing checks, specifically the Uniform Commercial Code (UCC), coupled with the billing error provisions under § 226.13, provide consumers with appropriate protections from the unauthorized use of access checks. For example, a consumer generally would not have any liability for a forged access check under the UCC, provided that the consumer complies with certain timing requirements in reporting the forgery. In addition, in the event the consumer asserts a timely notice of error for an unauthorized transaction involving an access check under § 226.13, the consumer would not have any liability if the creditor's investigation determines that the transaction was in fact unauthorized. Lastly, the Board understands that, in most instances, consumers may ask their creditor to stop sending access checks altogether, and these opt-out requests will be honored by the creditor.

Coupon books. The Board stated in the supplementary information for the June 2007 Proposal that it is unaware of devices existing today that would qualify as a “coupon book” for purposes of the definition of “credit card” under § 226.2(a)(15). In addition, the Board noted that elimination of this obsolete term from the definition of “credit card” would help to reduce potential confusion regarding whether an access check or other single credit device that is used once, if connected in some way to other checks or devices, becomes a “coupon book,” thus becoming a “credit card” for purposes of the regulation. For these reasons, the June 2007 Proposal would have deleted the reference to the term “coupon book” from the definition of “credit card” under § 226.2(a)(15).

Consumer groups opposed the Board's proposal, citing the statutory reference in TILA Section 103(k) to a “coupon book,” and noting that even if such products were not currently being offered, the proposed deletion could provide issuers an incentive to develop such products and in that event, consumers would be unable to avail themselves of the protections against unauthorized use and unsolicited issuance.

The final rule removes the reference to “coupon book” in the definition of “credit card,” as proposed. Commenters did not cite any examples of products that could potentially qualify as a “coupon book.” Thus, in light of the confusion today regarding whether access checks are “credit cards” as a result of the existing reference to “coupon books,” the Board believes removal of the term is appropriate in the final rule, and that the removal will not limit the availability of Regulation Z protections overall.

Plans in which no physical device is issued. The June 2007 Proposal did not explicitly address circumstances where a consumer may conduct a transaction on an open-end plan that does not have a physical device. In response, industry commenters agreed that it was premature and unnecessary to address such open-end plans. Consumer groups in contrast stated that it was appropriate to amend the regulation at this time to explicitly cover such plans, particularly in light of the Board's decision elsewhere to update the commentary to refer to biometric means of verifying the identity of a cardholder or authorized user. See comment 12(b)(2)(iii)-1, discussed below. While the final rule does not explicitly address open-end plans in which no physical device is issued, the Board will continue to monitor developments in the marketplace and may update the regulation if and when such products become common. Of course, to the extent a creditor has issued a device that meets the definition of a “credit card” for an account, the provisions that require use of a “credit card,” could apply even though a particular transaction itself is not conducted using the device (for example, in the case of telephone and Internet transactions; see comments 12(b)(2)(iii)-3 and 12(c)(1)-1).

Charge cards. Comment 2(a)(15)-3 discusses charge cards and identifies provisions in Regulation Z in which a charge card is distinguished from a credit card. The June 2007 Proposal would have updated comment 2(a)(15)-3 to reflect that the new late payment and minimum payment disclosure requirements set forth by the Bankruptcy Act do not apply to charge card issuers. As further discussed in more detail below under § 226.7, comment 2(a)(15)-3 is adopted as proposed.

2(a)(17) Creditor

In June 2007, the Board proposed to exempt from TILA coverage credit extended under employee-sponsored retirement plans. For reasons explained in the section-by-section analysis to § 226.3, this provision is adopted with modifications, as discussed below. Comment 2(a)(17)(i)-8, which provides guidance on whether such a plan is a Start Printed Page 5258creditor for purposes of TILA, is deleted as unnecessary, as proposed.

In addition, the substance of footnote 3 is moved to a new § 226.2(a)(17)(v), and references revised, accordingly, as proposed. The dates used to illustrate numerical tests for determining whether a creditor “regularly” extends consumer credit are updated in comments 2(a)(17)(i)-3 through -6, as proposed. References in § 226.2(a)(17)(iv) to provisions in § 226.6 and § 226.7 are renumbered consistent with this final rule.

2(a)(20) Open-End Credit

Under TILA Section 103(i), as implemented by § 226.2(a)(20) of Regulation Z, “open-end credit” is consumer credit extended by a creditor under a plan in which (1) the creditor reasonably contemplates repeated transactions, (2) the creditor may impose a finance charge from time to time on an outstanding unpaid balance, and (3) the amount of credit that may be extended to the consumer during the term of the plan, up to any limit set by the creditor, generally is made available to the extent that any outstanding balance is repaid.

“Open-end” plans comprised of closed-end features. In the June 2007 Proposal, the Board proposed several revisions to the commentary regarding § 226.2(a)(20) to address the concern that currently some credit products are treated as open-end plans, with open-end disclosures given to consumers, when such products would more appropriately be treated as closed-end transactions. The proposal was based on the Board's belief that closed-end disclosures are more appropriate than open-end disclosures when the credit being extended is individual loans that are individually approved and underwritten. As stated in the June 2007 Proposal, the Board was particularly concerned about certain credit plans, where each individual credit transaction is separately evaluated.

For example, under certain so-called multifeatured open-end plans, creditors may offer loans to be used for the purchase of an automobile. These automobile loan transactions are approved and underwritten separately from other credit made available on the plan. (In addition, the consumer typically has no right to borrow additional amounts on the automobile loan “feature” as the loan is repaid.) If the consumer repays the entire automobile loan, he or she may have no right to take further advances on that “feature,” and must separately reapply if he or she wishes to obtain another automobile loan, or use that aspect of the plan for similar purchases. Typically, while the consumer may be able to obtain additional advances under the plan as a whole, the creditor separately evaluates each request.

In the June 2007 Proposal, the Board proposed, among other things, two main substantive revisions to the commentary to § 226.2(a)(20). First, the Board proposed to revise comment 2(a)(20)-2 to clarify that while a consumer's account may contain different sub-accounts, each with different minimum payment or other payment options, each sub-account must meet the self-replenishing criterion. Proposed comment 2(a)(20)-2 would have provided that repayments of an advance for any sub-account must generally replenish a single credit line for that sub-account so that the consumer may continue to borrow and take advances under the plan to the extent that he or she repays outstanding balances without having to obtain separate approval for each subsequent advance.

Second, the Board proposed in June 2007 to clarify in comment 2(a)(20)-5 that in general, a credit line is self-replenishing if a consumer can obtain further advances or funds without being required to separately apply for those additional advances, and without undergoing a separate review by the creditor of that consumer's credit information, in order to obtain approval for each such additional advance. TILA Section 103(i) provides that a plan can be an open-end credit plan even if the creditor verifies credit information from time to time. 15 U.S.C. 1602(i). As stated in the June 2007 Proposal, however, the Board believes this provision is not intended to permit a creditor to separately underwrite each advance made to a consumer under an open-end plan or account. Such a process could result in closed-end credit being deemed open-end credit.

General comments. The Board received approximately 300 comment letters, mainly from credit unions, on the proposed changes to § 226.2(a)(20). (See below for a discussion of the comments specific to each portion of the proposed changes to § 226.2(a)(20); more general comments pertaining to the overall impact of recharacterizing certain multifeatured plans as closed-end credit are discussed in this subsection.)

Consumer groups and one credit union supported the proposed changes. The credit union commenter noted that it currently uses a multifeatured open-end lending program, but that it believes the changes would be beneficial to consumers and financial institutions, and that the benefit to consumers would outweigh any inconvenience and cost imposed on the credit union. This commenter noted that under a multifeatured open-end lending program, a consumer signs a master loan agreement but does not receive meaningful disclosures with each additional extension of credit. This commenter believes that consumers often do not realize that subsequent extensions of credit are subject to the terms of the master loan agreement.

Consumer groups stated that there is no meaningful difference between a customer who obtains a conventional car loan from a bank versus one who receives an advance to purchase a car via a sub-account from an open-end plan. Consumer groups further noted that to the extent a sub-account has fixed payments, fixed terms, and no replenishing line, it is functionally indistinguishable from any other closed-end loan for which closed-end disclosures must be given. The consumer groups' comments stated that there is no legitimate basis on which to continue to classify these plans as open-end credit.

Most comment letters opposed the proposed changes to the definition of “open-end credit.” Many credit union commenters questioned the need for the proposed changes, and stated that the Board had not identified a specific harm arising out of multifeatured open-end lending. These commenters stated that there is no evidence of harm to consumers associated with these plans, such as complaints, information about credit union members paying higher rates or purchasing unnecessary products, or evidence of higher default rates. These commenters noted that such plans have been offered by credit unions for more than 25 years. These commenters also stated that open-end credit disclosures are adequate and provide members with the information they need on a timely basis, and that open-end lending members receive frequent reminders, via periodic statements, of key financial terms such as the APR. Also, commenters stated that to the extent credit unions do not charge fees for advances with fixed repayment periods, the APR disclosed for purposes of the open-end credit disclosures is the same as the APR that would be disclosed if the transaction were characterized as closed-end.

The National Credit Union Administration (NCUA) commented that there are no problems that appear to be generated by or inherent to the multifeatured aspect of credit unions' multifeatured open-end plans. This agency urged the Board not to ignore the identity of the creditor in considering Start Printed Page 5259the appropriateness of disclosures because doing so ignores the circumstances in which the disclosures are made; the comment letter further noted that multifeatured open-end plans offered by credit unions involve circumstances where there is an ongoing relationship between the consumer-member and a regulated financial institution.

Credit union commenters and the NCUA also stated that the proposed revisions would result in a loss of convenience to consumers because credit unions generally would not be able to continue to offer multifeatured open-end lending programs, and consumers would have to sign additional paperwork in order to obtain closed-end advances. Several of these commenters specifically noted that loss of convenience would be a concern with respect to military personnel and other customers they serve in geographically remote locations. Credit union commenters stated that the proposed revisions, if adopted, would result in increased costs of borrowing for consumers. Some comment letters noted that credit unions' rates would become less competitive and that consumers would be more likely to obtain financing from more expensive sources, such as auto dealers, check cashing shops, or payday lenders.

Several credit union commenters discussed the likely cost associated with providing closed-end disclosures instead of open-end disclosures. The commenters indicated that such costs would include re-training personnel, changing lending documents and data-processing systems, purchasing new lending forms, potentially increased staffing requirements, updating systems, and additional paperwork. Several commenters offered estimates of the probable cost to credit unions of converting multifeatured open-end plans to closed-end credit. Those comments with regard to small entities are discussed in more detail below in VIII. Final Regulatory Flexibility Analysis. One major service provider to credit unions estimated that the conversion in loan products would cost a credit union approximately $100,000, with total expenses of at least $350 million for all credit unions and their members. This commenter further noted that there would be annual ongoing costs totaling millions of dollars, largely due to additional staff costs that would arise because more business would take place in person at the credit union.

One commenter indicated that the proposed changes to the commentary could give rise to litigation risk, and may create more confusion and unintended consequences than currently exist under the existing commentary to Regulation Z. This commenter stated that changing the definition of open-end credit would jeopardize many legitimate open-end credit plans.

Comments regarding hybrid disclosure. Several comment letters from credit unions, one credit union trade association, and the NCUA suggested that the Board should adopt a hybrid disclosure approach for multifeatured open-end plans. Under this approach, these commenters indicated that the Board should continue to permit multifeatured open-end plans, as they are currently structured, to provide open-end disclosures to consumers, but should also impose a new subsequent disclosure requirement. Shortly after obtaining credit, such as for an auto loan, that is individually underwritten or not self-replenishing, the creditor would be required to give disclosures that mirror the disclosures given for closed-end credit.

The Board is not adopting this hybrid disclosure approach. The Board believes that the statutory framework clearly provides for two distinct types of credit, open-end and closed-end, for which different types of disclosures are deemed to be appropriate. Such a hybrid disclosure regime would be premised on the fact that the closed-end disclosures are beneficial to consumers in connection with certain types of advances made under these plans. If this is the case, the Board believes that consumers should receive the closed-end disclosures prior to consummation of the transaction, when a consumer is shopping for credit.

Replenishment. As discussed above, the Board proposed in June 2007 to revise comment 2(a)(20)-2 to clarify that while a consumer's account may contain different sub-accounts, each with different minimum payment or other payment options, each sub-account must meet the self-replenishing criterion.

Several industry commenters specifically objected to the new requirement in proposed comment 2(a)(20)-2 that open-end credit replenish on a sub-account by sub-account basis. Some commenters expressed concern about the applicability of proposed comment 2(a)(20)-2 to promotional rate offers. The commenters noted that a creditor may make a balance transfer offer or send out convenience checks at a promotional APR. As the balance subject to the promotional APR is repaid, the available credit on the account will be replenished, although the available credit for the original promotional rate offer is not replenished. These commenters stated that unless the Board can define sub-accounts in a manner that excludes balances subject to special terms, the Board should withdraw the proposed revision to comment 2(a)(20)-2. Other commenters indicated that the critical requirement should be that repayment of balances in any sub-account replenishes the overall account, not that each sub-account itself must be replenishing.

Similarly, the Board received several industry comment letters indicating that the proposed changes to comment 2(a)(20)-2 would have adverse consequences for certain HELOCs. The comments noted that many creditors use multiple features or sub-accounts in order to provide consumers with flexibility and choices regarding the terms applicable to certain portions of an open-end credit balance. They noted as an example a feature on a HELOC that permits a consumer to convert a portion of the balance into a fixed-rate, fixed-term sub-account; the sub-account is never replenished but payments on the sub-account replenish the master open-end account.

In addition, the Board received a comment from an association of state regulators of credit unions raising concerns that proposed comment 2(a)(20)-2 would present a safety and soundness concern for institutions. These comments noted that a self-replenishing sub-account for an auto loan, for example, would be a safety and soundness concern because the value of the collateral would decline and eventually be less than the credit limit.

In light of the comments received and upon further analysis, the Board has withdrawn the proposed changes to comment 2(a)(20)-2 from the final rule. The Board believes that one unintended consequence of the proposed requirement that payments on each sub-account replenish is that some sub-accounts (like HELOCs) would be re-characterized as closed-end credit when they are properly treated as open-end credit. Generally, the proposed changes to comment 2(a)(20)-2 were intended to ensure that repayments of advances on an open-end credit plan generally would replenish the credit available to the consumer. The Board believes that replenishment of an open-end plan on an overall basis achieves this purpose and that, as discussed below, the best way to address loans that are more properly characterized as closed-end credit being treated as features of open-end plans is through clarifications Start Printed Page 5260regarding verification of credit information and separate underwriting of individual advances.

Verification and underwriting of separate advances. As discussed above, the Board proposed in June 2007 to clarify in comment 2(a)(20)-5 that, in general, a credit line is self-replenishing if a consumer can obtain further advances or funds without being required to separately apply for those additional advances, and without undergoing a separate review by the creditor of that consumer's credit information, in order to obtain such additional advance.

Notwithstanding this proposed change, the Board noted that a creditor would be permitted to verify credit information to ensure that the consumer's creditworthiness has not deteriorated (and could revise the consumer's credit limit or account terms accordingly). This is consistent with the statutory definition of “open end credit plan,” which provides that a credit plan may be an open end credit plan even if credit information is verified from time to time. See 15 U.S.C. 1602(i). However, the Board noted in the June 2007 Proposal its belief that performing a distinct underwriting analysis for each specific credit request would go beyond the verification contemplated by the statute and would more closely resemble underwriting of closed-end credit. For example, assume that based on the initial underwriting of an open-end plan, a consumer were initially approved for a line of credit with a $20,000 credit limit. Under the proposal, if that consumer subsequently took a large advance of $10,000, it would be inconsistent with the definition of open-end credit for the creditor to independently evaluate the consumer's creditworthiness in connection with that advance. However, proposed comment 2(a)(20)-5 would have stated that a creditor could continue to review, and as appropriate, decrease the amount of credit available to a consumer from time to time to address safety and soundness and other concerns.

The NCUA agreed with the Board that the statutory provision regarding verification is not intended to permit separate underwriting and applications for each sub-account. The agency encouraged the Board to focus any commentary changes regarding the definition of open-end credit on the distinctions between verification versus a credit evaluation as a more appropriate and less burdensome response to its concerns than the proposed revisions regarding replenishment.

Several industry commenters indicated that proposed comment 2(a)(20)-5 could have unintended adverse consequences for legitimate open-end products. One industry trade association and several industry commenters stated creditors finance purchases that may utilize a substantial portion of available credit or even exceed the credit line under pre-established credit criteria. According to these commenters, creditors may have over-the-limit buffers or strategies in place that contemplate such purchases, and these transactions should not be considered a separate underwriting. The commenters further stated that any legitimate authorization procedures or consideration of a credit line increase should not exclude a transaction from open-end credit.

One credit card association and one large credit card issuer commented that some credit cards have no preset spending limits, and issuers may need to review a cardholder's credit history in connection with certain transactions on such accounts. These commenters stated that regardless of how an issuer handles individual transactions on such accounts, they should be characterized as open-end.

One other industry commenter stated that a creditor should be able to verify the consumer's creditworthiness in connection with a request for an advance on an open-end credit account. This creditor noted that the statute does not impose any limitation on the frequency with which verification is made, nor does it indicate that verification can be made only as part of an account review, and not also when a consumer requests an advance. The commenter stated that the most important time to conduct verification is when an advance is requested.

This commenter further suggested that the concept of “verification” is, by itself, distinguishable from a de novo credit decision on an application for a new loan. This commenter posited that comment 2(a)(20)-5 recognizes this insofar as it contemplates a determination of whether the consumer continues to meet the lender's credit standards and provides that the consumer should have a reasonable expectation of obtaining additional credit as long as the consumer continues to meet those credit standards. An application for a new extension of credit contemplates a de novo credit determination, while verification involves a determination of whether a borrower continues to meet the lender's credit standards.

The changes to comment 2(a)(20)-5 are adopted as proposed, with one revision discussed below in the subsection titled Credit cards. Under revised comment 2(a)(20)-5, verification of a consumer's creditworthiness consistent with the statute continues to be permitted in connection with an open-end plan; however, underwriting of specific advances is not permitted for an open-end plan. The Board believes that underwriting of individual advances exceeds the scope of the verification contemplated by the statute and is inconsistent with the definition of open-end credit. The Board believes that the rule does not undermine safe and sound lending practices, but simply clarifies that certain types of advances for which underwriting is done must be treated as closed-end credit with closed-end disclosures provided to the consumer.

The revisions to comment 2(a)(20)-5 are intended only to have prospective application to advances made after the effective date of the final rule. A creditor may continue to give open-end disclosures in connection with an advance that met the definition of “open-end credit” under current § 226.2(a)(20) and the associated commentary, if that advance was made prior to the effective date of the final rule. However, a creditor that makes a new advance under an existing credit plan after the effective date of the final rule will need to determine whether that advance is properly characterized as open-end or closed-end credit under the revised definition, and give the appropriate disclosures.

One commenter asked the Board to clarify the “reasonable expectation” language in comment 2(a)(20)-5. This commenter noted that a consumer should not expect to obtain additional advances if the consumer is in default in any provision of the loan agreement (it is not enough to merely be “current” in their payments), and otherwise does not comply with the requirements for advances in the loan agreement (such as minimum advance requirements or the method for requesting advances). The Board believes that under the current rule a creditor may suspend a consumer's credit privileges or reduce a consumer's credit limit if the consumer is in default under his or her loan agreement. Thus, the Board does not believe that this clarification is necessary and has not adopted it in the final rule.

Verification of collateral. Several commenters stated that comment 2(a)(20)-5 should expressly permit routine collateral valuation and verification procedures at any time, including as a condition of approving an advance. One of these commenters Start Printed Page 5261stated that Regulation U (Credit by Banks and Persons Other than Brokers or Dealers for the Purpose of Purchasing or Carrying Margin Stock) requires a bank in connection with margin lending, to not advance funds in excess of a certain collateral value. 12 CFR part 221. The commenter also pointed out that for some accounts, a borrower's credit limit is determined from time to time based on the market value of the collateral securing the account.

In response to commenters' concerns, new comment 2(a)(20)-(6) is added to clarify that creditors that otherwise meet the requirements of § 226.2(a)(20) extend open-end credit notwithstanding the fact that the creditor must verify collateral values to comply with federal, state, or other applicable laws or verifies the value of collateral in connection with a particular advance under the plan. Current comment 2(a)(20)-6 is renumbered as comment 2(a)(20)-7.

Credit cards. Several credit and charge card issuers commented that the proposal could have adverse effects on those products. One credit card issuer indicated that the proposed changes could have unintended adverse consequences for certain credit card securitizations. This commenter noted that securitization documentation for credit cards typically provides that an account must be a revolving credit card account for the receivables arising in that account to be eligible for inclusion in the securitization. If the proposal were to recharacterize accounts that are currently included in securitizations as closed-end credit, this commenter stated that it could require restructuring of existing and future securitization transactions.

As discussed above, several industry commenters noted other circumstances in which proposed comment 2(a)(20)-5 could have adverse consequences for credit cards. Several commenters stated that creditors may have over-the-limit buffers or strategies in place that contemplate purchases utilizing a substantial portion of, or even exceed, the credit line, and these transactions should not be considered a separate underwriting. Commenters also stated that any legitimate authorization procedures or consideration of a credit line increase should not exclude a transaction from open-end credit. Finally, one credit card association and one large credit card issuer commented that some credit cards have no preset spending limits, and issuers may need to review a cardholder's credit history in connection with certain transactions on such accounts. These commenters stated that regardless of how an issuer handles individual transactions on such accounts, they should be characterized as open-end.

The Board has addressed credit card issuers' concerns about emergency underwriting and underwriting of amounts that may exceed the consumer's credit limit by expressly providing in comment 2(a)(20)-5 that a credit card account where the plan as a whole replenishes meets the self-replenishing criterion, notwithstanding the fact that a credit card issuer may verify credit information from time to time in connection with specific transactions. The Board did not intend in the June 2007 Proposal and does not intend in the final rule to exclude credit cards from the definition of open-end credit and believes that the revised final rule gives certainty to creditors offering credit cards. The Board believes that the strategies identified by commenters, such as over-the-limit buffers, treatment of certain advances for cards without preset spending limits, and consideration of credit line increases generally do not constitute separate underwriting of advances, and that open-end disclosures are appropriate for credit cards for which the plan as a whole replenishes. The Board also believes that this clarification will help to promote uniformity in credit card disclosures by clarifying that all credit cards are subject to the open-end disclosure rules. The Board notes that charge card accounts may not meet the definition of open-end credit but pursuant to § 226.2(a)(17)(iii) are subject to the rules that apply to open-end credit.

Examples regarding repeated transactions. Due to the concerns noted above regarding closed-end automobile loans being characterized as features of so-called open-end plans, the Board also proposed in June 2007 to delete comment 2(a)(20)-3.ii., which states that it would be more reasonable for a financial institution to make advances from a line of credit for the purchase of an automobile than it would be for an automobile dealer to sell a car under an open-end plan. As stated in the proposal, the Board was concerned that the current example placed inappropriate emphasis on the identity of the creditor rather than the type of credit being extended by that creditor. Similarly, the Board proposed to revise current comment 2(a)(20)-3.i., which referred to a thrift institution, to refer more generally to a bank or financial institution and to move the example into the body of comment 2(a)(20)-3. The Board received no comments opposing the revisions to these examples, and the changes are adopted as proposed.

Technical amendments. The Board also proposed in the June 2007 Proposal a technical update to comment 2(a)(20)-4 to delete, without intended substantive change, a reference to “china club plans,” which may no longer be very common. No comments were received on this aspect of the proposal, and the update to comment 2(a)(20)-4 is adopted as proposed.

Comment 2(a)(20)-5.ii. currently notes that a creditor may reduce a credit limit or refuse to extend new credit due to changes in the economy, the creditor's financial condition, or the consumer's creditworthiness. The Board's proposal would have deleted the reference to changes in the economy to simplify this provision. No comments were received on this change, which is adopted as proposed.

Implementation date. Many credit union commenters on the June 2007 Proposal expressed concern about the effect of successive regulatory changes. These commenters stated that the June 2007 Proposal, if adopted, would require them to give closed-end disclosures in connection with certain advances, such as the purchase of an automobile, for which they currently give open-end disclosures. The commenters noted that because the Board is also considering regulatory changes to closed-end lending, it could require such creditors to make two sets of major systematic changes in close succession. These commenters stated that such successive regulatory changes could impose a significant burden that would impair the ability of credit unions to serve their members effectively. The Board expects all creditors to provide closed-end or open-end disclosures, as appropriate in light of revised § 226.2(a)(20) and the associated commentary, as of the effective date of the final rule. The Board has not delayed the effectiveness of the changes to the definition of “open-end credit.” The Board is mindful that the changes to the definition may impose costs on certain credit unions and other creditors, and that any future changes to the provisions of Regulation Z dealing with closed-end credit may impose further costs. However, the Board believes that it is important that consumers receive the appropriate type of disclosures for a given extension of credit, and that it is not appropriate to delay effectiveness of these changes pending the Board's review of the rules pertaining to closed-end credit.Start Printed Page 5262

2(a)(24) Residential Mortgage Transaction

Comment 2(a)(24)-1, which identifies key provisions affected by the term “residential mortgage transaction,” and comment 2(a)(24)-5.ii., which provides guidance on transactions financing the acquisition of a consumer's principal dwelling, are revised from the June 2007 Proposal to conform to changes adopted by the Board in the July 2008 Final HOEPA Rule to address certain mortgage practices and disclosures. 73 FR 44522, 44605, July 30, 2008.

Section 226.3 Exempt Transactions

Section 226.3 implements TILA Section 104 and provides exemptions for certain classes of transactions specified in the statute. 15 U.S.C. 1603.

In June 2007, the Board proposed several substantive and technical revisions to § 226.3 as described below. The Board also proposed to move the substance of footnote 4 to the commentary. See comment 3-1. No comments were received on moving footnote 4 to the commentary, and that change is adopted in the final rule.

3(a) Business, Commercial, Agricultural, or Organizational Credit

Section 226.3(a) provides, in part, that the regulation does not apply to extensions of credit primarily for business, commercial or agricultural purposes. As the Board noted in the supplementary information to the June 2007 Proposal, questions have arisen from time to time regarding whether transactions made for business purposes on a consumer-purpose credit card are exempt from TILA. The Board proposed to add a new comment 3(a)-2 to clarify transactions made for business purposes on a consumer-purpose credit card are covered by TILA (and, conversely, that purchases made for consumer purposes on a business-purpose credit card are exempt from TILA). The Board received several comments on proposed comment 3(a)-2. One consumer group and one large financial institution commented in support of the change. One industry trade association stated that the proposed clarification was anomalous given the general exclusion of business credit from TILA coverage. The Board acknowledges that this clarification will result in certain business purpose transactions being subject to TILA, and certain consumer purpose transactions being exempt from TILA. However, the Board believes that the determination as to whether a credit card account is primarily for consumer purposes or business purposes is best made when an account is opened (or when an account is reclassified as a business-purpose or consumer-purpose account) and that comment 3(a)-2 provides important clarification and certainty to consumers and creditors. In addition, determining whether specific transactions charged to the credit card account are for consumer or business purposes could be operationally difficult and burdensome for issuers. Accordingly, the Board adopts new comment 3(a)-2 as proposed with several technical revisions described below. Other sections of the commentary regarding § 226.3(a) are renumbered accordingly. The Board also adopts new comment 3(a)-7, which provides guidance on credit card renewals consistent with new comment 3(a)-2, as proposed.

The examples in proposed comment 3(a)-2 contained several references to credit plans, which are deleted from the final rule as unnecessary because comment 3(a)-2 was intended to address only credit cards. Credit plans are addressed by the examples in redesignated comment 3(a)-3, which is unaffected by this rulemaking.

3(g) Employer-Sponsored Retirement Plans

The Board has received questions from time to time regarding the applicability of TILA to loans taken against employer-sponsored retirement plans. Pursuant to TILA Section 104(5), the Board has the authority to exempt transactions for which it determines that coverage is not necessary in order to carry out the purposes of TILA. 15 U.S.C. 1603(5). The Board also has the authority pursuant to TILA Section 105(a) to provide adjustments and exceptions for any class of transactions, as in the judgment of the Board are necessary or proper to effectuate the purposes of TILA. 15 U.S.C. 1604(a).

The June 2007 Proposal included a new § 226.3(g), which would have exempted loans taken by employees against their employer-sponsored retirement plans qualified under Section 401(a) of the Internal Revenue Code and tax-sheltered annuities under Section 403(b) of the Internal Revenue Code, provided that the extension of credit is comprised of fully-vested funds from such participant's account and is made in compliance with the Internal Revenue Code. 26 U.S.C. 1 et seq.; 26 U.S.C. 401(a); 26 U.S.C. 403(b). The Board stated several reasons for this proposed exemption in the supplementary information to the June 2007 Proposal, including the fact that the consumer's interest and principal payments on such a loan are reinvested in the consumer's own account and there is no third-party creditor imposing finance charges on the consumer. In addition, the costs of a loan taken against assets invested in a 401(k) plan, for example, are not comparable to the costs of a third-party loan product, because a consumer pays the interest on a 401(k) loan to himself or herself rather than to a third party.

The Board received several comments regarding proposed § 226.3(g), which generally supported the proposed exemption for loans taken by employees against their employer-sponsored retirement plans. Two commenters asked the Board to expand the proposed exemption to include loans taken against governmental 457(b) plans, which are a type of retirement plan offered by certain state and local government employers. 26 U.S.C. 457(b). The comments noted that governmental 457(b) plans may permit participant loans, subject to the requirements of section 72(p) of the Internal Revenue Code (26 U.S.C. 1 et seq.), which are the same requirements that are applicable to qualified 401(a) plans and 403(b) plans. The comments also stated that the Board's reasons for proposing the exemption apply equally to governmental 457(b) plans. The final rule expands the scope of the exemption to include loans taken against governmental 457(b) plans. The exemption for loans taken against employer-sponsored retirement plans was intended to cover all such similar plans, and the omission of governmental 457(b) plans from the proposed exemption was unintentional. The Board believes the rationales stated above and in the June 2007 Proposal for the proposed exemption for qualified 401(a) plans and 403(b) plans apply equally to governmental 457(b) plans.

In addition to the rationales stated above, another reason given for the proposed exception in the June 2007 Proposal was a statement that plan administration fees must be disclosed under applicable Department of Labor regulations. One commenter noted that the Department of Labor regulations cited in the supplementary information to the June 2007 Proposal do not apply to governmental 403(b) plans, governmental 457(b) plans, and certain other 403(b) programs that are not subject to the Employee Retirement Income Security Act of 1974 (ERISA). 29 U.S.C. 1001 et seq. The commenter asked for clarification regarding whether the exemption will apply to loans taken from plans and programs which are not subject to ERISA. Section 226.3(g) itself does not contain a reference to ERISA or the Department of Labor regulations pertaining to ERISA, and, accordingly, Start Printed Page 5263the exemption applies even if the particular plan is not subject to ERISA. For the other reasons stated above and in the June 2007 Proposal, the Board believes that the exemption for the plans specified in new § 226.3(g) is appropriate even for those plans to which ERISA disclosure requirements do not apply.

Section 226.4 Finance Charge

Various provisions of TILA and Regulation Z specify how and when the cost of consumer credit expressed as a dollar amount, the “finance charge,” is to be disclosed. The rules for determining which charges make up the finance charge are set forth in TILA Section 106 and Regulation Z § 226.4. 15 U.S.C. 1605. Some rules apply only to open-end credit and others apply only to closed-end credit, while some apply to both. With limited exceptions, the Board did not propose in June 2007 to change § 226.4 for either closed-end credit or open-end credit. The areas in which the Board did propose to revise § 226.4 and related commentary relate to (1) transaction charges imposed by credit card issuers, such as charges for obtaining cash advances from automated teller machines (ATMs) and for making purchases in foreign currencies or foreign countries, and (2) charges for credit insurance, debt cancellation coverage, and debt suspension coverage.

4(a) Definition

Transaction charges. Under the definition of “finance charge” in TILA Section 106 and Regulation Z § 226.4(a), a charge specific to a credit transaction is ordinarily a finance charge. 15 U.S.C. 1605. See also § 226.4(b)(2). However, under current comment 4(a)-4, a fee charged by a card issuer for using an ATM to obtain a cash advance on a credit card account is not a finance charge to the extent that it does not exceed the charge imposed by the card issuer on its cardholders for using the ATM to withdraw cash from a consumer asset account, such as a checking or savings account. Another comment indicates that the fee is an “other charge.” See current comment 6(b)-1.vi. Accordingly, the fee must be disclosed at account opening and on the periodic statement, but it is not labeled as a “finance charge” nor is it included in the effective APR.

In the June 2007 Proposal, the Board proposed new comment 4(a)-4 to address questions that have been raised about the scope and application of the existing comment. For example, assume the issuer assesses an ATM fee for one kind of deposit account (for example, an account with a low minimum balance) but not for another. The existing comment does not indicate which account is the proper basis for comparison, nor is it clear in all cases which account should be the appropriate one to use.

Questions have also been raised about whether disclosure of an ATM cash advance fee pursuant to comments 4(a)-4 and 6(b)-1.vi. is meaningful to consumers. Under the comments, the disclosure a consumer receives after incurring a fee for taking a cash advance through an ATM depends on whether the credit card issuer provides asset accounts and offers debit cards on those accounts and whether the fee for using the ATM for the cash advance exceeds the fee for using the ATM for a cash withdrawal from an asset account. It is not clear that these distinctions are meaningful to consumers.

In addition, questions have arisen about the proper disclosure of fees that cardholders are assessed for making purchases in a foreign currency or outside the United States—for example, when the cardholder travels abroad. The question has arisen in litigation between consumers and major card issuers.[11] Some card issuers have reasoned by analogy to comment 4(a)-4 that a foreign transaction fee is not a finance charge if the fee does not exceed the issuer's fee for using a debit card for the same purchase. Some card issuers disclose the foreign transaction fee as a finance charge and include it in the effective APR, but others do not.

The uncertainty about proper disclosure of charges for foreign transactions and for cash advances from ATMs reflects the inherent complexity of seeking to distinguish transactions that are “comparable cash transactions” to credit card transactions from transactions that are not. In June 2007, the Board proposed to replace comment 4(a)-4 with a new comment of the same number stating a simple interpretive rule that any transaction fee on a credit card plan is a finance charge, regardless of whether the issuer imposes the same or lesser charge on withdrawals of funds from an asset account, such as a checking or savings account. The proposed comment would have provided as examples of such finance charges a fee imposed by the issuer for taking a cash advance at an ATM,[12] as well as a fee imposed by the issuer for foreign transactions. The Board stated its belief that clearer guidance might result from a new and simpler approach that treats as a finance charge any fee charged by credit card issuers for transactions on their credit card plans, and accordingly proposed new comment 4(a)-4.

Few commenters addressed proposed comment 4(a)-4. Some commenters supported the proposed comment, including a financial institution (although the commenter noted that its support of the proposal was predicated on the effective APR disclosure requirements being eliminated, as the Board proposed under one alternative). Other commenters opposed the proposed comment, some expressing concern that including all transaction fees as finance charges might cause the effective APR to exceed statutory interest rate limits contained in other laws (for example, the 18 percent statutory interest rate ceiling applicable to federal credit unions).

One commenter stated particular concerns about the proposed inclusion of foreign transaction fees as finance charges. The commenter stated that the settlements in the litigation referenced above have already resolved the issues involved and that adopting the proposal would cause disruption to disclosure practices established under the settlements. A consumer group that supported including all transaction fees in the finance charge noted its concern that the positive effect of the proposal would be nullified by specifying a limited list of fees that must be disclosed in writing at account opening (see the section-by-section analysis to § 226.6(b)(2) and (b)(3), below), and by eliminating the effective APR assuming the Board adopted that alternative. The commenter urged the Board to go further and include a number of other types of fees in the finance charge.

The Board is adopting proposed comment 4(a)-4 with some changes for clarification. As adopted in final form, comment 4(a)-4 includes language clarifying that foreign transaction fees include charges imposed when transactions are made in foreign currencies and converted to U.S. dollars, as well as charges imposed when transactions are made in U.S. dollars outside the United States and charges imposed when transactions are made (whether in a foreign currency or Start Printed Page 5264in U.S. dollars) with a foreign merchant, such as via a merchant's Web site. For example, a consumer may use a credit card to make a purchase in Bermuda, in U.S. dollars, and the card issuer may impose a fee because the transaction took place outside the United States. The comment also clarifies that foreign transaction fees include charges imposed by the card issuer and charges imposed by a third party that performs the conversion, such as a credit card network or the card issuer's corporate parent. (For example, in a transaction processed through a credit card network, the network may impose a 1 percent charge and the card-issuing bank may impose an additional 2 percent charge, for a total of a 3 percentage point foreign transaction fee being imposed on the consumer.)

However, the comment also clarifies that charges imposed by a third party are included only if they are directly passed on to the consumer. For example, if a credit card network imposes a 1 percent fee on the card issuer, but the card issuer absorbs the fee as a cost of doing business (and only passes it on to consumers in the general sense that the interest and fees are imposed on all its customers to recover its costs), then the fee is not a foreign transaction fee that must be disclosed. In another example, if the credit card network imposes a 1 percent fee for a foreign transaction on the card issuer, and the card issuer imposes this same fee on the consumer who engaged in the foreign transaction, then the fee is a foreign transaction fee and must be included in finance charges to be disclosed. The comment also makes clear that a card issuer is not required to disclose a charge imposed by a merchant. For example, if the merchant itself performs the currency conversion and adds a fee, this would be not be a foreign transaction fee that card issuers must disclose. Under § 226.9(d), the card issuer is not required to disclose finance charges imposed by a party honoring a credit card, such as a merchant, although the merchant itself is required to disclose such a finance charge (assuming the merchant is covered by TILA and Regulation Z generally).

The foreign transaction fee is determined by first calculating the dollar amount of the transaction, using a currency conversion rate outside the card issuer's and third party's control. Any amount in excess of that dollar amount is a foreign transaction fee. The comment provides examples of conversion rates outside the card issuer's and third party's control. (Such a rate is deemed to be outside the card issuer's and third party's control, even if the card issuer or third party could arguably in fact have some degree of control over the rate used, by selecting the rate from among a number of rates available.)

With regard to the conversion rate, the comment also clarifies that the rate used for a particular transaction need not be the same rate that the card issuer (or third party) itself obtains in its currency conversion operations. The card issuer or third party may convert currency in bulk amounts, as opposed to performing a conversion for each individual transaction. The comment also clarifies that the rate used for a particular transaction need not be the rate in effect on the date of the transaction (purchase or cash advance), because the conversion calculation may take place on a later date.

Concerns of some commenters that inclusion of all transaction charges in the finance charge would cause the effective APR to exceed permissible ceilings are moot due to the fact that the final rule eliminates the effective APR requirements as to open-end (not home-secured) credit, as discussed in the general discussion on the effective APR in the section-by-section analysis to § 226.7(b). As to the consumer group comment that eliminating the effective APR would negate the beneficial impact of the proposed comment for consumers, the Board believes that adoption of the comment will nevertheless result in better and more meaningful disclosures to consumers. Transaction fees such as ATM cash advance fees and foreign transaction fees will be disclosed more consistently. The Board also believes that the comment will provide clearer guidance to card issuers, as discussed above.

With regard to foreign transaction fees, the Board believes that although the settlements in the litigation mentioned above may have led to some standardization of disclosure practices, the proposed comment is appropriate because it will bring a uniform disclosure approach to foreign transaction fees (as opposed to possibly differing approaches under the different settlement terms), and will be a continuing federal regulatory requirement (whereas settlements can be modified or expire).

Existing comment 4(b)(2)-1 (which is not revised in the final rule) states that if a checking or transaction account charge imposed on an account with a credit feature does not exceed the charge for an account without a credit feature, the charge is not a finance charge. Comment 4(b)(2)-1 and revised comment 4(a)-4 address different situations.

Charges in comparable cash transactions. Comment 4(a)-1 provides examples of charges in comparable cash transactions that are not finance charges. Among the examples are discounts available to a particular group of consumers because they meet certain criteria, such as being members of an organization or having accounts at a particular institution. In the June 2007 Proposal, the Board solicited comment on whether the example is still useful, or should be deleted as unnecessary or obsolete. No comments were received on this issue. Nonetheless, because many of the examples provide guidance to creditors offering closed-end credit, comment 4(a)-1 is retained in the final rule and the examples will be reviewed in a future rulemaking addressing closed-end credit.

4(b) Examples of Finance Charges

Charges for credit insurance or debt cancellation or suspension coverage. Premiums or other charges for credit life, accident, health, or loss-of-income insurance are finance charges if the insurance or coverage is “written in connection with” a credit transaction. 15 U.S.C. 1605(b); § 226.4(b)(7). Creditors may exclude from the finance charge premiums for credit insurance if they disclose the cost of the insurance and the fact that the insurance is not required to obtain credit. In addition, the statute requires creditors to obtain an affirmative written indication of the consumer's desire to obtain the insurance, which, as implemented in § 226.4(d)(1)(iii), requires creditors to obtain the consumer's initials or signature. 15 U.S.C. 1605(b). In 1996, the Board expanded the scope of the rule to include plans involving charges or premiums for debt cancellation coverage. See § 226.4(b)(10) and (d)(3). See also 61 FR 49237, Sept. 19, 1996. Currently, however, insurance or coverage sold after consummation of a closed-end credit transaction or after the opening of an open-end plan and upon a consumer's request is considered not to be “written in connection with the credit transaction,” and, therefore, a charge for such insurance or coverage is not a finance charge. See comment 4(b)(7) and (8)-2.

In June 2007, the Board proposed a number of revisions to these rules:

(1) The same rules that apply to debt cancellation coverage would have been applied explicitly to debt suspension coverage. However, to exclude the cost of debt suspension coverage from the finance charge, creditors would have been required to inform consumers, as Start Printed Page 5265applicable, that the obligation to pay loan principal and interest is only suspended, and that interest will continue to accrue during the period of suspension. These proposed revisions would have applied to all open-end plans and closed-end credit transactions.

(2) Creditors could exclude from the finance charge the cost of debt cancellation and suspension coverage for events in addition to those permitted today, namely, life, accident, health, or loss-of-income. This proposed revision would also have applied to all open-end plans and closed-end credit transactions.

(3) The meaning of insurance or coverage “written in connection with” an open-end plan would have been expanded to cover sales made throughout the life of an open-end (not home-secured) plan. Under the proposal, for example, consumers solicited for the purchase of optional insurance or debt cancellation or suspension coverage for existing credit card accounts would have received disclosures about the cost and optional nature of the product at the time of the consumer's request to purchase the insurance or coverage. HELOCs subject to § 226.5b and closed-end transactions would not have been affected by this proposed revision.

(4) For telephone sales, creditors offering open-end (not home-secured) plans would have been provided with flexibility in evidencing consumers' requests for optional insurance or debt cancellation or suspension coverage, consistent with rules published by federal banking agencies to implement Section 305 of the Gramm-Leach-Bliley Act regarding the sale of insurance products by depository institutions and guidance published by the Office of the Comptroller of the Currency (OCC) regarding the sale of debt cancellation and suspension products. See 12 CFR § 208.81 et seq. regarding insurance sales; 12 CFR part 37 regarding debt cancellation and debt suspension products. For telephone sales, creditors could have provided disclosures orally, and consumers could have requested the insurance or coverage orally, if the creditor maintained evidence of compliance with the requirements, and mailed written information within three days after the sale. HELOCs subject to § 226.5b and closed-end transactions would not have been affected by this proposed revision.

All of these products serve similar functions but some are considered insurance under state law and others are not. Taken together, the proposed revisions were intended to provide consistency in how creditors deliver, and consumers receive, information about the cost and optional nature of similar products. The revisions are discussed in detail below.

4(b)(7) and (8) Insurance Written in Connection With Credit Transaction

Premiums or other charges for insurance for credit life, accident, health, or loss-of-income, loss of or damage to property or against liability arising out of the ownership or use of property are finance charges if the insurance or coverage is written in connection with a credit transaction. 15 U.S.C. 1605(b) and (c); § 226.4(b)(7) and (b)(8). Comment 4(b)(7) and (8)-2 provides that insurance is not written in connection with a credit transaction if the insurance is sold after consummation on a closed-end transaction or after an open-end plan is opened and the consumer requests the insurance. As stated in the June 2007 Proposal, the Board believes this approach remains sound for closed-end transactions, which typically consist of a single transaction with a single advance of funds. Consumers with open-end plans, however, retain the ability to obtain advances of funds long after account opening, so long as they pay down the principal balance. That is, a consumer can engage in credit transactions throughout the life of a plan.

Accordingly, in June 2007 the Board proposed revisions to comment 4(b)(7) and (8)-2, to state that insurance purchased after an open-end (not home-secured) plan was opened would be considered to be written “in connection with a credit transaction.” Proposed new comment 4(b)(10)-2 would have given the same treatment to purchases of debt cancellation or suspension coverage. As proposed, therefore, purchases of voluntary insurance or debt cancellation or suspension coverage after account opening would trigger disclosure and consent requirements.

Few commenters addressed this issue. One financial institution trade association supported the proposed revisions to comments 4(b)(7) and (8)-2 and 4(b)(10)-2, while two other commenters (a financial institution and a trade association) opposed them, arguing that the rules for open-end (not home-secured) plans should remain consistent with the rules for home-equity and closed-end credit, that there is no demonstrable harm to consumers from the existing rule, and that other state and federal law provides adequate protection.

The revisions to comments 4(b)(7) and (8)-2 and 4(b)(10)-2 are adopted as proposed. In an open-end plan, where consumers can engage in credit transactions after the opening of the plan, a creditor may have a greater opportunity to influence a consumer's decision whether or not to purchase credit insurance or debt cancellation or suspension coverage than in the case of closed-end credit. Accordingly, the disclosure and consent requirements are important in open-end plans, even after the opening of the plan, to ensure that the consumer is fully informed about the offer of insurance or coverage and that the decision to purchase it is voluntary. In addition, under the final rule, creditors will be permitted to provide disclosures and obtain consent by telephone (provided they mail written disclosures to the consumer after the purchase), so long as they meet requirements intended to ensure the purchase is voluntary. See the section-by-section analysis to § 226.4(d)(4) below. As to consistency between the rules for open-end (not home-secured) plans and home-equity plans, the Board intends to consider this issue when the home-equity credit plan rules are reviewed in the future.

4(b)(9) Discounts

Comment 4(b)(9)-2, which addresses cash discounts to induce consumers to use cash or other payment means instead of credit cards or other open-end plans is revised for clarity, as proposed in June 2007. No substantive change is intended. No comments were received on this change.

4(b)(10) Debt Cancellation and Debt Suspension Fees

As discussed above, premiums or other charges for credit life, accident, health, or loss-of-income insurance are finance charges if the insurance or coverage is written in connection with a credit transaction. This same rule applies to charges for debt cancellation coverage. See § 226.4(b)(10). Although debt cancellation fees meet the definition of “finance charge,” they may be excluded from the finance charge on the same conditions as credit insurance premiums. See § 226.4(d)(3).

The Board proposed in June 2007 to revise the regulation to provide the same treatment to debt suspension coverage as to credit insurance and debt cancellation coverage. Thus, under proposed § 226.4(b)(10), charges for debt suspension coverage would be finance charges. (The conditions under which debt suspension charges may be excluded from the finance charge are discussed in the section-by-section Start Printed Page 5266analysis to § 226.4(d)(3), below.) Debt suspension is the creditor's agreement to suspend, on the occurrence of a specified event, the consumer's obligation to make the minimum payment(s) that would otherwise be due. During the suspension period, interest may continue to accrue or it may be suspended as well, depending on the plan. The borrower may be prohibited from using the credit plan during the suspension period. In addition, debt suspension may cover events other than loss of life, health, or income, such as a wedding, a divorce, the birth of child, or a medical emergency.

In the June 2007 Proposal, debt suspension coverage would have been defined as coverage that suspends the consumer's obligation to make one or more payments on the date(s) otherwise required by the credit agreement, when a specified event occurs. See proposed comment 4(b)(10)-1. The comment would have clarified that the term debt suspension coverage as used in § 226.4(b)(10) does not include “skip payment” arrangements in which the triggering event is the borrower's unilateral election to defer repayment, or the bank's unilateral decision to allow a deferral of payment.

This aspect of the proposal would have applied to closed-end as well as open-end credit transactions. As discussed in the supplementary information to the June 2007 Proposal, it appears appropriate to consider charges for debt suspension products to be finance charges, because these products operate in a similar manner to debt cancellation, and reallocate the risk of nonpayment between the borrower and the creditor.

Industry commenters supported the proposed approach of including charges for debt suspension coverage as finance charges generally, but permitting exclusion of such charges if the coverage is voluntary and meets the other conditions contained in the proposal. Consumer group commenters did not address this issue. Comment 4(b)(10)-1 is adopted as proposed with some minor changes for clarification. Exclusion of charges for debt suspension coverage from the definition of finance charge is discussed in the section-by-section analysis to § 226.4(d)(3) below.

4(d) Insurance and Debt Cancellation Coverage

4(d)(3) Voluntary Debt Cancellation or Debt Suspension Fees

As explained in the section-by-section analysis to § 226.4(b)(10), debt cancellation fees and, as clarified in the final rule, debt suspension fees meet the definition of “finance charge.” Under current § 226.4(d)(3), debt cancellation fees may be excluded from the finance charge on the same conditions as credit insurance premiums. These conditions are: the coverage is not required and this fact is disclosed in writing, and the consumer affirmatively indicates in writing a desire to obtain the coverage after the consumer receives written disclosure of the cost. Debt cancellation coverage that may be excluded from the finance charge is limited to coverage that provides for cancellation of all or part of a debtor's liability (1) in case of accident or loss of life, health, or income; or (2) for amounts exceeding the value of collateral securing the debt (commonly referred to as “gap” coverage, frequently sold in connection with motor vehicle loans).

Debt cancellation coverage and debt suspension coverage are fundamentally similar to the extent they offer a consumer the ability to pay in advance for the right to reduce the consumer's obligations under the plan on the occurrence of specified events that could impair the consumer's ability to satisfy those obligations. The two types of coverage are, however, different in a key respect. One cancels debt, at least up to a certain agreed limit, while the other merely suspends the payment obligation while the debt remains constant or increases, depending on coverage terms.

In June 2007, the Board proposed to revise § 226.4(d)(3) to expressly permit creditors to exclude charges for voluntary debt suspension coverage from the finance charge when, after receiving certain disclosures, the consumer affirmatively requests such a product. The Board also proposed to add a disclosure (§ 226.4(d)(3)(iii)), to be provided as applicable, that the obligation to pay loan principal and interest is only suspended, and that interest will continue to accrue during the period of suspension. These proposed revisions would have applied to closed-end as well as open-end credit transactions. Model clauses and samples were proposed at Appendix G-16(A) and G-16(B) and Appendix H-17(A) and H-17(B) to part 226.

In addition, the Board proposed in the June 2007 Proposal to continue to limit the exclusion permitted by § 226.4(d)(3) to charges for coverage for accident or loss of life, health, or income or for gap coverage. The Board also proposed, however, to add comment 4(d)(3)-3 to clarify that, if debt cancellation or debt suspension coverage for two or more events is sold at a single charge, the entire charge may be excluded from the finance charge if at least one of the events is accident or loss of life, health, or income. The proposal is adopted in the final rule, with a few modifications discussed below.

A few industry commenters suggested that the exclusion of debt cancellation or debt suspension coverage from the finance charge should not be limited to instances where one of the triggering events is accident or loss of life, health, or income. The commenters contended that such a rule would lead to an inconsistent result; for example, if debt cancellation or suspension coverage has only divorce as a triggering event, the charge could not be excluded from the finance charge, while if the coverage applied to divorce and loss of income, the charge could be excluded. The proposal is adopted without change in this regard. The identification of accident or loss of life, health, or income in current § 226.4(d)(3)(ii) (renumbered § 226.4(d)(3) in the final rule) with respect to debt cancellation coverage is based on TILA Section 106(b), which addresses credit insurance for accident or loss of life or health. 15 U.S.C. 1605(b). That statutory provision reflects the regulation of credit insurance by the states, which may limit the types of insurance that insurers may sell. The approach in the final rule is consistent with the purpose of Section 106(b), but also recognizes that debt cancellation and suspension coverage often are not limited by applicable law to the events allowed for insurance.

A few commenters addressed the proposed disclosure for debt suspension programs that the obligation to pay loan principal and interest is only suspended, and that interest will continue to accrue during the period of suspension. A commenter suggested that in programs combining elements of debt cancellation and debt suspension, the disclosure should not be required. The final rule retains the disclosure requirement in § 226.4(d)(3)(iii). However, comment 4(d)(3)-4 has been added stating that if the debt can be cancelled under certain circumstances, the disclosure may be modified to reflect that fact. The disclosure could, for example, state (in addition to the language required by § 226.4(d)(3)(iii)) that “in some circumstances, my debt may be cancelled.” However, the disclosure would not be permitted to list the specific events that would result in debt cancellation, to avoid “information overload.”

Another commenter noted that the model disclosures proposed at Appendix G-16(A), G-16(B), H-17(A), Start Printed Page 5267and H-17(B) to part 226 were phrased assuming interest continues to accrue in all cases of debt suspension programs. The commenter contended that interest does not continue to accrue during the period of suspension in all cases, and suggested revising the forms. However, the disclosures under § 226.4(d)(3)(iii) are only required as applicable; thus, if the disclosure that interest will continue to accrue during the period of suspension is not applicable, it need not be provided.

A commenter noted that proposed model and sample forms G-16(A) and G-16(B), for open-end credit, and H-17(A) and H-17(B), for closed-end credit are virtually identical, but that the model language regarding cost of coverage is more appropriate for open-end credit. Model Clause H-17(A) and Sample H-17(B) have been revised in the final rule to include language regarding cost of coverage that is appropriate for closed-end credit.

A consumer group suggested that in debt suspension programs where interest continues to accrue during the suspension period, periodic statements should be required to include a disclosure of the amount of the accrued interest. The Board believes that the requirement under § 226.7, as adopted in the final rule, for each periodic statement to disclose total interest for the billing cycle as well as total year-to-date interest on the account adequately addresses this concern.

The Board noted in the June 2007 Proposal that the regulation provides guidance on how to disclose the cost of debt cancellation coverage (in proposed § 226.4(d)(3)(ii)), and sought comment on whether additional guidance was needed for debt suspension coverage, particularly for closed-end loans. No commenters addressed this issue except for one industry commenter that responded that no additional guidance was needed.

In a technical revision, as proposed in June 2007, the substance of footnotes 5 and 6 is moved to the text of § 226.4(d)(3).

4(d)(4) Telephone Purchases

Under § 226.4(d)(1) and (d)(3), creditors may exclude from the finance charge premiums for credit insurance and debt cancellation or (as provided in revisions in the final rule) debt suspension coverage if, among other conditions, the consumer signs or initials an affirmative written request for the insurance or coverage. In the June 2007 Proposal, the Board proposed an exception to the requirement to obtain a written signature or initials for telephone purchases of credit insurance or debt cancellation and debt suspension coverage on an open-end (not home-secured) plan. Under proposed new § 226.4(d)(4), for telephone purchases, the creditor would have been permitted to make the disclosures orally and the consumer could affirmatively request the insurance or coverage orally, provided that the creditor (1) maintained reasonable procedures to provide the consumer with the oral disclosures and maintains evidence that demonstrates the consumer then affirmatively elected to purchase the insurance or coverage; and (2) mailed the disclosures under § 226.4(d)(1) or (d)(3) within three business days after the telephone purchase. Comment 4(d)(4)-1 would have provided that a creditor does not satisfy the requirement to obtain an affirmative request if the creditor uses a script with leading questions or negative consent.

Commenters supported proposed § 226.4(d)(4), with some suggested modifications, and it is adopted in final form with a few modifications discussed below. A few commenters requested that the Board expand the proposed telephone purchase rule to home-equity plans and closed-end credit for consistency. HELOCs and closed-end credit are largely separate product lines from credit card and other open-end (not home-secured) plans, and the Board anticipates reviewing the rules applying to these types of credit separately; the issue of telephone sales of credit insurance and debt cancellation or suspension coverage can better be addressed in the course of those reviews. In addition, as discussed above, comment 4(b)(7) and (8)-2, as amended in the final rule, provides that insurance is not written in connection with a credit transaction if the insurance is sold after consummation of a closed-end transaction, or after a home-equity plan is opened, and the consumer requests the insurance. Accordingly, the requirements for disclosure and affirmative written consent to purchase the insurance or coverage do not apply in these situations, and thus the relief that would be afforded by the telephone purchase rule appears less necessary.

A commenter stated that the requirement (in § 226.4(d)(4)(ii)) to mail the disclosures under § 226.4(d)(1) or (d)(3) within three business days after the telephone purchase would be difficult operationally, and recommended that the rule allow five business days instead of three. The Board believes that three business days should provide adequate time to creditors to mail the written disclosures. In addition, the three-business-day period for mailing written disclosures is consistent with the rules published by the federal banking agencies to implement Section 305 of the Gramm-Leach-Bliley Act regarding the sale of insurance products by depository institutions, as well as with the OCC rules regarding the sale of debt cancellation and suspension products.

A few commenters expressed concern about proposed comment 4(d)(4)-1, prohibiting the use of leading questions or negative consent in telephone sales. The commenters stated that the leading questions rule would be difficult to comply with, because the distinction between a leading question and routine marketing language may not be apparent in many cases. The commenters were particularly concerned about being able to ensure that the enrollment question itself not be considered leading. The final comment includes an example of an enrollment question (“Do you want to enroll in this optional debt cancellation plan?”) that would not be considered leading.

Section 226.4(d)(4)(i) in the June 2007 Proposal would have required that the creditor must, in addition to providing the required disclosures orally and maintaining evidence that the consumer affirmatively elected to purchase the insurance or coverage, also maintain reasonable procedures to provide the disclosures orally. The final rule does not contain the requirement to maintain procedures to provide the disclosures orally; this requirement is unnecessary because creditors must actually provide the disclosures orally in each case.

The Board proposed this approach pursuant to its exception and exemption authorities under TILA Section 105. Section 105(a) authorizes the Board to make exceptions to TILA to effectuate the statute's purposes, which include facilitating consumers' ability to compare credit terms and helping consumers avoid the uniformed use of credit. 15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes the Board to exempt any class of transactions (with an exception not relevant here) from coverage under any part of TILA if the Board determines that coverage under that part does not provide a meaningful benefit to consumers in the form of useful information or protection. 15 U.S.C. 1604(f)(1). Section 105(f) directs the Board to make this determination in light of specific factors. 15 U.S.C. 1604(f)(2). These factors are (1) the amount of the loan and whether the disclosure provides a benefit to consumers who are parties to the transaction involving a loan of such amount; (2) the extent to which the requirement complicates, hinders, or Start Printed Page 5268makes more expensive the credit process; (3) the status of the borrower, including any related financial arrangements of the borrower, the financial sophistication of the borrower relative to the type of transaction, and the importance to the borrower of the credit, related supporting property, and coverage under TILA; (4) whether the loan is secured by the principal residence of the borrower; and (5) whether the exemption would undermine the goal of consumer protection.

As stated in the June 2007 Proposal, the Board has considered each of these factors carefully, and based on that review, believes it is appropriate to exempt, for open-end (not home-secured) plans, telephone sales of credit insurance or debt cancellation or debt suspension plans from the requirement to obtain a written signature or initials from the consumer. Requiring a consumer's written signature or initials is intended to evidence that the consumer is purchasing the product voluntarily; the proposal contained safeguards intended to insure that oral purchases are voluntary. Under the proposal and as adopted in the final rule, creditors must maintain tapes or other evidence that the consumer received required disclosures orally and affirmatively requested the product. Comment 4(d)(4)-1 indicates that a creditor does not satisfy the requirement to obtain an affirmative request if the creditor uses a script with leading questions or negative consent. In addition to oral disclosures, under the proposal consumers will receive written disclosures shortly after the transaction.

The fee for the credit insurance or debt cancellation or debt suspension coverage will also appear on the first monthly periodic statement after the purchase, and, as applicable, thereafter. Consumer testing conducted for the Board suggests that consumers review the transactions on their statements carefully. Moreover, as discussed in the section-by-section analysis under § 226.7, under the final rule fees, including insurance and debt cancellation or suspension coverage charges, will be better highlighted on statements. Consumers who are billed for insurance or coverage they did not purchase may dispute the charge as a billing error. These safeguards are expected to ensure that purchases of credit insurance or debt cancellation or suspension coverage by telephone are voluntary.

At the same time, the amendments should facilitate the convenience to both consumers and creditors of conducting transactions by telephone. The amendments, therefore, have the potential to better inform consumers and further the goals of consumer protection and the informed use of credit for open-end (not home-secured) credit.

Section 226.5 General Disclosure Requirements

Section 226.5 contains format and timing requirements for open-end credit disclosures. In the June 2007 Proposal, the Board proposed, among other changes to § 226.5, to reform the rules governing the disclosure of charges before they are imposed in open-end (not home-secured) credit. Under the proposal, all charges imposed as part of the plan would have had to be disclosed before they were imposed; however, while certain specified charges would have continued to be disclosed in writing in the account-opening disclosures, other charges imposed as part of the plan could have been disclosed orally or in writing at any time before the consumer becomes obligated to pay the charge.

5(a) Form of Disclosures

In the June 2007 Proposal, the Board proposed changes to § 226.5(a) and the associated commentary regarding the standard to provide “clear and conspicuous” disclosures. In addition, in both the June 2007 Proposal and the May 2008 Proposal, the Board proposed changes to § 226.5(a) and the associated commentary with respect to terminology. To improve clarity, the Board also proposed technical revisions to § 226.5(a) in the June 2007 Proposal.

5(a)(1) General

Clear and conspicuous standard. Under TILA Section 122(a), all required disclosures must be “clear and conspicuous.” 15 U.S.C. 1632(a). The Board has interpreted “clear and conspicuous” for most open-end disclosures to mean that they must be in a reasonably understandable form. Comment 5(a)(1)-1. In most cases, this standard does not require that disclosures be segregated from other material or located in any particular place on the disclosure statement, nor that disclosures be in any particular type size. Certain disclosures in credit and charge card applications and solicitations subject to § 226.5a, however, must meet a higher standard of clear and conspicuous due to the importance of the disclosures and the context in which they are given. For these disclosures, the Board has required that they be both in a reasonably understandable form and readily noticeable to the consumer. Comment 5(a)(1)-1. In the June 2007 Proposal, the Board proposed to amend comment 5(a)(1)-1 to expand the list of disclosures that must be both in a reasonably understandable form and readily noticeable to the consumer.

Readily noticeable standard. Certain disclosures in credit and charge card applications and solicitations subject to § 226.5a are currently required to be in a tabular format. In the June 2007 Proposal, the Board proposed to require information be highlighted in a tabular format in additional circumstances, including: In the account-opening disclosures pursuant to § 226.6(b)(4) (adopted as § 226.6(b)(1) below); with checks that access a credit card account pursuant to § 226.9(b)(3); in change-in-terms notices pursuant to § 226.9(c)(2)(iii)(B); and in disclosures when a rate is increased due to delinquency, default or as a penalty pursuant to § 226.9(g)(3)(ii). Because these disclosures would be highlighted in a tabular format similar to the table required with respect to credit card applications and solicitations under § 226.5a, the Board proposed that these disclosures also be in a reasonably understandable form and readily noticeable to the consumer.

As discussed in further detail in the section-by-section analysis to §§ 226.6(b), 226.9(b), 226.9(c), and 226.9(g), many commenters supported the Board's proposal to require certain information to be presented in a tabular format, and consumer testing showed that tabular presentation of disclosures improved consumer attention to, and understanding of, the disclosures. As a result, the Board adopts the proposal to require a tabular format for certain information required by these sections as well as the proposal to amend comment 5(a)(1)-1. Technical amendments proposed under the June 2007 Proposal, including moving the guidance on the meaning of “reasonably understandable form” to comment 5(a)(1)-2, and moving guidance on what constitutes an “integrated document” to comment 5(a)(1)-4, are also adopted.

In the June 2007 Proposal, the Board also proposed to add comment 5(a)(1)-3 to provide guidance on the meaning of the readily noticeable standard. Specifically, the Board proposed that to meet the readily noticeable standard, the following disclosures must be given in a minimum of 10-point font: Disclosures for credit card applications and solicitations under § 226.5a, highlighted account-opening disclosures under § 226.6(b)(4) (adopted as § 226.6(b)(1) below), highlighted disclosures accompanying checks that access a credit card account under Start Printed Page 5269§ 226.9(b)(3), highlighted change-in-terms disclosures under § 226.9(c)(2)(iii)(B), and highlighted disclosures when a rate is increased due to delinquency, default or as a penalty under § 226.9(g)(3)(ii).

The Board received numerous consumer comments that credit card disclosures are in fine print and that disclosures should be given in a larger font. Many consumer and consumer group commenters suggested that disclosures should be given in a minimum 12-point font. Several of these comments also suggested that the 12-point font minimum be applied to disclosures other than the highlighted disclosures proposed to be subjected to the readily noticeable standard as proposed in comment 5(a)(1)-1. Industry commenters suggested that there be no minimum font size or that the minimum should be 9-point font. One industry commenter stated that the 10-point font minimum should not apply to any disclosures on a periodic statement.

The Board adopts comment 5(a)(1)-3 as proposed. As discussed in the June 2007 Proposal, the Board believes that for certain disclosures, special formatting requirements, such as a tabular format and font size requirements, are needed to highlight for consumers the importance and significance of the disclosures. The Board does not believe, however, that all TILA-required disclosures should be subject to this same standard. For certain disclosures, such as periodic statements, requiring all TILA-required disclosures to be highlighted in the same way could be burdensome for creditors because it would cause the disclosures to be longer and more expensive to provide to consumers. In addition, the benefits to consumers would not outweigh such costs. The Board believes that a more balanced approach is to require such highlighting only for certain important disclosures. The Board, thus, declines to extend the minimum font size requirement to disclosures other than those listed in proposed comment 5(a)(1)-3. Similarly, for disclosures that may appear on periodic statements, such as the highlighted change-in-terms disclosures under § 226.9(c)(2)(iii)(B) and highlighted disclosures when a rate is increased due to delinquency, default or as a penalty under § 226.9(g)(3)(ii), the Board believes that the minimum 10-point font size for these disclosures is appropriate because these are disclosures that consumers do not expect to see each billing cycle. Therefore, the Board believes that it is especially important to highlight these disclosures.

As discussed in the June 2007 Proposal, the Board proposed a minimum of 10-point font for these disclosures to be consistent with the approach taken by eight federal agencies (including the Board) in issuing a proposed model form that financial institutions may use to comply with the privacy notice requirements under Section 503 of the Gramm-Leach-Bliley Act. 15 U.S.C. 6803(e); 72 FR 14940, Mar. 29, 2007. Furthermore, in consumer testing conducted for the Board, participants were able to read and notice information in a 10-point font. Therefore, the Board adopts the comment as proposed.

Disclosures subject to the clear and conspicuous standard. The Board proposed comment 5(a)(1)-5 in the June 2007 Proposal to address questions on the types of communications that are subject to the clear and conspicuous standard. The comment would have clarified that all required disclosures and other communications under subpart B of Regulation Z are considered disclosures required to be clear and conspicuous, including the disclosure by a person other than the creditor of a finance charge imposed at the time of honoring a consumer's credit card under § 226.9(d) and any correction notice required to be sent to the consumer under § 226.13(e). No comments were received regarding the proposed comment, and the comment is adopted as proposed.

Oral disclosure. In order to give guidance about the meaning of “clear and conspicuous” for oral disclosures, the Board proposed in the June 2007 Proposal to amend the guidance on what constitutes a “reasonably understandable form,” in proposed comment 5(a)(1)-2. Specifically, the Board proposed that oral disclosures be considered to be in a reasonably understandable form when they are given at a volume and speed sufficient for a consumer to hear and comprehend the disclosures. No comments were received on the Board's proposed guidance concerning clear and conspicuous oral disclosures. Comment 5(a)(1)-2 is adopted as proposed. The Board believes the comment provides necessary guidance not only for the oral disclosure of certain charges under § 226.5(a)(1)(ii), but also for other oral disclosure, such as radio and television advertisements.

5(a)(1)(ii)

Section 226.5(a)(1)(ii) provides that in general, disclosures for open-end plans must be provided in writing and in a retainable form.

Oral disclosures. As discussed in the June 2007 Proposal, the Board proposed that certain charges may be disclosed after account opening and that disclosure of those charges may be provided orally or in writing before the cost is imposed. Many industry commenters supported the Board's proposal to permit oral disclosure of certain charges while consumer group commenters opposed the Board's proposal. Some of these consumer group commenters acknowledged the usefulness of oral disclosure of fees at a time when the consumer is about to incur the fee but suggested that it should be in addition to, but not take the place of, written disclosure.

As the Board discussed in the June 2007 Proposal, in proposing to permit certain charges to be disclosed after account opening, the Board's goal was to better ensure that consumers receive disclosures at a time and in a manner that they would be likely to notice them. As discussed in the June 2007 Proposal, at account opening, written disclosure has obvious merit because it is a time when a consumer must assimilate information that may influence major decisions by the consumer about how, or even whether, to use the account. During the life of an account, however, a consumer will sometimes need to decide whether to purchase a single service from the creditor that may not be central to the consumer's use of the account (for example, the service of providing documentary evidence of transactions). The consumer may become accustomed to purchasing such services by telephone, and will, accordingly, expect to receive an oral disclosure of the charge for the service during the same telephone call. Permitting oral disclosure of charges that are not central to the consumer's use of the account would be consistent with consumer expectations and with the business practices of creditors. For these reasons, the Board adopts its proposal to permit creditors to disclose orally charges not specifically identified in the account-opening table in § 226.6(b)(2) (proposed as § 226.6(b)(4)). Further, the Board adopts its proposal that creditors be provided with the same flexibility when the cost of such a charge changes or is newly introduced, as discussed in the section-by-section analysis to § 226.9(c).

One industry commenter stated its concerns that oral disclosure may make it difficult for creditors to demonstrate compliance with TILA. As the Board discussed in the June 2007 Proposal, creditors may continue to comply with Start Printed Page 5270TILA by providing written disclosures at account opening for all fees. The Board anticipates that creditors will likely continue to identify fees in the account agreement for contract and other reasons even if the regulation does not specifically require creditors to do so.

In technical revisions, as proposed in the June 2007 Proposal, the final rule moves to § 226.5(a)(1)(ii)(A) the current exemption in footnote 7 under § 226.5(a)(1) that disclosures required by § 226.9(d) need not be in writing. Section 226.9(d) requires disclosure when a finance charge is imposed by a person other than the card issuer at the time of a transaction. Specific wording in § 226.5(a)(1)(ii)(A) also has been amended from the proposal in order to provide greater clarity, with no intended substantive change from the June 2007 Proposal. In another technical revision, the substance of footnote 8, regarding disclosures that do not need to be in a retainable form the consumer may keep, is moved to § 226.5(a)(1)(ii)(B) as proposed.

Electronic communication. Commenters on the June 2007 Proposal suggested that for disclosures that need not be provided in writing at account opening, creditors should be permitted to provide disclosures in electronic form, without having to comply with 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., at the time an on-line or other electronic service is used. For example, commenters suggested, if a consumer wishes to make an on-line payment on the account, for which the creditor imposes a fee (which has not previously been disclosed), the creditor should be allowed to disclose the fee electronically, without E-Sign notice and consent, at the time the on-line payment service is requested. Commenters contended that such a provision would not harm consumers and would expedite transactions, and also that it would be consistent with the Board's proposal to permit oral disclosure of such fees.

Under section 101(c) of the E-Sign Act, if a statute or regulation requires that consumer disclosures be provided in writing, certain notice and consent procedures must be followed in order to provide the disclosures in electronic form. Accordingly because the disclosures under § 226.5(a)(1)(ii)(A) are not required to be provided in writing, the Board proposed to add comment 5(a)(1)(ii)(A)-1 in May 2008 to clarify that disclosures not required to be in writing may be provided in writing, orally, or in electronic form without regard to the consumer consent or other provisions of the E-Sign Act.

Most commenters supported the Board's proposal. Some consumer group commenters, however, suggested that the Board require that any electronic disclosure be in a format that can be printed and retained. The Board declines to impose such a requirement. Disclosures that the Board permits to be made orally are not required to be in written or retainable form. The Board believes that the same standard should apply if such disclosures are made electronically. In order to clarify this point, the Board has amended § 226.5(a)(1)(ii)(B) to specify that disclosures that need not be in writing also do not need to be in retainable form. This would encompass both oral and electronic disclosures.

5(a)(1)(iii)

In a final rule addressing electronic disclosures published in November 2007 (November 2007 Final Electronic Disclosure Rule), the Board adopted amendments to § 226.5(a)(1) to clarify that creditors may provide open-end disclosures to consumers in electronic form, subject to compliance with the consumer consent and other applicable provisions of the E-Sign Act. 72 FR 63462, Nov. 9, 2007; 72 FR 71058, Dec. 14, 2007. These amendments also provide that the disclosures required by §§ 226.5a, 226.5b, and 226.16 may be provided to the consumer in electronic form, under the circumstances set forth in those sections, without regard to the consumer consent or other provisions in the E-Sign Act. These amendments have been moved to § 226.5(a)(1)(iii) for organizational purposes.

Furthermore, in May 2008, the Board proposed comment 5(a)(1)(iii)-1 to clarify that the disclosures specified in § 226.5(a)(1)(ii)(A) also may be provided in electronic form without regard to the E-Sign Act when the consumer requests the service in electronic form, such as on a creditor's Web site. Consistent with the Board's decision to adopt comment 5(a)(1)(ii)(A)-1, as discussed above, the Board adopts comment 5(a)(1)(iii)-1.

5(a)(2) Terminology

Consistent terminology. As proposed in June 2007, disclosures required by the open-end provisions of Regulation Z (Subpart B) would have been required to use consistent terminology under proposed § 226.5(a)(2)(i). The Board also proposed comment 5(a)(2)-4 to clarify that terms do not need to be identical but must be close enough in meaning to enable the consumer to relate the disclosures to one another.

The Board received no comments objecting to this proposal. Accordingly, the Board adopts § 226.5(a)(2)(i) and comment 5(a)(2)-4 as proposed. The Board, however, received one comment requesting clarification on the implementation of this provision. Specifically, the commenter pointed out that creditors will likely phase in changes during a transitional period, and as a result, may not be able to align terminology in all their disclosures to consumers during this transitional period. The Board agrees; thus, some disclosures may contain existing terminology required currently under Regulation Z while other disclosures may contain new terminology required in this final rule or the final rules issued by the Board and other federal banking agencies published elsewhere in today's Federal Register. Therefore, during this transitional period, terminology need not be consistent across all disclosures. By the effective date of this rule, however, all disclosures must have consistent terminology.

Terms required to be more conspicuous than others. TILA Section 122(a) requires that the terms “annual percentage rate” and “finance charge” be disclosed more conspicuously than other terms, data, or information. 15 U.S.C. 1632(a). The Board has implemented this provision in current § 226.5(a)(2) by requiring that the terms “finance charge” and “annual percentage rate,” when disclosed with a corresponding amount or percentage rate, be disclosed more conspicuously than any other required disclosure. Currently, the terms do not need to be more conspicuous when used under §§ 226.5a, 226.7(d), 226.9(e), and 226.16. In June 2007, the Board proposed to expand this list to include the account-opening disclosures that would be highlighted under proposed § 226.6(b)(4) (adopted as § 226.6(b)(1) and (b)(2) below), the disclosure of the effective APR under proposed § 226.7(b)(7) under one approach, disclosures on checks that access a credit card account under proposed § 226.9(b)(3), the information on change-in-terms notices that would be highlighted under proposed § 226.9(c)(2)(iii)(B), and the disclosures given when a rate is increased due to delinquency, default or as a penalty under proposed § 226.9(g)(3)(ii). In addition, the Board sought comment in the June 2007 Proposal on ways to address criticism by the United States Government Accountability Office (GAO) that credit card disclosure Start Printed Page 5271documents “unnecessarily emphasized specific terms.” [13]

As discussed in the June 2007 Proposal, the Board agreed with the GAO's assessment that overemphasis of these terms may make disclosures more difficult for consumers to read. One approach the Board had considered to remedy this problem was to prohibit the terms “finance charge” and “annual percentage rate” from being disclosed more conspicuously than other required disclosures except when the regulation so requires. However, the Board acknowledged in the June 2007 Proposal that this approach could produce unintended consequences. Commenters agreed with the Board.

Many industry commenters suggested that in light of the Board's requirement to disclose APRs and certain other finance charges at account-opening and at other times in the life of the account in a tabular format with a minimum 10-point font size pursuant to comment 5(a)(1)-3 (or 16-point font size as required for the APR for purchases under §§ 226.5a(b)(1) and 226.6(b)(2)), requiring the terms “annual percentage rate” and “finance charge” to be more conspicuous than other disclosures to draw attention to the terms was not necessary. Furthermore, commenters pointed out that the Board is no longer requiring use of the term “finance charge” in TILA disclosures to consumers for open-end (not home-secured) plans, and in fact, is requiring creditors to disclose finance charges as either “fees” or “interest” on periodic statements. As a result, creditors would, in many cases, no longer have the term “finance charge” to make more conspicuous than other terms.

For the reasons discussed above, the Board is eliminating for open-end (not home-secured) plans the requirement to disclose “annual percentage rate” and “finance charge” more conspicuously, using its authority under Section 105(a) of TILA to make “such adjustments and exceptions for any class of transaction as in the judgment of the Board are necessary or proper to effectuate the purposes of the title, to prevent circumvention or evasion thereof, or to facilitate compliance therewith.” 15 U.S.C. 1604(a). Therefore, the requirement in § 226.5(a)(2)(ii) that “annual percentage rate” and “finance charge” be disclosed more conspicuously than any other required disclosures when disclosed with a corresponding amount or percentage rate applies only to home-equity plans subject to § 226.5b. As is currently the case, even for home-equity plans subject to § 226.5b, these terms need not be more conspicuous when used under § 226.7(a)(4) on periodic statements and under section § 226.16 in advertisements. Other exceptions currently in footnote 9 to § 226.5(a)(2), which reference §§ 226.5a and 226.9(e), have been deleted as unnecessary since these disclosures do not apply to home-equity plans subject to § 226.5b. The requirement, as it applies to home-equity plans subject to § 226.5b, may be re-evaluated when the Board conducts its review of the regulations related to home-equity plans.

Use of the term “grace period”. In the June 2007 Proposal, the Board proposed § 226.5(a)(2)(iii) to require that the term “grace period” be used, as applicable, in any disclosure that must be in a tabular format under proposed § 226.5(a)(3). The Board's proposal was meant to make other disclosures consistent with credit card applications and solicitations where use of the term “grace period” is required by TILA Section 122(c)(2)(C) and § 226.5a(a)(2)(iii). 15 U.S.C. 1632(c)(2)(C). Based on comments received as part of the June 2007 Proposal and further consumer testing, the Board proposed in the May 2008 Proposal to delete § 226.5a(a)(2)(ii) and withdraw the requirement to use the term “grace period” in proposed § 226.5(a)(2)(iii).

As discussed in the section-by-section analysis to § 226.5a(b)(5), the Board is exercising its authority under TILA Sections 105(a) and (f), and TILA Section 127(c)(5) to delete the requirement to use the term “grace period” in the table required by § 226.5a. 15 U.S.C. 1604(a) and (f), 1637(c)(5). The purpose of the proposed requirement was to provide consistency for headings in a tabular summary. Accordingly, the Board withdraws the requirement to use the term “grace period” in proposed § 226.5(a)(2)(iii).

Other required terminology. The Board proposed § 226.5(a)(2)(iii) in the June 2007 Proposal to provide that if disclosures are required to be presented in a tabular format, the term “penalty APR” shall be used to describe an increased rate that may result because of the occurrence of one or more specific events specified in the account agreement, such as a late payment or an extension of credit that exceeds the credit limit. Therefore, the term “penalty APR” would have been required when creditors provide information about penalty rates in the table given with credit card applications and solicitations under § 226.5a, in the summary table given at account opening under § 226.6(b)(1) and (b)(2) (proposed as § 226.6(b)(4)), if the penalty rate is changing, in the summary table given on or with a change-in-terms notice under § 226.9(c)(2)(iii)(B), or if a penalty rate is triggered, in the table given under § 226.9(g)(3)(ii).

Commenters were generally supportive of the Board's efforts to develop some common terminology and the Board's proposal to require use of the term “penalty APR” to describe an increased rate resulting from the occurrence of one or more specific events. Some industry commenters, however, urged the Board to reconsider requiring use of the term “penalty APR,” especially when used to describe the loss of an introductory rate or promotional rate. As discussed in the June 2007 Proposal, the term “penalty APR” proved the most successful of the terms tested with participants in the Board's consumer testing efforts. In the interest of uniformity, the Board adopts the provision as proposed, with one exception for promotional rates. To prevent consumer confusion over use of the term “penalty rate” to describe the loss of a promotional rate where the rate applied is the same or is calculated in the same way as the rate that would have applied at the end of the promotional period, the Board is amending proposed § 226.5(a)(2)(iii) to provide that the term “penalty APR” need not be used in reference to the APR that applies with the loss of a promotional rate, provided the APR that applies is no greater than the APR that would have applied at the end of the promotional period; or if the APR that applies is a variable rate, the APR is calculated using the same index and margin as would have been used to calculate the APR that would have applied at the end of the promotional period. In addition, the Board is also modifying the required disclosure related to the loss of an introductory rate as discussed below in the section-by-section analysis to § 226.5a, which should also address these concerns.

Under the June 2007 Proposal, proposed § 226.5(a)(2)(iii) also would have provided that if credit insurance or debt cancellation or debt suspension coverage is required as part of the plan and information about that coverage is required to be disclosed in a tabular format, the term “required” shall be used in describing the coverage and the program shall be identified by its name. No comments were received on this provision, and the provision is adopted as proposed.Start Printed Page 5272

Consistent with the Board's proposal under the advertising rules in the June 2007 Proposal, proposed § 226.5(a)(2)(iii), would have provided that if required to be disclosed in a tabular format, an APR may be described as “fixed,” or using any similar term, only if that rate will remain in effect unconditionally until the expiration of a specified time period. If no time period is specified, then the term “fixed,” or any similar term, may not be used to describe the rate unless the rate remains in effect unconditionally until the plan is closed. The final rule adopts § 226.5(a)(2)(iii) as proposed, consistent with the Board's decision with respect to use of the term “fixed” in describing an APR stated in an advertisement, as further discussed in the section-by-section analysis to § 226.16(f) below.

5(a)(3) Specific Formats

As proposed in June 2007, for clarity, the special rules regarding the specific format for disclosures under § 226.5a for credit and charge card applications and solicitations and § 226.5b for home-equity plans have been consolidated in § 226.5(a)(3) as proposed. In addition, as discussed below, the Board is requiring certain account-opening disclosures, periodic statement disclosures and subsequent disclosures, such as change-in-terms disclosures, to be provided in specific formats under § 226.6(b)(1); § 226.7(b)(6) and (b)(13); and § 226.9(b), (c) and (g). The final rule includes these special format rules in § 226.5(a)(3), as proposed in the June 2007 Proposal, with one exception. Because the Board is not requiring disclosure of the effective APR pursuant to § 226.7(b)(7), as discussed further in the general discussion on the effective APR in the section-by-section analysis to § 226.7(b), the proposed special format rule relating to the effective APR is not contained in the final rule.

5(b) Time of Disclosures

5(b)(1) Account-opening Disclosures

Creditors are required to make certain disclosures to consumers “before opening any account.” TILA Section 127(a) (15 U.S.C. 1637(a)). Under § 226.5(b)(1), these disclosures, as identified in § 226.6, must be furnished “before the first transaction is made under the plan,” which the Board has interpreted as “before the consumer becomes obligated on the plan.” Comment 5(b)(1)-1. There are limited circumstances under which creditors may provide the disclosures required by § 226.6 after the first transaction, and the Board proposed in the June 2007 Proposal to move this guidance from comment 5(b)(1)-1 to proposed § 226.5(b)(1)(iii)-(v). In the May 2008 Proposal, the Board proposed additional revisions to § 226.5(b)(1)(iv) regarding membership fees.

The Board also proposed revisions in the June 2007 Proposal to the timing rules for disclosing certain costs imposed on an open-end (not home-secured) plan and in connection with certain transactions conducted by telephone. Furthermore, the Board proposed additional guidance on providing timely disclosures when the first transaction is a balance transfer. Finally, technical revisions were proposed to change references from “initial” disclosures required by § 226.6 to “account-opening” disclosures, without any intended substantive change.

5(b)(1)(i) General Rule

Creditors generally must provide the account-opening disclosures before the first transaction is made under the plan. The renumbering of this rule as § 226.5(b)(1)(i) is adopted as proposed in the June 2007 Proposal.

Balance transfers. Under existing commentary and consistent with the general rule on account-opening disclosures, creditors must provide account-opening disclosures before a balance transfer occurs. In the June 2007 Proposal, the Board proposed to update this commentary to reflect current business practices. As the Board discussed in the June 2007 Proposal, some creditors offer balance transfers for which the APRs that may apply are disclosed as a range, depending on the consumer's creditworthiness. Consumers who respond to such an offer, and are approved for the transfer later receive account-opening disclosures, including the actual APR that will apply to the transferred balance. The Board proposed to clarify in comment 5(b)(1)(i)-5 that a creditor must provide disclosures sufficiently in advance of the balance transfer to allow the consumer to review and respond to the terms that will apply to the transfer, including to contact the creditor before the balance is transferred and decline the transfer. The Board, however, did not propose a specific time period that would be considered “sufficiently in advance.”

Industry commenters indicated that following the Board's guidance would cause delays in making transfers, which would be contrary to consumer expectations that these transfers be effected quickly. A consumer group commenter suggested that requiring the APR that will apply, as opposed to allowing a range, to be disclosed on the application or solicitation would be simpler. The Board notes that creditors may, at their option, provide account-opening disclosures, including the specific APRs, along with the balance transfer offer and account application to avoid delaying the transfer.

The Board believes that, consistent with the general rule, consumers should receive account-opening information, including the APR that will apply, before the first transaction, which is the balance transfer. Comment 5(b)(1)(i)-5 is adopted as proposed, and states that a creditor must provide the consumer with the annual percentage rate (along with the fees and other required disclosures) that would apply to the balance transfer in time for the consumer to contact the creditor and withdraw the request. The Board has made one revision to comment 5(b)(1)(i)-5 as adopted. In response to commenters' requests for additional guidance, comment 5(b)(1)(i)-5 provides a safe harbor that may be used by creditors that permit a consumer to decline the balance transfer by telephone. In such cases, a creditor has provided sufficient time to the consumer to contact the creditor and withdraw the request if the creditor does not effect the balance transfer until 10 days after the creditor has sent out information, assuming the consumer has not canceled the transaction.

Disclosure before the first transaction. Comment 5(b)(1)-1, renumbered as comment 5(b)(1)(i)-1 in the June 2007 Proposal, addresses a creditor's general duty to provide account-opening disclosures “before the first transaction.” In the May 2008 Proposal, the comment was proposed to be reorganized for clarity to provide existing examples of “first transactions” related to purchases and cash advances. Other guidance in current comment 5(b)(1)-1 was proposed to be amended and moved to proposed § 226.5(b)(1)(iv) and associated commentary in the June 2007 and May 2008 Proposals, as discussed below in the section-by-section analysis to § 226.5(b)(1)(iv).

The Board did not receive comment on the proposed reorganization but received many comments on the guidance that was amended and moved to proposed § 226.5(b)(1)(iv). These comments are discussed below in the section-by-section analysis to § 226.5(b)(1)(iv). Some consumer group commenters noted that the Board's reorganization of this comment made them realize that they opposed current guidance on cash advances in comment 5(b)(1)-1 (now renumbered as comment 5(b)(1)(i)-1), which permits creditors to Start Printed Page 5273provide account-opening disclosures along with the first cash advance check as long as the consumer can return the cash advance without obligation. The Board continues to believe that this approach is appropriate because of the lack of harm to consumers. Therefore, the Board declines to amend its current guidance on cash advances in comment 5(b)(1)(i)-1, which is renumbered as proposed without substantive change.

5(b)(1)(ii) Charges Imposed as Part of an Open-End (Not Home-Secured) Plan

Under the June 2007 Proposal, the Board proposed in new § 226.5(b)(1)(ii) and comment 5(b)(1)(ii)-1 to except charges imposed as part of an open-end (not home-secured) plan, other than those specified in proposed § 226.6(b)(4)(iii) (adopted as § 226.6(b)(2)), from the requirement to disclose charges before the first transaction. Creditors would have been permitted, at their option, to disclose those charges either before the first transaction or later, so long as they were disclosed before the cost was imposed. The current rule requiring the disclosure of costs before the first transaction (in writing and in a retainable form) would have continued to apply to certain specified costs. These costs are fees of which consumers should be aware before using the account, such as annual or late payment fees, or fees that the creditor would not otherwise have an opportunity to disclose before the fee is triggered, such as a fee for using a cash advance check during the first billing cycle.

Numerous industry commenters supported the Board's proposal. Consumer group commenters, on the other hand, opposed the Board's proposal, arguing that all charges should be required to be disclosed at account opening before the first transaction. While consumer group commenters acknowledged that disclosure of the amount of the fee at a time when the consumer is about to incur it is a good business practice, the commenters indicated that the Board's proposal would encourage creditors to create new fees that are not specified to be given in writing at account-opening. The final rule adopts § 226.5(b)(1)(ii) and comment 5(b)(1)(ii)-1 largely as proposed with some clarifying amendments and additional illustrative examples.

As the Board discussed in the June 2007 Proposal, the charges covered by the proposed exception from disclosure at account opening are triggered by events or transactions that may take place months, or even years, into the life of the account, when the consumer may not reasonably be expected to recall the amount of the charge from the account-opening disclosure, nor readily to find or obtain a copy of the account-opening disclosure or most recent change-in-terms notice. Requiring such charges to be disclosed before account opening may not provide a meaningful benefit to consumers in the form of useful information or protection. The rule would allow flexibility in the timing of certain cost disclosures by permitting creditors to disclose such charges—orally or in writing—before the fee is imposed. As a result, creditors would be disclosing the charge when the consumer is deciding whether to take the action that would trigger the charge, such as purchasing a service, which is a time at which consumers would likely notice the charge. The Board intends to continue monitoring credit card fees and practices, and could add additional fees to the specified costs that must be disclosed in the account-opening table before the first transaction, as appropriate.

In addition, as discussed in the June 2007 Proposal, the Board believes the exception may facilitate compliance by creditors. Determining whether charges are a finance charge or an other charge or not covered by TILA (and thus whether advance notice is required) can be challenging, and the rule reduces these uncertainties and risks. The creditor will not have to determine whether a charge is a finance charge or other charge or not covered by TILA, so long as the creditor discloses the charge, orally or in writing, before the consumer becomes obligated to pay it, which creditors, in general, already do for business and other legal reasons.

Electronic Disclosures. In the May 2008 Proposal, the Board proposed to revise comment 5(b)(1)(ii)-1 to clarify that for disclosures not required to be provided in writing at account opening, electronic disclosure, without regard to the E-Sign Act notice and consent requirements, is a permissible alternative to oral or written disclosure, when a consumer requests a service in electronic form, such as on a creditor's Web site. As discussed in the section-by-section analysis to comment 5(a)(1)(ii)(A)-1 above, the Board received many comments in support of permitting electronic disclosure, without regard to the E-Sign Act notice and consent requirements, for disclosures that are not required to be provided in writing at account opening. Some consumer group commenters objected to allowing any electronic disclosure without the protections of the E-Sign Act. As discussed in the May 2008 Proposal, since the disclosure of charges imposed as part of an open-end (not home-secured) plan, other than those specified in § 226.6(b)(2), are not required to be provided in writing, the Board believes that E-Sign notice and consent requirements do not apply when the consumer requests the service in electronic form. The revision to comment 5(b)(1)(ii)-1 proposed in May 2008 is adopted as proposed.

5(b)(1)(iii) Telephone Purchases

In the June 2007 Proposal, the Board proposed § 226.5(b)(1)(iii) to address situations where a consumer calls a merchant to order goods by telephone and concurrently establishes a new open-end credit plan to finance that purchase. Because TILA account-opening disclosures must be provided before the first transaction under the current timing rule, merchants must delay the shipment of goods until a consumer has received the disclosures. Consumers who want goods shipped immediately may use another method to finance the purchase, but they may lose any incentives the merchant may offer with opening a new plan, such as discounted purchase prices or promotional payment plans. The Board's proposal was meant to provide additional flexibility to merchants and consumers in such cases.

Under proposed § 226.5(b)(1)(iii), merchants that established an open-end plan in connection with a telephone purchase of goods initiated by the consumer would have been able to provide account-opening disclosures as soon as reasonably practicable after the first transaction if the merchant (1) permits consumers to return any goods financed under the plan at the time the plan is opened and provides the consumer sufficient time to reject the plan and return the items free of cost after receiving the written disclosures required by § 226.6, and (2) informs the consumer about the return policy as a part of the offer to finance the purchase. Alternatively, the merchant would have been able to delay shipping the goods until after the account disclosures have been provided.

The Board also proposed comment 5(b)(1)(iii)-1 to provide that a return policy is of sufficient duration if the consumer is likely to receive the disclosures and have sufficient time to decide about the financing plan. A return policy includes returns via the United States Postal Service for goods delivered by private couriers. The proposed commentary also clarified that retailers' policies regarding the return of merchandise need not provide a right to return goods if the consumer consumes or damages the goods. As discussed in Start Printed Page 5274the June 2007 Proposal, the regulation and commentary would not have affected merchandise purchased after the plan was initially established or purchased by another means of financing, such as a credit card issued by another creditor.

Consumer group commenters opposed the proposal arguing that providing a right to cancel is much less protective of consumers' rights than requiring that a consumer receive disclosures before goods are shipped. As discussed above and in the June 2007 Proposal, the Board believes proposed § 226.5(b)(1)(iii) would provide consumers with greater flexibility. Consumers may have their goods shipped immediately, and in some cases, take advantage of merchant incentives, such as discounted purchase prices or promotional payment plans, but still retain the right to reject the plan, without cost, after receiving account-opening disclosures.

Industry commenters were supportive of the Board's proposal, but several commenters asked for additional extensions or clarifications to the policy. First, commenters requested clarification that the exception is available for third-party creditors that are not retailers, arguing that few merchants are themselves creditors and that the same flexibility should be available to creditors offering private label or co-brand credit arrangements in connection with the purchase of a merchant's goods. The Board agrees, and revisions have been made to § 226.5(b)(1)(iii) accordingly. Industry commenters also suggested that the provision in § 226.5(b)(1)(iii) be available not only for telephone purchases “initiated by the consumer,” but also telephone purchases where the merchant contacts the consumer. Outbound calls to a consumer may raise many telemarketing issues and concerns about questionable marketing tactics. As a result, the Board declines to extend § 226.5(b)(1)(iii) to telephone purchases that have not been initiated by the consumer.

A few industry commenters also suggested that this exception be available for all creditors opening an account by telephone, regardless of whether it is in connection with the purchase of goods or not. These commenters stated that for certain consumers, such as active duty military members, immediate use of the account after it is opened may be necessary to take care of personal or family needs. The Board notes that the exception under § 226.5(b)(1)(iii) turns on the ability of consumers to return any goods financed under the plan free of cost after receiving the written disclosures required by § 226.6. In the case of an account opened by telephone that is not in connection with the purchase of goods from the creditor or an affiliated third party, a creditor would likely have no way to reverse any purchases or other transactions made before the disclosures required by § 226.6 are received by the consumer should the consumer wish to reject the plan if the purchase was made with an unaffiliated third party. Thus, the Board declines to extend § 226.5(b)(1)(iii) to accounts opened by telephone that are not in connection with the contemporaneous purchase of goods.

The Board also received comments requesting that § 226.5(b)(1)(iii) be made applicable to the on-line purchase of goods or that merchants have the option to refer consumers purchasing by telephone to a Web site to obtain disclosures required by § 226.6. This issue has been addressed in the November 2007 Final Electronic Disclosure Rule. The E-Sign Act clearly states that any consumer to whom written disclosures are required to be given must affirmatively consent to the use of electronic disclosures before such disclosures can be used in place of paper disclosures. The November 2007 Final Electronic Disclosure Rule created certain instances where E-Sign consent does not need to be obtained before disclosures may be provided electronically. Specifically, open-end credit disclosures required by §§ 226.5a (credit card applications and solicitations), 226.5b (HELOC applications), and 226.16 (open-end credit advertising) may be provided to the consumer in electronic form, under the circumstances set forth in those sections, without regard to the consumer consent or other provisions of the E-Sign Act. Disclosures required by § 226.6, however, may only be provided electronically if the creditor obtains consumer consent consistent with the E-Sign Act. 72 FR 63462, Nov. 9, 2007; 72 FR 71058, Dec. 14, 2007.

The Board also received comments requesting clarification of the return policy; in particular, whether this would cause creditors to provide those consumers who open a new credit plan concurrently with the purchase of goods over the telephone with a different return policy from other customers. For example, assume a merchant's customers are normally charged a restocking fee for returning goods, and the merchant does not wish to wait until the disclosures under § 226.6 are sent out before shipping the goods. A commenter asked whether this means that a customer opening a new credit plan concurrently with the purchase of goods over the telephone is exempted from paying that restocking fee if the goods are returned. As proposed in the June 2007 Proposal, the final rule requires that in order to use the exception from providing disclosures under § 226.6 before the consumer becomes obligated on the account, the consumer must have sufficient time to reject the plan and return the items free of cost after receiving the written disclosures required by § 226.6. This means that there can be no cost to the consumer for returning the goods even if for the merchant's other customers, a fee is normally charged. As the Board discussed in the June 2007 Proposal, merchants always have the option to delay shipping of the goods until after the disclosures are given if the merchant does not want to maintain a potentially different return policy for consumers opening a new credit plan concurrently with the purchase of goods over the telephone.

Commenters also requested guidance on what would be considered “sufficient time” for the consumer to reject the plan and return the goods. Because the amount of time that would be deemed to be sufficient would depend on the nature of the goods and the transaction, and the locations of the various parties to the transaction, the Board does not believe that it is appropriate to specify a particular time period applicable to all transactions.

The Board also received requests for other clarifications. One commenter suggested that the Board expressly acknowledge that if the consumer rejects the credit plan, the consumer may substitute another reasonable form of payment acceptable to the merchant other than the credit plan to pay for the goods in full. This clarification has been included in comment 5(b)(1)(iii)-1. Furthermore, this commenter also suggested that the exception in comment 5(b)(1)(iii)-1 allowing for no return policy for consumed or damaged goods should be revised to expressly cover installed appliances or fixtures, provided a reasonable repair or replacement policy covers defective goods or installations. The Board concurs and changes have been made to comment 5(b)(1)(iii)-1 accordingly.

5(b)(1)(iv) Membership Fees

TILA Section 127(a) requires creditors to provide specified disclosures “before opening any account.” 15 U.S.C. 1637(a). Section 226.5(b)(1) requires these disclosures (identified in § 226.6) to be furnished before the first transaction is made under the plan. Currently and under the June 2007 and Start Printed Page 5275May 2008 Proposals, creditors may collect or obtain the consumer's promise to pay a membership fee before the account-opening disclosures are provided, if the consumer can reject the plan after receiving the disclosures. If a consumer rejects the plan, the creditor must promptly refund the fee if it has been paid or take other action necessary to ensure the consumer is not obligated to pay the fee. In the June 2007 Proposal, guidance currently in comment 5(b)(1)-1 about creditors' ability to assess certain membership fees before consumers receive the account-opening disclosures was moved to § 226.5(b)(1)(iv).

In the June 2007 and May 2008 Proposals, the Board proposed clarifications to the consumer's right not to pay membership fees that were assessed or agreed to be paid before the consumer received account-opening disclosures, if a consumer rejects a plan after receiving the account-opening disclosures. In the May 2008 Proposal, the Board proposed in revised § 226.5(b)(1)(iv) and new comment 5(b)(1)(iv)-1 that “membership fee” has the same meaning as fees for issuance or availability of a credit or charge card under § 226.5a(b)(2), including annual or other periodic fees, or “start-up” fees, such as account-opening fees. The Board also proposed in the May 2008 Proposal under revised § 226.5(b)(1)(iv) to clarify that if a consumer rejects an open-end (not home-secured) plan as permitted under that provision, consumers are not obligated to pay any membership fee, or any other fee or charge (other than an application fee that is charged to all applicants whether or not they receive the credit).

Some consumer group commenters opposed the Board's clarification on the term “membership fee” and argued that the definition could expand the ability of creditors to charge additional types of fees prior to sending out account-opening disclosures. These consumer group commenters, however, supported that the Board's clarification could allow for a greater number of fees that consumers would not be obligated to pay should they reject the plan. One industry commenter opposed the Board's reference to annual fees as “membership fees.” The Board notes that the term “membership fee” is not currently defined, and, therefore, there is little guidance as to what fees would be covered by that term. As discussed in the May 2008 Proposal, the Board proposed that “membership fee” have the same meaning as fees for issuance or availability under § 226.5a(b)(2) for consistency and ease of compliance. The Board continues to believe this clarification is warranted, and § 226.5(b)(1)(iv) is adopted generally as proposed, with one change discussed below.

The final rule expands the types of fees for which consumers must not be obligated if they reject an open-end (not home-secured) plan as permitted under § 226.5(b)(1)(iv) to include application fees charged to all applicants. The Board believes that it is important that consumers have the opportunity, after receiving the account-opening disclosures which set forth the fees and other charges that will be applicable to the account, to reject the plan without being obligated for any charges. It is the Board's understanding that some creditors may debit application fees to the account, and thus these fees should be treated in the same manner as other fees debited at account opening. Conforming changes have been made to § 226.5a(d)(2).

Furthermore, in May 2008, the Board proposed to revise and move to comment 5(b)(1)(iv)-2, guidance in current comment 5(b)(1)-1 (renumbered as comment 5(b)(1)(i)-1 in the June 2007 Proposal) regarding instances when a creditor may consider an account not rejected. In the May 2008 Proposal, the Board proposed to revise the guidance to provide that a consumer who has received the disclosures and uses the account, or makes a payment on the account after receiving a billing statement, is deemed not to have rejected the plan. In the May 2008 Proposal, the Board also proposed to provide a “safe harbor” that a creditor may deem the plan to be rejected if, 60 days after the creditor mailed the account-opening disclosures, the consumer has not used the account or made a payment on the account.

The Board received mixed comments on the 60 day “safe harbor” proposal. Some industry commenters opposed the “safe harbor” citing operational complexity and uncertainty in account administration procedures. Some consumer group commenters and an industry trade group commenter supported the Board's proposal. These commenters also suggested that the Board either require or encourage as a “best practice” a notice to be given to consumers stating that inactivity for 60 days will cause an account to be closed. After considering comments on the proposal, the Board is amending comment 5(b)(1)(iv)-2 to delete the 60 day “safe harbor” because the Board believes the potential confusion this guidance may cause and the operational difficulties the guidance could impose outweigh the benefits of the guidance.

In the June 2007 Proposal, the Board proposed to provide guidance in comment 5(b)(1)(i)-1 on what it means to “use” the account. The June 2007 proposed clarification was intended to address concerns about some subprime card accounts that assess a large number of fees at account opening. In the May 2008 Proposal, this provision was moved to new proposed comment 5(b)(1)(iv)-3 and revised to clarify that a consumer does not “use” an account when the creditor assesses fees to the account (such as start-up fees or fees associated with credit insurance or debt cancellation or suspension programs agreed to as a part of the application and before the consumer receives account-opening disclosures). The May 2008 Proposal also clarified in comment 5(b)(1)(iv)-3 that the consumer does not “use” an account when, for example, a creditor sends a billing statement with start-up fees, there is no other activity on the account, the consumer does not pay the fees, and the creditor subsequently assesses a late fee or interest on the unpaid fee balances. In the May 2008 Proposal, the Board also proposed to add that a consumer is not considered to “use” an account when, for example, a consumer receives a credit card in the mail and calls to activate the card for security purposes.

The Board received several comments regarding the guidance on whether activation of the card constitutes “use” of the account. Some commenters supported the Board's proposed guidance. Other commenters opposed the proposal noting that a consumer will have received account-opening disclosures at the time the consumer activates the card. These commenters also stated that when a consumer affirmatively activates a card, it should constitute acceptance of the account. Some consumer group commenters suggested that the Board also include guidance that payment of fees on the first billing statement should not constitute acceptance of the account and that consumers should only be considered to have used an account by affirmatively using the credit, such as by making a purchase or obtaining a cash advance.

The Board is adopting comment 5(b)(1)(iv)-3 as proposed with one modification. The Board believes that what constitutes “use” of the account should be consistent with consumer understanding of the term. A consumer is likely to think he or she has not “used” the account if the only action he or she has taken is to activate the account. Conversely, a consumer who has made a purchase or a payment on the account would likely believe that he Start Printed Page 5276or she is “using” the account. The Board, however, is amending the comment to delete the phrase “such as for security purposes” in relation to the discussion about card activation. One industry commenter, while supportive of the Board's general guidance that activation alone does not indicate a consumer's acceptance of a credit plan, was concerned about any suggestion that a customer should activate, for security purposes, an account that a consumer does not intend to use.

In technical revisions, comment 5(b)(1)-1, renumbered as comment 5(b)(1)(i)-1 in the June 2007 Proposal, currently addresses a creditor's general duty to provide account-opening disclosures “before the first transaction” and provides that HELOCs are not subject to the prohibition on the payment of fees other than application or refundable membership fees before account-opening disclosures are provided. See § 226.5b(h) regarding limitations on the collection of fees. In the May 2008 Proposal, the existing guidance about HELOCs was moved to revised § 226.5(b)(1)(iv) and a new comment 5(b)(1)(iv)-4 for clarity. The Board received no comment on the proposed reorganization, and the reorganization of the guidance regarding HELOCs is adopted as proposed.

5(b)(2) Periodic Statements

TILA Sections 127(b) and 163 set forth the timing requirements for providing periodic statements for open-end credit accounts. 15 U.S.C. 1637(b) and 1666b. In the June 2007 Proposal, the Board proposed to retain the existing regulation and commentary related to the timing requirements for providing periodic statements for open-end credit accounts, with a few changes and clarifications as discussed below.

5(b)(2)(i)

TILA Section 127(b) establishes that creditors generally must send periodic statements at the end of billing cycles in which there is an outstanding balance or a finance charge is imposed. 15 U.S.C. 1637(b). Section 226.5(b)(2)(i) provides for a number of exceptions to a creditor's duty to send periodic statements.

De minimis amounts. Under the current regulation, creditors need not send periodic statements if an account balance, whether debit or credit, is $1 or less and no finance charge is imposed. The Board proposed no changes to and received no comments on this provision. As a result, the Board retains this provision as currently written.

Uncollectible accounts. Creditors are not required to send periodic statements on accounts the creditor has deemed “uncollectible,” which is not specifically defined. In the June 2007 Proposal, the Board sought comment on whether guidance on the term “uncollectible” would be helpful.

Commenters to the June 2007 Proposal stated that guidance would be helpful but differed on what that guidance should be. Several consumer group commenters suggested that an account should be deemed “uncollectible” only when a creditor has ceased collection efforts, either directly or through a third party. These commenters stated that for a consumer whose account is delinquent but still subject to collection, a periodic statement is important to show the consumer when and how much interest is accruing and whether the consumer's payments have been credited. Industry commenters suggested instead that an account should be deemed “uncollectible” once the account is charged off in accordance with loan-loss provisions.

Based on the plain language of the term “uncollectible” and the importance of periodic statements to show consumers when interest accrues or fees are assessed on the account, the Board is adopting new comment 5(b)(2)(i)-3 (accordingly, as discussed below comment 5(b)(2)(i)-3 as proposed in the June 2007 Proposal is adopted as 5(b)(2)(i)-4). The comment clarifies that an account is “uncollectible” when a creditor has ceased collection efforts, either directly or through a third party.

In addition, if an account has been charged off in accordance with loan-loss provisions and the creditor no longer accrues new interest or charges new fees on the account, the Board believes that the value of a periodic statement does not justify the cost of providing the disclosure because the amount of a consumer's obligation will not be increasing. As a result, the Board is modifying § 226.5(b)(2)(i) to state that in such cases, the creditor also need not provide a periodic statement. However, this provision does not apply if a creditor has charged off the account but continues to accrue new interest or charge new fees.

Instituting collection proceedings. Creditors need not send statements if “delinquency collection proceedings have been instituted” under § 226.5(b)(2)(i). In the June 2007 Proposal, the Board proposed to add comment 5(b)(2)(i)-3 to clarify that a collection proceeding entails a filing of a court action or other adjudicatory process with a third party, and not merely assigning the debt to a debt collector. Several consumer groups strongly supported the Board's proposal while industry commenters recommended that the Board provide greater flexibility in interpreting when delinquency collection proceedings have been instituted. In particular, an industry commenter stated that the minimum payment warning could conflict with the creditor's collection demand and create consumer confusion. Nonetheless, as discussed in more detail in the section-by-section analysis to § 226.7(b)(12), the minimum payment disclosure is not required where a fixed repayment period has been specified in the account agreement, such as where the account has been closed due to delinquency and the required monthly payment has been reduced or the balance decreased to accommodate a fixed payment for a fixed period of time designed to pay off the outstanding balance.

The Board believes that clarifying that a collection proceeding entails the filing of a court action or other adjudicatory process with a third party provides clear and uniform guidance to creditors as to when periodic statements are no longer required. Accordingly, the Board adopts the comment as proposed, though for organizational purposes, the comment is renumbered as comment 5(b)(2)(i)-4.

Workout arrangements. Comment 5(b)(2)(i)-2 provides that creditors must continue to comply with all the rules for open-end credit, including sending a periodic statement, when credit privileges end, such as when a consumer stops taking draws and pays off the outstanding balance over time. Another comment provides that “if an open-end credit account is converted to a closed-end transaction under a written agreement with the consumer, the creditor must provide a set of closed-end credit disclosures before consummation of the closed-end transaction.” Comment 17(b)-2.

To provide flexibility and reduce burden and uncertainty, the Board proposed to clarify in the June 2007 Proposal that creditors entering into workout agreements for delinquent open-end plans without converting the debt to a closed-end transaction comply with the regulation if creditors continue to comply with the open-end provisions for the work-out period. The Board received only one comment concerning workout arrangements, which supported the Board's proposal. Therefore, amendments to comment 5(b)(2)(i)-2 are adopted as proposed.

5(b)(2)(ii)

TILA Section 163(a) requires creditors that provide a grace period to send statements at least 14 days before the Start Printed Page 5277grace period ends. 15 U.S.C. 1666b(a). The 14-day period runs from the date creditors mail their statements, not from the end of the statement period nor from the date consumers receive their statements. As discussed in the June 2007 Proposal, the Board has anecdotal evidence that some consumers receive statements relatively close to the payment due date, which leaves consumers with little time to review the statement before payment must be mailed to meet the due date. As a result, the Board requested comment on (1) whether it should recommend to Congress that the 14-day period be increased to a longer time period, so that consumers will have additional time to receive their statements and mail their payments to ensure that payments will be received by the due date, and (2) if so, what time period the Board should recommend to Congress.

The Board received numerous comments on this issue. Consumer and consumer group commenters complained that the time period from when consumers received their statements to the payment due date was too short, causing consumers often to incur late fees and lose the benefit of the grace period, and creditors to raise consumers' rates to the penalty rate. Industry commenters, on the other hand, stated that the 14-day period under TILA Section 163(a) was appropriate and that the Board should not recommend a longer time frame to Congress.

Based in part on these comments, the Board and other federal banking agencies proposed in May 2008 to prohibit institutions from treating a payment as late for any purpose unless the consumer has been provided a reasonable amount of time to make that payment. Treating a payment as late for any purpose includes increasing the APR as a penalty, reporting the consumer as delinquent to a credit reporting agency, or assessing a late or any other fee based on the consumer's failure to make payment within the amount of time provided. 73 FR 28904, May 19, 2008. The Board is opting not to address the 14-day period under TILA Section 163(a) and is retaining § 226.5(b)(2)(ii) as currently written. Consumer comment letters mainly focused on the due date with respect to having their payments credited in time to avoid a late fee and an increase in their APR to the penalty rate and not with the loss of a grace period. Therefore, the Board has chosen to address these concerns in final rules issued by the Board and other federal banking agencies published elsewhere in today's Federal Register.

Technical Revisions. Changes conforming with final rules issued by the Board and other federal banking agencies published elsewhere in today's Federal Register have been made to comment 5(b)(2)(ii)-1. In addition, the substance of comment 5(c)-4, which was inadvertently placed as commentary to § 226.5(c), has been moved and renumbered as comment 5(b)(2)(ii)-2.

5(b)(2)(iii)

As proposed in the June 2007 Proposal, the substance of footnote 10 is moved to the regulatory text.

5(c) Through 5(e)

Sections 226.5(c), (d), and (e) address, respectively: The basis of disclosures and the use of estimates; multiple creditors and multiple consumers; and the effect of subsequent events.

In the June 2007 Proposal, the Board did not propose any changes to these provisions, except the addition of new comment 5(d)-3, referencing the statutory provisions pertaining to charge cards with plans that allow access to an open-end credit plan maintained by a person other than the charge card issuer. TILA 127(c)(4)(D); 15 U.S.C. 1637(c)(4)(D). (See the section-by-section analysis to § 226.5a(f).) No comments were received on comment 5(d)-3. The Board adopts this comment as proposed. In addition, comment 5(c)-4 is redesignated as comment 5(b)(2)(ii)-2 to correct a technical error in placement.

Section 226.5a Credit and Charge Card Applications and Solicitations

TILA Section 127(c), implemented by § 226.5a, requires card issuers to provide certain cost disclosures on or with an application or solicitation to open a credit or charge card account.[14] 15 U.S.C. 1637(c). The format and content requirements differ for cost disclosures in card applications or solicitations, depending on whether the applications or solicitations are given through direct mail, provided electronically, provided orally, or made available to the general public such as in “take-one” applications and in catalogs or magazines. Disclosures in applications and solicitations provided by direct mail or electronically must be presented in a table. For oral applications and solicitations, certain cost disclosures must be provided orally, except that issuers in some cases are allowed to provide the disclosures later in a written form. Applications and solicitations made available to the general public, such as in a take-one application, must contain one of the following: (1) The same disclosures as for direct mail presented in a table; (2) a narrative description of how finance charges and other charges are assessed; or (3) a statement that costs are involved, along with a toll-free telephone number to call for further information.

5a(a) General Rules

Combining disclosures. Currently, comment 5a-2 states that account-opening disclosures required by § 226.6 do not substitute for the disclosures required by § 226.5a; however, a card issuer may establish procedures so that a single disclosure document meets the requirements of both sections. In the June 2007 Proposal, the Board proposed to retain this comment, but to revise it to account for proposed revisions to § 226.6. Specifically, the Board proposed to revise comment 5a-2 to provide that a card issuer may satisfy § 226.5a by providing the account-opening summary table on or with a card application or solicitation, in lieu of the § 226.5a table. See proposed § 226.6(b)(4). The account-opening table is substantially similar to the table required by § 226.5a, but the content required is not identical. The account-opening table requires information that is not required in the § 226.5a table, such as a reference to billing error rights. The Board adopts this comment provision as proposed, except for one technical edit which is discussed in the section-by-section analysis to § 226.5a(d)(2). Commenters on the June 2007 Proposal generally supported the proposed comment allowing the account-opening summary table to substitute for the table required by § 226.5a. For various reasons, card issuers may want to provide the account-opening disclosures with the card application or solicitation. To ease compliance burden on issuers, this comment allows them to provide the account-opening summary table in lieu of the table containing the § 226.5a disclosures. Otherwise, issuers in these circumstances would be required to provide the table required by § 226.5a and the account-opening table. In addition, allowing issuers to substitute the account-opening table for the table required by § 226.5a would not undercut consumers' ability to compare the terms of two credit card accounts where one issuer provides the account-opening table and the other issuer provides the table required by § 226.5a, Start Printed Page 5278because the two tables are substantially similar.

Clear and conspicuous standard. Section 226.5(a) requires that disclosures made under subpart B (including disclosures required by § 226.5a) must be clear and conspicuous. Currently, comment 5a(a)(2)-1 provides guidance on the clear and conspicuous standard for the § 226.5a disclosures. In the June 2007 Proposal, the Board proposed to provide guidance on applying the clear and conspicuous standard to the § 226.5a disclosures in comment 5(a)(1)-1. Thus, guidance currently in comment 5a(a)(2)-1 would have been deleted as unnecessary. The Board proposed to add comment 5a-3 to cross reference the clear and conspicuous guidance in comment 5(a)(1)-1. The final rule deletes current comment 5a(a)(2)-1 and adds comment 5a-3 as proposed.

5a(a)(1) Definition of Solicitation

Firm offers of credit. The term “solicitation” is defined in § 226.5a(a)(1) of Regulation Z to mean “an offer by the card issuer to open a credit or charge card account that does not require the consumer to complete an application.” 15 U.S.C. 1637(c). Board staff has received questions about whether card issuers making “firm offers of credit” as defined in the Fair Credit Reporting Act (FCRA) are considered to be making solicitations for purposes of § 226.5a. 15 U.S.C. 1681 et seq. In June 2007, the Board proposed to amend the definition of “solicitation” in § 226.5a(a)(1) to clarify that such “firm offers of credit” for credit cards are solicitations for purposes of § 226.5a. The final rule adopts the amendment to § 226.5a(a)(1) as proposed. Because consumers who receive “firm offers of credit” have been preapproved to receive a credit card and may be turned down for credit only under limited circumstances, the Board believes that these preapproved offers are of the type intended to be captured as a “solicitation,” even though consumers are asked to provide some additional information in connection with accepting the offer.

Invitations to apply. In the June 2007 Proposal, the Board also proposed to add comment 5a(a)(1)-1 to distinguish solicitations from “invitations to apply,” which are not covered by § 226.5a. An “invitation to apply” occurs when a card issuer contacts a consumer who has not been preapproved for a card account about opening an account (whether by direct mail, telephone, or other means) and invites the consumer to complete an application, but the contact itself does not include an application. The Board adopts comment 5a(a)(1)-1 as proposed. The Board believes that these “invitations to apply” do not meet the definition of “solicitation” because the consumer must still submit an application in order to obtain the offered card. Thus, comment 5a(a)(1)-1 clarifies that this “invitation to apply” is not covered by § 226.5a unless the contact itself includes (1) an application form in a direct mailing, electronic communication or “take-one”; (2) an oral application in a telephone contact initiated by the card issuer; or (3) an application in an in-person contact initiated by the card issuer.

5a(a)(2) Form of Disclosures and Tabular Format

Table must be substantially similar to model and sample forms in Appendix G-10. Currently and under the June 2007 Proposal, § 226.5a(a)(2)(i) provides that when making disclosures that are required to be disclosed in a table, issuers must use headings, content and format for the table substantially similar to any of the applicable tables found in Appendix G-10 to part 226. In response to the June 2007 Proposal, several consumer groups suggested that the Board explicitly require that the disclosures be made in the order shown on the proposed model and sample forms in Appendix G-10 to part 226. These consumer groups also suggested that the Board require issuers to use the headings for the rows provided in the proposed model and sample form in Appendix G to part 226, and not allow issuers to use headings that are “substantially similar” to the ones in the model and sample forms. The final rule adopts § 226.5a(a)(2)(i), as proposed. The Board believes that issuers may need flexibility to change the order of the disclosures or the headings for the row provided in the table, such as to accommodate differences in account terms that may be offered on products and different terminology used by the issuer to describe those account terms. In addition, as discussed elsewhere in the section-by-section analysis to Appendix G, the Board is permitting creditors in some circumstances to combine rows for APRs or fees, when the amount of the fee or rate is the same for two or more types of transactions. The Board believes that the “substantially similar” standard is sufficient to ensure uniformity of the tables used by different issuers.

In response to the June 2007 Proposal, several commenters suggested changes to the formatting of the proposed model and sample forms in Appendix G-10 to part 226. These comments are discussed in the section-by-section analysis to Appendix G.

Fees for late payment, over-the-limit, balance transfers and cash advances. Currently, § 226.5a(a)(2)(ii) and comment 5a(a)(2)-5, which implement TILA Section 127(c)(1)(B), provide that card issuers may disclose late-payment fees, over-the-limit fees, balance transfer fees, and cash advance fees in the table or outside the table. 15 U.S.C. 1637(c)(1)(B).

In the June 2007 Proposal, the Board proposed to amend § 226.5a(a)(2)(i) to require that these fees be disclosed in the table. In addition, the Board proposed to delete current § 226.5a(a)(2)(ii) and comment 5a(a)(2)-5, which currently allow issuers to place the fees outside the table.

The Board adopts § 226.5a(a)(2)(i) and deletes current § 226.5a(a)(2)(ii) and comment 5a(a)(2)-5 as proposed. The final rule amends § 226.5a(a)(2)(i) to require these fees to be disclosed in the table, so that consumers can easily identify them. In the consumer testing conducted for the Board prior to the June 2007 Proposal, participants consistently identified these fees as among the most important pieces of information they consider as part of the credit card offer. With respect to the disclosure of these fees, the Board tested placement of these fees in the table and immediately below the table. Participants who were shown forms where the fees were disclosed below the table tended not to notice these fees compared to participants who were shown forms where the fees were presented in the table. These final revisions are adopted in part pursuant to TILA Section 127(c)(5), which authorizes the Board to add or modify § 226.5a disclosures as necessary to carry out the purposes of TILA. 15 U.S.C. 1637(c)(5).

Highlighting APRs and fee amounts in the table. Section 226.5a generally requires that certain information about rates and fees applicable to the card offer be disclosed to the consumer in card applications and solicitations. This information includes not only the APRs and fee amounts that will apply, but also explanatory information that gives context to these figures. The Board seeks to enable consumers to identify easily the rates and fees disclosed in the table. Thus, in the June 2007 Proposal, the Board proposed to add § 226.5a(a)(2)(iv) to require that when a tabular format is required, issuers must disclose in bold text any APRs required to be disclosed, any discounted initial rate permitted to be disclosed, and most fee amounts or percentages required to be disclosed. Start Printed Page 5279The Board also proposed to add comment 5a(a)(2)-5 to explain that proposed Samples G-10(B) and G-10(C) provide guidance on how to show the rates and fees described in bold text. In addition, proposed comment 5a(a)(2)-5 also would have explained that proposed Samples G-10(B) and G-10(C) provide guidance to issuers on how to disclose the percentages and fees described above in a clear and conspicuous manner, by including these percentages and fees generally as the first text in the applicable rows of the table so that the highlighted rates and fees generally are aligned vertically. In consumer testing conducted for the Board prior to the June 2007 Proposal, participants who saw a table with the APRs and fees in bold and generally before any text in the table were more likely to identify the APRs and fees quickly and accurately than participants who saw other forms in which the APRs and fees were not highlighted in such a fashion.

The final rule adopts § 226.5a(a)(2)(iv) and comment 5a(a)(2)-5 with several technical revisions. Section 226.5a(a)(2)(iv) is amended to provide that maximum limits on fee amounts disclosed in the table that do not relate to fees that vary by state must not be disclosed in bold text. Comment 5a(a)(2)-5 provides guidance on when maximum limits must be disclosed in bold text. For example, assume an issuer will charge a cash advance fee of $5 or 3 percent of the cash advance transaction amount, whichever is greater, but the fee will not exceed $100. The maximum limit of $100 for the cash advance fee must not be highlighted in bold text. In contrast, assume that the amount of the late fee varies by state, and the range of amount of late fees disclosed is $15-$25. In this case, the maximum limit of $25 on the late fee amount must be highlighted in bold text. In both cases, the minimum fee amount (e.g., $5 or $15) must be disclosed in bold text.

Comment 5a(a)(2)-5 also provides guidance on highlighting periodic fees. Section 226.5a(a)(2)(iv) provides that any periodic fee disclosed pursuant to § 226.5a(b)(2) that is not an annualized amount must not be disclosed in bold. For example, if an issuer imposes a $10 monthly maintenance fee for a card account, the issuer must disclose in the table that there is a $10 monthly maintenance fee, and that the fee is $120 on an annual basis. In this example, the $10 fee disclosure would not be disclosed in bold, but the $120 annualized amount must be disclosed in bold. In addition, if an issuer must disclose any annual fee in the table, the amount of the annual fee must be disclosed in bold.

Section 226.5a(a)(2)(iv) is amended to refer to discounted initial rates as “introductory” rates, as that term is defined in § 226.16(g)(2)(ii), for consistency, and to clarify that introductory rates that are disclosed in the table under new § 226.5a(b)(1)(vii) must be in bold text. Similarly, rates that apply after a premium initial rate expires that are disclosed in the table must also be in bold text.

Electronic applications and solicitations. Section 1304 of the Bankruptcy Act amends TILA Section 127(c) to require solicitations to open a card account using the Internet or other interactive computer service to contain the same disclosures as those made for applications or solicitations sent by direct mail. Regarding format, the Bankruptcy Act specifies that disclosures provided using the Internet or other interactive computer service must be “readily accessible to consumers in close proximity” to the solicitation. 15 U.S.C. 1637(c)(7).

In September 2000, the Board revised § 226.5a, and as part of these revisions, provided guidance on how card issuers using electronic disclosures may comply with the § 226.5a requirement that certain disclosures be “prominently located” on or with the application or solicitation. 65 FR 58903, Oct. 3, 2000. In March 2001, the Board issued interim final rules containing additional guidance for the electronic delivery of disclosures under Regulation Z. 66 FR 17329, Mar. 30, 2001. In November 2007, the Board adopted the November 2007 Final Electronic Disclosure Rule, which withdrew portions of the 2001 interim final rules and issued final rules containing additional guidance for the electronic delivery of disclosures under Regulation Z. 72 FR 63462, Nov. 9, 2007; 72 FR 71058, Dec. 14, 2007.

The Bankruptcy Act provision applies to solicitations to open a card account “using the Internet or other interactive computer service.” The term “Internet” is defined as the international computer network of both Federal and non-Federal interoperable packet-switched data networks. The term “interactive computer service” is defined as any information service, system or access software provider that provides or enables computer access by multiple users to a computer server, including specifically a service or system that provides access to the Internet and such systems operated or services offered by libraries or educational institutions. 15 U.S.C. 1637(c)(7). Based on the definitions of “Internet” and “interactive computer service,” the Board believes that Congress intended to cover all card offers that are provided to consumers in electronic form, such as via e-mail or a Web site.

In addition, although this Bankruptcy Act provision refers to credit card solicitations (where no application is required), in the June 2007 Proposal, the Board proposed to apply the Bankruptcy Act provision relating to electronic offers to both electronic solicitations and applications pursuant to the Board's authority under TILA Section 105(a) to make adjustments that are necessary to effectuate the purposes of TILA. 15 U.S.C. 1601(a), 1604(a). Specifically, the Board proposed to amend § 226.5a(c) to require that applications and solicitations that are provided in electronic form contain the same disclosures as applications and solicitations sent by direct mail. With respect to both electronic applications and solicitations, it is important for consumers who are shopping for credit to receive accurate cost information before submitting an electronic application or responding to an electronic solicitation. The final rule adopts this change to § 226.5a(c), as proposed.

With respect to the form of disclosures required under § 226.5a, in the June 2007 Proposal, the Board proposed to amend § 226.5a(a)(2) by adding a new paragraph (v) to provide that if a consumer accesses an application or solicitation for a credit card in electronic form, the disclosures required on or with an application or solicitation for a credit card must be provided to the consumer in electronic form on or with the application or solicitation. The Board also proposed to add comment 5a(a)(2)-6 to clarify this point and also to make clear that if a consumer is provided with a paper application or solicitation, the required disclosures must be provided in paper form on or with the application or solicitation (and not, for example, by including a reference in the paper application or solicitation to the Web site where the disclosures are located).

In the November 2007 Final Electronic Disclosure Rule, the Board adopted the proposed changes to § 226.5a(a)(2)(v) and comment 5a(a)(2)-6 with several revisions. 72 FR 63462, Nov. 9, 2007; 72 FR 71058, Dec. 14, 2007. In the November 2007 Final Electronic Disclosure Rule, the guidance in proposed comment 5a(a)(2)-6 was contained in comment 5a(a)(2)-9. In this final rule, the guidance in comment 5a(a)(2)-9 added by the November 2007 Final Electronic Disclosure Rule is moved to comment 5a(a)(2)-6.Start Printed Page 5280

In the June 2007 Proposal, the Board also proposed to revise existing comment 5a(a)(2)-8 added by the 2001 interim final rule on electronic disclosures, which states that a consumer must be able to access the electronic disclosures at the time the application form or solicitation reply form is made available by electronic communication. The Board proposed to revise this comment to describe alternative methods for presenting electronic disclosures. This comment was intended to provide examples of the methods rather than an exhaustive list. In the November 2007 Final Electronic Disclosure Rule, the Board adopted the proposed changes to comment 5a(a)(2)-8 with several revisions. 72 FR 63462, Nov. 9, 2007; 72 FR 71058, Dec. 14, 2007.

In the June 2007 Proposal, the Board proposed to incorporate the “close proximity” standard for electronic applications and solicitations in § 226.5a(a)(2)(vi)(B), and the guidance regarding the location of the § 226.5a disclosures in electronic applications and solicitations in comment 5a(a)(2)-1.ii. This guidance, contained in proposed comment 5a(a)(2)-1.ii, was consistent with proposed changes to comment 5a(a)(2)-8, that provides guidance to issuers on providing access to electronic disclosures at the time the application form or solicitation reply form is made available in electronic form.

The final rule adopts § 226.5a(a)(2)(vi)(B) and comment 5a(a)(2)-1.ii as proposed, with several revisions. Specifically, comment 5a(a)(2)-1.ii is revised to be consistent with the revisions to comment 5a(a)(2)-8 made in the November 2007 Final Electronic Disclosure Rule. Comment 5a(a)(2)-1.ii provides that if the table required by § 226.5a is provided electronically, the table must be provided in close proximity to the application or solicitation. Card issuers have flexibility in satisfying this requirement. Methods card issuers could use to satisfy the requirement include, but are not limited to, the following examples: (1) The disclosures could automatically appear on the screen when the application or reply form appears; (2) the disclosures could be located on the same Web page as the application or reply form (whether or not they appear on the initial screen), if the application or reply form contains a clear and conspicuous reference to the location of the disclosures and indicates that the disclosures contain rate, fee, and other cost information, as applicable; (3) card issuers could provide a link to the electronic disclosures on or with the application (or reply form) as long as consumers cannot bypass the disclosures before submitting the application or reply form. The link would take the consumer to the disclosures, but the consumer need not be required to scroll completely through the disclosures; or (4) the disclosures could be located on the same Web page as the application or reply form without necessarily appearing on the initial screen, immediately preceding the button that the consumer will click to submit the application or reply. Whatever method is used, a card issuer need not confirm that the consumer has read the disclosures. Comment 5a(a)(2)-8 is deleted as unnecessary.

As discussed in the June 2007 Proposal, the Board believes that the “close proximity” standard is designed to ensure that the disclosures are easily noticeable to consumers, and this standard is not met when consumers are only given a link to the disclosures on the Web page containing the application (or reply form), but not the disclosures themselves. Thus, the Board retains the requirement that if an electronic link to the disclosures is used, the consumer must not be able to bypass the link before submitting an application or a reply form.

Terminology. Section 226.5a currently requires terminology in describing the disclosures required by § 226.5a to be consistent with terminology used in the account-opening disclosures (§ 226.6) and the periodic statement disclosures (§ 226.7). TILA and § 226.5a also require that the term “grace period” be used to describe the date by which or the period within which any credit extended for purchases may be repaid without incurring a finance charge. 15 U.S.C. 1632(c)(2)(C). In the June 2007 Proposal, the Board proposed that all guidance for terminology requirements for § 226.5a disclosures be placed in proposed § 226.5(a)(2)(iii). See section-by-section analysis to § 226.5(a)(2). The Board also proposed to add comment 5a(a)(2)-7 to cross reference the guidance in § 226.5(a)(2). The Board adopts comment 5a(a)(2)-7 as proposed.

5a(a)(4) Fees That Vary by State

Currently, under § 226.5a, if the amount of a late-payment fee, over-the-limit fee, cash advance fee or balance transfer fee varies by state, a card issuer may either disclose in the table (1) the amount of the fee for all states; or (2) a range of fees and a statement that the amount of the fee varies by state. See current § 226.5a(a)(5), renumbered as proposed § 226.5a(a)(4); see also TILA Section 127(f). As discussed below, in the June 2007 Proposal, the Board proposed to require card issuers to disclose in the table any fee imposed when a payment is returned. See proposed § 226.5a(b)(12). The Board proposed to amend new § 226.5a(a)(4) to add returned-payment fees to the list of fees for which an issuer may disclose a range of fees.

The final rule adopts proposed § 226.5a(a)(4) with several modifications. The Board is revising proposed § 226.5a(a)(4) to provide that card issuers that impose a late-payment fee, over-the-limit fee, cash advance fee, balance transfer fee or returned-payment fee where the amount of those fees vary by state may, at the issuer's option, disclose in the table required by § 226.5a either (1) the specific fee applicable to the consumer's account, or (2) the range of the fees, if the disclosure includes a statement that the amount of the fee varies by state and refers the consumer to a disclosure provided with the § 226.5a table where the amount of the fee applicable to the consumer's account is disclosed, for example in a list of fees for all states. Listing fees for multiple states in the table is not permissible. For example, a card issuer may not list fees for all states in the table. Similarly, a card issuer that does business in six states may not list fees for all six of those states in the table. (Conforming changes are also made to comment 5a(a)(4)-1.)

As discussed in the section-by-section analysis to § 226.6(b)(1)(iii), the Board is adopting a similar rule for account-opening disclosures, with one notable exception discussed below. In general, a creditor must disclose the fee applicable to the consumer's account; listing all fees for all states in the account-opening summary table is not permissible. The Board is concerned in each case that an approach of listing all fees for all states would detract from the purpose of the table: to provide key information in a simplified way.

One difference between the fee disclosure requirement in § 226.5a(a)(4) and the similar requirement in § 226.6(b)(1)(iii) is that § 226.6(b)(1)(iii) limits use of the range of fees to point-of-sale situations while § 226.5a contains no similar limitation. As discussed further in the section-by-section analysis to § 226.6(b)(1)(iii), for creditors with retail stores in a number of states, it is not practicable to require fee-specific disclosures to be provided when an open-end (not home-secured) plan is established in person in connection with the purchase of goods or services. Thus, the final rule in § 226.6(b)(1)(iii) provides that creditors imposing fees such as late-payment fees Start Printed Page 5281or returned-payment fees that vary by state and providing the disclosures required by § 226.6(b) in person at the time the open-end (not home-secured) plan is established in connection with financing the purchase of goods or services may, at the creditor's option, disclose in the account-opening table either (1) the specific fee applicable to the consumer's account, or (2) the range of the fees, if the disclosure includes a statement that the amount of the fee varies by state and refers the consumer to the account agreement or other disclosure provided with the account-opening summary table where the amount of the fee applicable to the consumer's account is disclosed.

As with the account-opening table, the Board is concerned that including all fees for all states in the table required by § 226.5a would detract from the purpose of the table: to provide key information in a simplified way. Nonetheless, unlike with the account-opening table, the final rule does not limit the use of the range of fees for the table required by § 226.5a only to point-of-sale situations. With respect to the application and solicitation disclosures, there may be many situations in which it is impractical to provide the fee-specific disclosures with the application or solicitation, such as when the application is provided on the Internet or in “take-one” materials. For Internet or “take-one” applications or solicitations, a creditor will in most cases not be aware in which state the consumer resides and, consequently, will not be able to determine the amount of fees that would be charged to that consumer under applicable state law. The changes to § 226.5a(a)(4) are adopted in part pursuant to TILA Section 127(c)(5), which authorizes the Board to add or modify § 226.5a disclosures as necessary to carry out the purposes of TILA. 15 U.S.C. 1637(c)(5).

5a(a)(5) Exceptions

Section 226.5a currently contains several exceptions to the disclosure requirements. Some of these exceptions are in the regulation itself, while others are contained in the commentary. For clarity, in the June 2007 Proposal, the Board proposed to place all exceptions in new § 226.5a(a)(5). The final rule adopts new § 226.5a(a)(5) as proposed.

5a(b) Required Disclosures

Section 226.5a(b) specifies the disclosures that are required to be included on or with certain credit card applications and solicitations.

5a(b)(1) Annual Percentage Rate

Section 226.5a requires card issuers to disclose the rates applicable to the account, for purchases, cash advances, and balance transfers. 15 U.S.C. 1637(c)(1)(A)(i)(I).

16-point font for disclosure of purchase APRs. Currently, under § 226.5a(b)(1), the purchase rate must be disclosed in the table in at least 18-point font. This font requirement does not apply to (1) a temporary initial rate for purchases that is lower than the rate that will apply after the temporary rate expires; or (2) a penalty rate that will apply upon the occurrence of one or more specified events. In the June 2007 Proposal, the Board proposed to amend § 226.5a(b)(1) to reduce the 18-point font requirement to a 16-point font. Commenters generally did not object to the proposal to reduce the font size for the purchase APR. Several consumer groups suggested that the Board explicitly prohibit issuers from disclosing any discounted initial rate in 16-point font.

The final rule adopts the 16-point font requirement in § 226.5a(b)(1) as proposed, with several revisions as described below. The purchase rate is one of the most important terms disclosed in the table, and it is essential that consumers be able to identify that rate easily. A 16-point font size requirement for the purchase APR appears to be sufficient to highlight the purchase APR. In consumer testing conducted for the Board prior to June 2007, versions of the table in which the purchase rate was the same font as other rates included in the table were reviewed. In other versions, the purchase rate was in 16-point type while other disclosures were in 10-point type. Participants tended to notice the purchase rate more often when it was in a font larger than the font used for other rates. Nonetheless, there was no evidence from consumer testing that it was necessary to use a font size of 18-point in order for the purchase APR to be noticeable to participants. Given that the Board is requiring a minimum of 10-point type for the disclosure of other terms in the table, based on document design principles, the Board believes that a 16-point font size for the purchase APR is effective in highlighting the purchase APR in the table.

The final rule requires that discounted initial rates for purchases must be in 16-point font. Section 226.5a(b)(1), as proposed, did not specifically prohibit disclosing any discounted initial rate in 16-point font but did not require such formatting. New § 226.5a(b)(1)(vii), discussed below, requires disclosure of the discounted initial rate in the table for issuers subject to final rules issued by the Board and other federal banking agencies published elsewhere in today's Federal Register. As a result, the Board believes that all rates that could apply to a purchase balance, other than a penalty rate, should be highlighted in 16-point font. For the same reasons, § 226.5a(b)(1)(iii) also has been amended to clarify that both the premium initial rate for purchases and any rate that applies after the premium initial rate for purchases expires must be disclosed in 16-point font.

The final rule in § 226.5a(b)(1) has also been revised to refer to discounted initial rates as “introductory” rates, as that term is defined in § 226.16(g)(2)(ii), for consistency.

Periodic rate. Currently, comment 5a(b)(1)-1 allows card issuers to disclose the periodic rate in the table in addition to the required disclosure of the corresponding APR. In the June 2007 Proposal, the Board proposed to delete comment 5a(b)(1)-1, and thus, prohibit disclosure of the periodic rate in the table. Based on consumer testing conducted for the Board prior to June 2007, consumers do not appear to shop using the periodic rate, nor is it clear that this information is important to understanding a credit card offer. Allowing the periodic rate to be disclosed in the table may distract from more important information in the table, and contribute to “information overload.” In an effort to streamline the information that appears in the table, the Board proposed to prohibit disclosure of the periodic rate in the table. Commenters generally did not oppose the Board's proposal to prohibit disclosure of the periodic rate in the table. Thus, the Board is deleting current comment 5a(b)(1)-1 as proposed. In addition, new comment 5a(b)(1)-8 is added to state that periodic rates must not be disclosed in the table. The Board notes that card issuers may disclose the periodic rate outside of the table. See § 226.5a(a)(2)(ii).

Variable rate information. Section 226.5a(b)(1)(i), which implements TILA Section 127(c)(1)(A)(i)(II), currently requires for variable-rate accounts, that the card issuer must disclose the fact that the rate may vary and how the rate is determined. 15 U.S.C. 1637(c)(1)(A)(i)(II). Under current comment 5a(b)(1)-4, in disclosing how the applicable rate will be determined, the card issuer is required to provide the index or formula used and disclose any margin or spread added to the index or formula in setting the rate. The card issuer may disclose the margin or Start Printed Page 5282spread as a range of the highest and lowest margins that may be applicable to the account. A disclosure of any applicable limitations on rate increases or decreases may also be included in the table.

1. Index and margins. Currently, the variable rate information is required to be disclosed separately from the applicable APR, in a row of the table with the heading “Variable Rate Information.” Some card issuers include the phrase “variable rate” with the disclosure of the applicable APR and include the details about the index and margin under the “Variable Rate Information” heading. In the consumer testing conducted for the Board prior to the June 2007 Proposal, many participants who saw the variable rate information as described above understood that the label “variable” meant that a rate could change, but could not locate information on the tested form regarding how or why these rates could change. This was true even if the index and margin information was taken out of the row of the table with the heading “Variable Rate Information” and placed in a footnote to the phrase “variable rate.” Many participants who did find the variable rate information were confused by the variable-rate margins, often interpreting them erroneously as the actual rate being charged. In addition, very few participants indicated that they would use the margins in shopping for a credit card account.

Accordingly, in the June 2007 Proposal, the Board proposed to amend § 226.5a(b)(1)(i) to specify that issuers may not disclose the amount of the index or margins in the table. Specifically, card issuers would not have been allowed to disclose in the table the current value of the index (for example, that the prime rate currently is 7.5 percent) or the amount of the margin that is used to calculate the variable rate. Card issuers would have been allowed to indicate only that the rate varies and the type of index used to determine the rate (such as the “prime rate,” for example). In describing the type of index, the issuer would have been precluded from including details about the index in the table. For example, if the issuer uses a prime rate, the issuer would have been allowed to describe the rate as tied to a “prime rate” and would not have been allowed to disclose in the table that the prime rate used is the highest prime rate published in the Wall Street Journal two business days before the closing date of the statement for each billing period. See proposed comment 5a(b)(1)-2. Also, the proposal would have required that the disclosure about a variable rate (the fact that the rate varies and the type of index used to determine the rate) must be disclosed with the applicable APRs, so that consumers can more easily locate this information. See proposed Model Form G-10(A), Samples G-10(B) and G-10(C). Proposed Samples G-10(B) and G-10(C) would have provided guidance to issuers on how to disclose the fact that the applicable rate varies and how it is determined.

Commenters generally supported the Board's proposal to amend § 226.5a(b)(1)(i) to specify that issuers may not disclose the amount of the index or margins in the table. Several commenters asked the Board to clarify that issuers may include the index and margin outside of the table, given that some consumers are interested in knowing the index and margin. One commenter suggested that issuers be allowed to disclose in the table additional information about the index used, such as the publication source of the index used to calculate the rate (e.g.,. describing that the prime rate used is the highest prime rate published in the Wall Street Journal two business days before the closing date of the statement for each billing period.) One commenter suggested that issuers be allowed to refer to an index as a “prime rate” only if it is a bank prime loan rate posted by the majority of the top 25 U.S. chartered commercial banks, as published by the Board.

The final rule amends § 226.5a(b)(1)(i) as proposed to specify that issuers may not disclose the amount of the index or margins in the table. Section 226.5a(b)(1)(i) is not amended to allow issuers to disclose in the table additional information about the index used, such as the publication source of the index. See comment 5a(b)(1)-2. The Board is concerned that allowing such information in the table could contribute to “information overload” for consumers, and may distract from more important information in the table. The Board notes that additional information about the variable rate, such as the amount of the index and margins and the publication source of the index used to calculate the rate, may be included outside of the table. See § 226.5a(a)(2)(ii).

In addition, the Board did not amend the rule to provide that issuers only be allowed to refer to an index as a “prime rate” if it is a bank prime loan rate posted by the majority of the top 25 U.S. chartered commercial banks, as published by the Board. The Board believes that this rule is unnecessary at this time. Credit card issuers typically use a prime rate that is published in the Wall Street Journal, where that published prime rate is based on prime rates offered by the 30 largest U.S. banks, and is a widely accepted measure of prime rate.

2. Rate floors and ceilings. Currently, card issuers may disclose in the table, at their option, any limitations on how high (i.e.,. a rate ceiling) or low (i.e., a rate floor) a particular rate may go. For example, assume that the purchase rate on an account could not go below 12 percent or above 24 percent. An issuer would be required to disclose in the table the current rate offered on the credit card (for example, 18 percent), but could also disclose in the table that the rate would not go below 12 percent and above 24 percent. See current comment 5a(b)(1)-4. In the June 2007 Proposal, the Board proposed to revise the commentary to prohibit the disclosure of the rate floors and ceilings in the table.

Several consumer group commenters suggested that the Board require floors and ceilings to be disclosed in the table because such information has a significant effect on consumers' economic risk. Several industry commenters suggested that the Board permit (but not require) issuers to include the floors and ceiling of the variable rate in the table so that consumers are aware of the potential variations in the rate. Section 226.5a(b)(1)(i) is revised to prohibit explicitly the disclosure of the rate floors and ceilings in the table, as proposed. See also comment 5a(b)(1)-2. Based on consumer testing conducted for the Board prior to June 2007 and in March 2008, consumers do not appear to shop based on these rate floors and ceilings, and allowing them to be disclosed in the table may distract from more important information in the table, and contribute to “information overload.” Card issuers may, however, disclose this information outside of the table. See § 226.5a(a)(2)(ii).

Discounted initial rates. Currently, comment 5a(b)(1)-5 specifies that if the initial rate is temporary and is lower than the rate that will apply after the temporary rate expires, a card issuer must disclose the rate that will otherwise apply to the account. A discounted initial rate may be provided in the table along with the rate required to be disclosed if the card issuer also discloses the time period during which the discounted initial rate will remain in effect. In the June 2007 Proposal, the Board proposed to move comment 5a(b)(1)-5 to new § 226.5a(b)(1)(ii). The Board also proposed to add new comment 5a(b)(1)-3 to specify that if a card issuer discloses the discounted Start Printed Page 5283initial rate and expiration date in the table, the issuer is deemed to comply with the standard to provide this information clearly and conspicuously if the issuer uses the format specified in proposed Samples G-10(B) and G-10(C).

In addition, under TILA Sections 127(c)(6)(A) and 127(c)(7), as added by Sections 1303(a) and 1304 of the Bankruptcy Act, the term “introductory” must be used in immediate proximity to each listing of a discounted initial rate in a direct mail or electronic application or solicitation; or promotional materials accompanying such application or solicitation. In the June 2007 Proposal, the Board proposed to expand the requirement to other applications or solicitations where a table under § 226.5a is given, to promote the informed use of credit by consumers, pursuant to the Board's authority under TILA Section 105(a) to make adjustments that are necessary to effectuate the purposes of TILA. 15 U.S.C. 1604(a). Thus, the Board proposed to add new § 226.5a(b)(1)(ii) to specify that if an issuer provides a discounted initial rate in the table along with the rate required to be disclosed, the card issuer must use the term “introductory” in immediate proximity to the listing of the initial discounted rate. Because “intro” is a commonly understood abbreviation of the term “introductory,” and consumer testing indicates that consumers understand this term, the Board proposed to allow creditors to use “intro” as an alternative to the requirement to use the term “introductory” and proposed to clarify this approach in new § 226.5a(b)(1)(ii). Also, to give card issuers guidance on the meaning of “immediate proximity,” the Board proposed to provide a safe harbor for card issuers that place the word “introductory” or “intro” within the same phrase as each listing of the discounted initial rate. This guidance was set forth in proposed comment 5a(b)(1)-3.

The Board adopts new § 226.5a(b)(1)(ii) and comment 5a(b)(1)-3, as proposed, with several modifications. Discounted initial rates are referred to as “introductory” rates, as that term is defined in § 226.16(g)(2)(ii), for consistency. In addition, as discussed below with respect to disclosing penalty rates, an issuer is required to disclose directly beneath the table the circumstances under which any discounted initial rate may be revoked and the rate that will apply after the discounted initial rate is revoked, if the issuer discloses the discounted initial rate in the table or in any written or electronic promotional materials accompanying a direct mail, electronic or take-one application or solicitation. See § 226.5a(b)(1)(iv)(B).

Comment 5a(b)(1)-3 has been amended to provide additional clarifications on discounted initial rates. Comment 5a(b)(1)-3.ii. has been added to clarify that an issuer's reservation of the right to change a rate after account opening, subject to the requirements of § 226.9(c), does not by itself make that rate an introductory rate, even if the issuer subsequently increases the rate after providing a change-in-terms notice. The comment notes, however, that issuers subject to the final rules issued by the Board and other federal banking agencies published elsewhere in today's Federal Register are subject to limitations on such rate increases. In addition, comment 5a(b)(1)-3.iii. has been added to clarify that if more than one introductory rate may apply to a particular balance in succeeding periods, the term “introductory” need only be used to describe the first introductory rate.

Section 226.5a(b)(1)(ii) in the final rule has been revised, and a new § 226.5a(b)(1)(vii) has been added as discussed below, to provide that certain issuers must disclose any introductory rate applicable to the account in the table. Creditors that are subject to the final rules issued by the Board and other federal banking agencies published elsewhere in today's Federal Register are required to state at account opening the annual percentage rates that will apply to each category of transactions on a consumer credit card account, and generally may not increase those rates, except as expressly permitted pursuant to those rules. This requirement is intended, among other things, to promote fairness in the pricing of consumer credit card accounts by enabling consumers to rely on the rates disclosed at account opening for at least the first year that an account is open.

Consistent with those final rules, for such issuers, the Board believes that disclosure of introductory rates should be as prominent as other rates disclosed in the tabular summary given at account opening. Therefore, as discussed in the section-by-section analysis to § 226.6(b)(2)(i), the Board is requiring that a creditor subject to those rules must disclose any introductory rate in the account-opening table provided pursuant to § 226.6.

For consistency, the Board also is requiring in the final rule that such issuers also disclose any introductory rate in the table provided with applications and solicitations. The Board believes that this will promote consistency throughout the life of an account and will enable consumers to better compare the terms that the consumer receives at account opening with the terms that were offered. Thus, § 226.5a(b)(1)(vii) has been added to the final rule to clarify that an issuer subject to 12 CFR 227.24 or similar law must disclose in the tabular disclosures given pursuant to § 226.5a any introductory rate that will apply to a consumer's account. The Board believes that it is important that any issuer required to disclose an introductory rate applicable to a consumer's account highlights that introductory rate or rates by disclosing it in the § 226.5a table.

Similarly, and for the same reasons stated above, § 226.5a(b)(1)(vii) also requires that card issuers subject to the final rules issued by the Board and other federal banking agencies published elsewhere in today's Federal Register disclose in the table any rate that will apply after a premium initial rate (as described in § 226.5a(b)(1)(iii)) expires. A conforming change has been made to § 226.5a(b)(1)(iii). Consistent with comment 5a(b)(1)-3.ii., discussed above, a new comment 5a(b)(1)-4 has been added to the final rule to clarify that an issuer's reservation of the right to change rates after account-opening does not by itself make an initial rate a premium initial rate, even if the issuer subsequently decreases the rate. The comment notes, however, that issuers subject to the final rules issued by the Board and other federal banking agencies published elsewhere in today's Federal Register may be subject to limitations on rate decreases.

Penalty rates. Currently, comment 5a(b)(1)-7 requires that if a rate may increase upon the occurrence of one or more specific events, such as a late payment or an extension of credit that exceeds the credit limit, the card issuer must disclose the increased penalty rate that may apply and the specific event or events that may result in the increased rate. If a tabular format is required, the issuer must disclose the penalty rate in the table under the heading “Other APRs,” along with any balance transfer or cash advance rates.

Currently, the specific event or events must be described outside the table with a reference (an asterisk or other means) included with the penalty APR in the table to direct the consumer to the additional information. At its option, the issuer may include outside the table an explanation of the period for which the increased rate will remain in effect, such as “until you make three timely payments.” The issuer need not disclose an increased rate that is imposed if credit privileges are permanently terminated.Start Printed Page 5284

In the consumer testing conducted for the Board prior to June 2007, when reviewing forms in which the specific events that trigger the penalty rate were disclosed outside the table, many participants did not readily notice the penalty rate triggers when they initially read through the document or when asked follow-up questions. In addition, many participants did not readily notice the penalty rate when it was included in the “Other APRs” row along with other rates. The GAO also found that consumers had difficulty identifying the default rate and circumstances that would trigger rate increases. See GAO Report on Credit Card Rates and Fees, at page 49. In the testing conducted for the Board prior to June 2007, when the penalty rate was placed in a separate row in the table, participants tended to notice the rate more often. Moreover, participants tended to notice the specific events that trigger the penalty rate more often when these events were included with the penalty rate in a single row in the table. For example, two types of forms related to placement of the events that could trigger the penalty rate were tested—several versions showed the penalty rate in one row of the table and the description of the events that could trigger the penalty rate in another row of the table. Several other versions showed the penalty rate and the triggering events in the same row. Participants who saw the versions of the table with the penalty rate in a separate row from the description of the triggering events tended to skip over the row that specified the triggering events when reading the table. In contrast, participants who saw the versions of the table in which the penalty rate and the triggering events were in the same row tended to notice the triggering events when they reviewed the table.

As a result of this testing, in the June 2007 Proposal, the Board proposed to add § 226.5a(b)(1)(iv) and amend new comment 5a(b)(1)-4 (previously comment 5a(b)(1)-7) to require card issuers to briefly disclose in the table the specific event or events that may result in the imposition of a penalty rate. In addition, the Board proposed that the penalty rate and the specific events that cause the penalty rate to be imposed must be disclosed in the same row of the table. See proposed Model Form G-10(A). In describing the specific event or events that may result in an increased rate, the Board proposed to amend new comment 5a(b)(1)-4 to provide that the descriptions of the triggering events in the table should be brief. For example, if an issuer may increase a rate to the penalty rate because the consumer does not make the minimum payment by 5 p.m., Eastern time, on its payment due date, the proposal would have indicated that the issuer should describe this circumstance in the table as “make a late payment.” Proposed Samples G-10(B) and G-10(C) would have provided additional guidance on the level of detail that issuers should use in describing the specific events can trigger the penalty rate.

The Board also proposed to specify in new § 226.5a(b)(1)(iv) that in disclosing a penalty rate, a card issuer also must specify the balances to which the increased rate will apply. This proposal was based on the Board's understanding that, currently, card issuers typically apply the increased rate to all balances on the account. The Board believed that this information would help consumers better understand the consequences of triggering the penalty rate.

In addition, the Board proposed to specify in new § 226.5a(b)(1)(iv) that in disclosing the penalty rate, a card issuer must describe how long the increased rate will apply. The Board proposed to amend proposed comment 5a(b)(1)-4 to provide that in describing how long the increased rate will remain in effect, the description should be brief, and referred issuers to Samples G-10(B) and G-10(C) for guidance on the level of detail that issuer should use to describe how long the increased rate will remain in effect. Also, proposed comment 5a(b)(1)-4 would have provided that if a card issuer reserves the right to apply the increased rate indefinitely, that fact should be stated. The Board stated its belief that this information may help consumers better understand the consequences of triggering the penalty rate.

Also, the Board proposed to add language to new § 226.5a(b)(1)(iv) to specify that in disclosing a penalty rate, card issuers must include a brief description of the circumstances under which any discounted initial rates may be revoked and the rate that will apply after the discounted initial rate is revoked. Sections 1303(a) and 1304 of the Bankruptcy Act require that for a direct mail or electronic credit card application or solicitation, a clear and conspicuous description of the circumstances that may result in revocation of a discounted initial rate offered with the card and the rate that will apply after the discounted initial rate is revoked must be disclosed in a prominent location on or with the application or solicitation. 15 U.S.C. 1637(c)(6)(C). The Board proposed that this information be disclosed in the table along with other penalty rate information for all applications and solicitations where a table under § 226.5a is given, to promote the informed use of credit by consumers, pursuant to the Board's authority under TILA Section 105(a) to make adjustments that are necessary to effectuate the purposes of TILA. 15 U.S.C. 1604(a).

In response to the June 2007 Proposal, some consumer group commenters requested that the Board delete the statement that the card issuer need not disclose the increased rate that would be imposed if credit privileges are permanently terminated. They viewed this provision as inconsistent with the Board's other efforts to ensure that consumers are aware of penalty rates. They believed card issuers should be required to disclose this information in the table if the rate is different than the penalty rate that otherwise applies.

In the May 2008 Proposal, the Board proposed to delete the current provision that an issuer need not disclose in the table an increased rate that would be imposed if credit privileges are permanently terminated. Most consumer groups and industry commenters supported this aspect of the proposal.

The final rule adopts new § 226.5a(b)(1)(iv) and comment 5a(b)(1)-5 (proposed as comment 5a(b)(1)-4) as proposed in the May 2008 Proposal with several revisions. Section 226.5a(b)(1)(iv)(A) sets forth the disclosures that are required when rates that are not introductory rates may be increased as a penalty for one or more events specified in the account agreement. The final rule specifies that for rates that are not introductory rates, if a rate may increase as a penalty for one or more events specified in the account agreement, such as a late payment or an extension of credit that exceeds the credit limit, the card issuer must disclose the increased rate that would apply, a brief description of the event or events that may result in the increased rate, and a brief description of how long the increased rate will remain in effect. Samples G-10(B) and G-10(C) (in the row labeled “Penalty APR and When it Applies”) provide guidance to card issuers on how to meet the requirements in § 226.5a(b)(1)(iv)(A) and accompanying comment 5a(b)(1)-5. An issuer may use phrasing similar to either Sample G-10(B) or G-10(C) to disclose how long the increased rate will remain in effect, modified as appropriate to accurately reflect the terms offered by that issuer.

The proposed requirement that issuers must disclose a description of the types of balances to which the Start Printed Page 5285increased penalty rate will apply is not included in the final rule. When the Board proposed this requirement in June 2007, most issuers typically applied the increased penalty rate to all balances on the account. Nonetheless, under final rules issued by the Board and other federal banking agencies published elsewhere in today's Federal Register, most credit card issuers are precluded from applying an increased rate to existing balances, except in limited circumstances.[15] In particular, most issuers may not increase the interest rate on existing credit card balances to the penalty rate unless the consumer is more than 30 days late on the account. Because most issuers are restricted from applying the increased penalty rate to existing balances, except in limited circumstances, the Board is withdrawing the proposed requirement to disclose in the table a description of the types of balances to which the increased penalty rate will apply. Requiring issuers to explain in the table the types of balances to which the increased penalty rate will apply—such as disclosing that the increased penalty rate will apply to new transactions, except if the consumer is more than 30 days late on the account, then the increased penalty rate will apply to all balances—could lead to “information overload” for consumers. The Board notes if a penalty rate is triggered on an account, the issuer must provide the consumer with a notice under § 226.9(g) prior to the imposition of the penalty rate, and this notice must include an explanation of the balances to which the increased penalty rate would apply.

Similarly, issuers that apply penalty pricing only to some balances on the account, specifically issuers subject to the final rules issued by the Board and other federal banking agencies published elsewhere in today's Federal Register may not distinguish, in the disclosures required by § 226.5a(b)(1)(iv), between the events that may result in an increased rate for one type of balances and the events that may result in an increased rate for other types of balances. Such issuers may provide a consolidated list of the event or events that may result in an increased rate for any balance.

The Board has amended comment 5a(b)(1)-5.i. (proposed as comment 5a(b)(1)-4) to provide specific guidance to issuers that are subject to the final rules issued by the Board and other federal banking agencies published elsewhere in today's Federal Register. Such an issuer may have penalty rate triggers that apply to new transactions that differ from the penalty rate triggers applicable to outstanding balances. For example, an issuer might apply the penalty rate to new transactions, subject to the notice requirements in § 226.9(g), based on a consumer making a payment three days late, but may increase the rate applicable to outstanding balances only if the consumer pays more than 30 days late. Comment 5a(b)(1)-5.i., as adopted, includes guidance stating that if an issuer may increase a rate that applies to a particular balance because the account is more than 30 days late, the issuer should describe this circumstance in the table as “make a late payment.” The comment has also been amended to clarify that the issuer may not distinguish between the events that may result in an increased rate for existing balances and the events that may result in an increased rate for new transactions.

In addition, as proposed in May 2008, the final rule deletes the current provision that an issuer need not disclose an increased rate that would be imposed if credit privileges were permanently terminated.[16] Thus, to the extent an issuer is charging an increased rate different from the penalty rate when credit privileges are permanently terminated, this different rate must be disclosed along with the penalty rate. The Board agrees with consumer group commenters that requiring the disclosure of the rate when credit privileges are permanently terminated is consistent with the Board's efforts to ensure that consumers are aware of the potential for increased rates.

A commenter in response to the May 2008 Proposal asked for clarification of the interplay between the requirement to disclose an increased rate when credit privileges are permanently terminated and the restriction on issuers' ability to apply increased rates to existing balances, proposed by the Board and other federal banking agencies. See 73 FR 28904, May 19, 2008. As discussed above, under final rules issued by the Board and other federal banking agencies published elsewhere in today's Federal Register, most credit card issuers are precluded from applying an increased rate to existing balances, unless an exception applies, such as if the account is more than 30 days late. Nonetheless, for issuers subject to these restrictions, there still are cases where an issuer could impose on existing balances an increased rate when credit privileges are permanently terminated, for example when the account is more than 30 days late.

Section 226.5a(b)(1)(iv)(B) sets forth the disclosures that are required when discounted initial rates may be increased as a penalty for one or more events specified in the account agreement. (In § 226.5a(b)(1)(iv)(B), discounted initial rates are referred to as “introductory” rates, as that term is defined in § 226.16(g)(2)(ii), for consistency.) Specifically, § 226.5a(b)(1)(iv)(B) of the final rule states that an issuer is required to disclose directly beneath the table the circumstances under which any discounted initial rate may be revoked and the rate that will apply after the discounted initial rate is revoked only if the issuer discloses the discounted initial rate in the table, or in any written or electronic promotional materials accompanying a direct mail, electronic or take-one application or solicitation. As revised, this provision is consistent with the Bankruptcy Act requirement that a credit card application or solicitation must clearly and conspicuously disclose in a prominent location on or with the application or solicitation a general description of the circumstances that may result in revocation of a discounted initial rate offered with the card. Therefore, to the extent that an issuer is promoting the discounted initial rate in the disclosure table provided with the application or solicitation or in the promotional materials accompanying the application or solicitation, the issuer must also disclose directly beneath the table the circumstances that may result in revocation of the discounted initial rate, and the rate that will apply after the discounted initial rate is revoked. Requiring issuers to disclose that information directly beneath the table will help consumers better understand the terms under which the discounted initial rate is being offered on the account.

The final rule requires that the circumstances under which a discounted initial rate may be revoked be disclosed directly beneath the table, rather than in the table. Credit card issuers subject to the final rules issued by the Board and other federal banking agencies published elsewhere in today's Federal Register will be prohibited from increasing an introductory rate unless the consumer's account becomes more Start Printed Page 5286than 30 days late. Accordingly, for most issuers subject to § 226.5a, the disclosure provided under this paragraph will be identical, because an introductory rate may be increased only if the account becomes more than 30 days late. As a result, the Board does not believe that most consumers will use the information about the revocation of a discounted initial rate in shopping for a credit card, since it will not vary from product to product. Therefore, while this information should be disclosed clearly and conspicuously with the table, the Board believes it should not be included in the table, where it may contribute to “information overload” and detract from the disclosure of other terms that may be of more use to consumers in shopping for credit.

Comment 5a(b)(1)-5 (proposed as comment 5a(b)(1)-4) is restructured to be consistent with new § 226.5a(b)(1)(iv). In addition, comment 5a(b)(1)-5.ii. is revised to clarify that the information about revocation of a discounted initial rate and the rate that will apply after revocation must be provided even if the rate that will apply after the discounted initial rate is revoked is the rate that would have applied at the end of the promotional period, and not a higher “penalty rate.” Also, comment 5a(b)(1)-5.ii. clarifies that in describing the rate that will apply after revocation of the discounted initial rate, if the rate that will apply after revocation of the discounted initial rate is already disclosed in the table, the issuer is not required to repeat the rate, but may refer to that rate in a clear and conspicuous manner. For example, if the rate that will apply after revocation of a discounted initial rate is the standard rate that applies to that type of transaction (such as a purchase or balance transfer transaction), and the standard rates are labeled in the table as “standard APRs,” the issuer may refer to the “standard APR” when describing the rate that will apply after revocation of a discounted initial rate.

In addition, comment 5a(b)(1)-5.ii. is revised to specify that the description of the circumstances in which a discounted initial rate could be revoked should be brief. For example, if an issuer may increase a discounted initial rate because the consumer does not make the minimum payment within 30 days of the due date, the issuer should describe this circumstance directly beneath the table as “make a late payment.” In addition, if the circumstances in which a discounted initial rate could be revoked are already listed elsewhere in the table, the issuer is not required to repeat the circumstances again, but may refer to those circumstances in a clear and conspicuous manner. For example, if the circumstances in which an initial discounted rate could be revoked are the same as the event or events that may trigger a “penalty rate” as described in § 226.5a(b)(1)(iv)(A), the issuer may refer to the actions listed in the Penalty APR row, in describing the circumstances in which the introductory rate could be revoked. Sample G-10(C) sets forth a disclosure labeled “Loss of Introductory APR” directly below the table to provide guidance to card issuers on how to meet the requirements in § 226.5a(b)(1)(iv)(B) and accompanying comment 5a(b)(1)-5.

Comment 5a(b)(1)-5.iii. also has been included in the final rule to expressly note that issuers subject to the final rules issued by the Board and other federal banking agencies published elsewhere in today's Federal Register are prohibited by those rules from increasing or revoking an introductory rate prior to its expiration, unless the account is more than 30 days late. The comment gives guidance on how such an issuer should comply with § 226.5a(b)(1)(iv)(B).

Rates that depend on consumers' creditworthiness. Credit card issuers often engage in risk-based pricing such that the rates offered on a credit card will depend on later determinations of a consumer's creditworthiness. For example, an issuer may use information collected in a consumer's application or solicitation reply form (e.g., income information) or obtained through a credit report from a consumer reporting agency to determine the rate for which a consumer qualifies. Issuers that use risk-based pricing may not be able to disclose the specific rate that would apply to a consumer, because issuers may not have sufficient information about a consumer's creditworthiness at the time the application is given or made available to the consumer.

In the June 2007 Proposal, the Board proposed to add § 226.5(b)(1)(v) and comment 5a(b)(1)-5 to address the circumstances in which an issuer is not required to state a single specific rate being offered at the time disclosures are given because the rate will depend on a later determination of the consumer's creditworthiness. In this situation, issuers would have been required to disclose the possible rates that might apply, and a statement that the rate for which the consumer may qualify at account opening depends on the consumer's creditworthiness. Under the proposal, a card issuer would have been allowed to disclose the possible rates as either specific rates or a range of rates. For example, if there are three possible rates that may apply (e.g., 9.99, 12.99 or 17.99 percent), an issuer would have been allowed to disclose specific rates (9.99, 12.99 or 17.99 percent) or a range of rates (9.99 to 17.99 percent). Proposed Samples G-10(B) and G-10(C) would have provided guidance for issuers on how to meet these requirements. In addition, the Board solicited comment on whether card issuers should alternatively be permitted to list only the highest possible rate that may apply instead of a range of rates (e.g., up to 17.99 percent).

In response to the June 2007 Proposal, several consumer group commenters suggested that the Board should not allow issuers to disclose a range of possible rates. Instead, issuers should be required to disclose the actual APR that the issuer is offering the consumer, because otherwise, consumers do not know the rate for which they are applying. Industry commenters generally supported the proposal clarifying that issuers may disclose the specific rates or range of possible rates, with an explanation that the rate obtained by the consumer is based on the consumer's creditworthiness. Several commenters suggested that the Board also allow issuers to disclose the highest APR that may apply instead of a range of rates, because they believed that this approach might be less confusing to consumers than seeing a range of rates. For example, a consumer may focus on the lowest rate in a range and be surprised when the final rate is higher than this lowest rate. Also, if the highest rate was the only rate disclosed, a consumer would not be upset by obtaining a lower rate than the rate initially disclosed. Other commenters indicated that disclosing only the highest APR should not be allowed, because consumers may believe this would be the APR that applied to them even though the highest APR may apply only to a small group of consumers solicited.

In addition, one commenter indicated that for some issuers, especially in the private label market, the actual rate for which a consumer qualifies may be determined using multiple factors, including the consumer's creditworthiness, whether the consumer is contemplating a purchase with the retailer named on the private label card, and other factors.

The Board adopts § 226.5a(b)(1)(v) and comment 5a(b)(1)-6 (proposed as comment 5a(b)(1)-5) with several revisions. Consistent with the proposal, § 226.5a(b)(1)(v) specifies that if a rate cannot be determined at the time disclosures are given because the rate Start Printed Page 5287depends at least in part on a later determination of the consumer's creditworthiness, the card issuer must disclose the specific rates or the range of rates that could apply and a statement that the rate for which the consumer may qualify at account opening will depend on the consumer's creditworthiness, and other factors if applicable. Generally, issuers are not allowed to disclose only the lowest rate, the median rate or the highest rate that could apply. See comment 5a(b)(1)-6 (proposed as comment 5a(b)(1)-5). The Board believes that requiring card issuers to disclose all the possible rates (as either specific rates, or as a range of rates) provides more useful information to consumers than allowing issuers to disclose only the lowest, median or highest APR. If a consumer sees a range or several specific rates, the consumer may be better able to understand the possible rates that may apply to the account.

Nonetheless, if the rate is a penalty rate, the card issuer at its option may disclose the highest rate that could apply, instead of disclosing the specific rates or the range of rates that could apply. See § 226.5a(b)(1)(v). With respect to penalty rates, issuers may set a highest rate for the penalty rate (such as 28 percent) but may either decide not to increase a consumer's rates based on a violation of a penalty rate trigger or may impose a penalty rate that is less than that highest rate, depending on factors at the time the penalty rate is imposed. It would be difficult for the issuer to disclose a range of possible rates for the penalty rate that is meaningful because the issuer might decide not to increase a consumer's rates based on a violation of a penalty rate trigger. In the penalty rate context, a range of possible penalty rates would likely be more confusing to consumers than only disclosing the highest penalty rate.

Comment 5a(b)(1)-6 (proposed as comment 5a(b)(1)-5) also is revised to clarify that § 226.5a(b)(1)(v) applies even if other factors are used in combination with a consumer's creditworthiness to determine the rate for which a consumer may qualify at account opening. For example, § 226.5a(b)(1)(v) would apply if the issuer considers the type of purchase the consumer is making at the time the consumer opens the account, in combination with the consumer's creditworthiness, to determine the rate for which the consumer may qualify at account opening. If other factors are considered, the issuer must amend the statement about creditworthiness, to indicate that the rate for which the consumer may qualify at account opening will depend on the consumer's creditworthiness and other factors. Nonetheless, if a consumer's creditworthiness is not one of the factors that will determine the rate for which the consumer may qualify at account opening (for example, if the rate is based solely on the type of purchase that the consumer is making at the time the consumer opens the account, or is based solely on whether the consumer has other banking relationships with the card issuer), § 226.5a(b)(1)(v) does not apply.

The Board is not requiring an issuer to provide the actual rate that the issuer is offering the consumer if that rate is not known. As explained above, issuers that use risk-based pricing may not be able to disclose the specific rate that would apply to a consumer because issuers may not have sufficient information about a consumer's creditworthiness at the time the application is given.

Proposed Samples G-10(B) and G-10(C) would have provided guidance for issuers on how to meet the requirements to provide the specific rates or the range of rates that could apply and a statement that the rate for which the consumer may qualify at account opening will depend on the consumer's creditworthiness. Specifically, proposed Samples G-10(B) and G-10(C) would have provided that issuers may meet these requirements by providing the specific rates or the range of rates and stating that the rate for which the consumer qualifies would be “based on your creditworthiness.” As discussed above, in response to the June 2007 Proposal, one commenter indicated that for some issuers, especially in the private label market, the actual rate for which a consumer qualifies may be determined using multiple factors, including the consumer's creditworthiness, whether the consumer is contemplating a purchase with the retailer named on the private label card and other factors. Samples G-10(B) and G-10(C) as adopted contain the phrase “based on your creditworthiness,” but pursuant to § 226.5a(b)(1)(v) discussed above, a creditor that considers other factors in addition to a consumer's creditworthiness in determining the APR applicable to a consumer's account would use language such as “based on your creditworthiness and other factors.”

Transactions with both rate and fee. When a consumer initiates a balance transfer or cash advance, card issuers typically charge consumers both interest on the outstanding balance of the transaction and a fee to complete the transaction. It is important that consumers understand when both a rate and a fee apply to specific transactions. In the June 2007 Proposal, the Board proposed to add a new § 226.5a(b)(1)(vi) to require that if both a rate and fee apply to a balance transfer or cash advance transaction, a card issuer must disclose that a fee also applies when disclosing the rate, and provide a cross reference to the fee. In consumer testing conducted for the Board prior to the June 2007 Proposal, some participants were more aware that an interest rate applies to cash advances and balance transfers than they were aware of the fee component, so the Board believed that a cross reference between the rate and the fee may help those consumers notice both the rate and the fee components.

In response to the June 2007 Proposal, several industry commenters suggested that the cross reference be eliminated, as unnecessary and leading to “information overload.” In addition, one industry commenter suggested that the Board also require a cross reference from the purchase APR to any transaction fee on purchases. One industry commenter suggested that issuers be allowed to modify the cross reference to state when the cash advance fee or balance transfer fee will not apply, such as “Cash advance fees will apply to cash advances except for convenience checks and fund transfers to other accounts with us.” In addition, one industry commenter asked the Board for clarification on whether a 0 percent APR required the cross reference between the rate and the fee.

In quantitative consumer testing conducted for the Board after the May 2008 Proposal, the Board investigated whether the presence of a cross reference from the balance transfer APR to the balance transfer fee improved consumers' awareness of and ability to identify the balance transfer fee. The results of the testing indicate that there was no statistically significant improvement in consumers' ability to identify the balance transfer fee if the cross reference was present. Given the results of the consumer testing and concerns about “information overload,” the Board has withdrawn proposed § 226.5a(b)(1)(vi). Proposed comment 5a(b)(1)-6, which would have given guidance on how to present a cross reference between a rate and fee, also is withdrawn.

APRs that vary by state. Currently, § 226.5a(b) requires card issuers to disclose the rates applicable to the account, for purchases, cash advances, and balance transfers. For disclosures required to be provided with credit card applications and solicitations, if the rate Start Printed Page 5288varies by state, card issuers must disclose in the table the rates for all states. Specifically, comment 5a(a)(2)-2 currently provides, in relevant part, that if rates or other terms vary by state, card issuers may list the states and the various disclosures in a single table or in separate tables.

The Board is concerned that such an approach of disclosing the rates for all states in the table (or having a table for each state) would detract from the purpose of the table: To provide key information in a simplified way. Thus, consistent with the reasons discussed in the section-by-section analysis to § 226.5a(a)(4) with respect to fees that vary by state, the final rule adds § 226.5a(b)(1)(vi) to provide that card issuers imposing APRs that vary by state may, at the issuer's option, disclose in the table required by § 226.5a either (1) the specific APR applicable to the consumer's account, or (2) the range of APRs, if the disclosure includes a statement that the APR varies by state and refers the consumer to a disclosure provided with the § 226.5a table where the APR applicable to the consumer's account is disclosed, for example in a list of APRs for all states. Listing APRs for multiple states in the table (or having a table for each state) is not permissible. In addition, as discussed above, comment 5a(a)(2)-2 currently provides, in relevant part, that if rates or other terms vary by state, card issuers may list the states and the various disclosures in a single table or in a separate table. Because under the final rule, an issuer would no longer be allowed to list fees or rates for multiple states in the table (or have a table for each state), this provision in comment 5a(a)(2)-2 is deleted as obsolete. These changes to § 226.5a and comment 5a(a)(2)-2 are adopted in part pursuant to TILA Section 127(c)(5), which authorizes the Board to add or modify § 226.5a disclosures as necessary to carry out the purposes of TILA. 15 U.S.C. 1637(c)(5).

Rate based on another rate on the account. In response to the June 2007 Proposal, one commenter asked the Board to clarify how a rate should be disclosed if that rate is based on another rate on the account. For example, assume that a penalty rate as described in § 226.5a(b)(1)(iv)(A) is determined by adding 5 percentage points to the current purchase rate, which is 10 percent. The Board adopts new comment 5a(b)(1)-7 to clarify how such a rate should be disclosed. Pursuant to comment 5a(b)(1)-7, a card issuer, in this example, must disclose 15 percent as the current penalty rate. If the purchase rate is a variable rate, then the penalty rate also is a variable rate. In that case, the card issuer also must disclose the fact that the penalty rate may vary and how the rate is determined, such as “This APR may vary with the market based on the Prime Rate.” In describing the penalty rate, the issuer may not disclose in the table the amount of the margin or spread added to the current purchase rate to determine the penalty rate, such as describing, in this example, that the penalty rate is determined by adding 5 percentage points to the purchase rate.

Typical APR. Several consumer groups have indicated that the current disclosure requirements in § 226.5a allow card issuers to promote low APRs, that include interest but not fees, while charging high penalty fees and penalty rates when consumers, for example, pay late or exceed the credit limit. As a result, these consumer groups suggested that the Board require credit card issuers to disclose in the table a “typical rate” that would include fees and charges that consumers pay for a particular open-end credit product. This rate would be calculated as the average effective rate disclosed on periodic statements over the last three years for customers with the same or similar credit card product. These consumer groups believe that this “typical rate” would reflect the real rate that consumers pay for the credit card product.

In the June 2007 Proposal, the Board did not propose that card issuers disclose the “typical rate” as part of the § 226.5a disclosures because the Board did not believe that the proposed typical APR would be helpful to consumers that seek credit cards. There are many different ways consumers may use their credit cards, such as the features they use, what fees they incur, and whether a balance is carried from month to month. For example, some consumers use their cards only for purchases, always pay off the bill in full, and never incur fees. Other consumers may use their cards for purchases, balance transfers or cash advances, but never incur late-payment fees, over-the-limit fees or other penalty fees. Still others may incur penalty fees and penalty rates. A “typical rate,” however, would be based on average fees and average balances that may not be typical for many consumers. Moreover, such a rate may confuse consumers about the actual rate that may apply to their account.

In response to the June 2007 Proposal, several consumers groups again suggested that the Board reconsider the issue of disclosing a “typical rate” in the table required by § 226.5a. The Board continues to believe that the proposed typical APR would not be helpful to consumers that seek credit cards for the reasons stated above. Thus, a requirement to disclose a “typical rate” is not included in the final rule.

5a(b)(2) Fees for Issuance or Availability

Section 226.5a(b)(2), which implements TILA Section 127(c)(1)(A)(ii)(I), requires card issuers to disclose any annual or other periodic fee, expressed as an annualized amount, that is imposed for the issuance or availability of a credit card, including any fee based on account activity or inactivity. 15 U.S.C. 1637(c)(1)(A)(ii)(I). In 1989, the Board used its authority under TILA Section 127(c)(5) to require that issuers also disclose non-periodic fees related to opening the account, such as one-time membership or participation fees. 15 U.S.C. 1637(c)(5); 54 FR 13855, Apr. 6, 1989.

Fees for issuance or availability of credit card products targeted to subprime borrowers. Often, subprime credit cards will have substantial fees related to the issuance and availability of credit. For example, these cards may impose an annual fee and a monthly maintenance fee for the card. In addition, these cards may impose multiple one-time fees when the consumer opens the card account, such as an application fee and a program fee. The Board believes that these fees should be clearly explained to consumers at the time of the offer so that consumers better understand when these fees will be imposed.

In the June 2007 Proposal, the Board proposed to amend § 226.5a(b)(2) to require additional information about periodic fees. 15 U.S.C. 1637(c)(5). Currently, issuers are required to disclose only the annualized amount of the fee. The Board proposed to amend § 226.5a(b)(2) to require issuers also to disclose the amount of the periodic fee, and how frequently it will be imposed. For example, if an issuer imposes a $10 monthly maintenance fee for a card account, the issuer must disclose in the table that there is a $10 monthly maintenance fee, and that the fee is $120 on an annual basis.

In addition, the Board proposed to amend § 226.5a(b)(2) to require additional information about non-periodic fees related to opening the account. Currently, issuers are required to disclose the amount of the non-periodic fee, but not that it is a one-time fee. The Board proposed to amend § 226.5a(b)(2) to require card issuers to disclose the amount of the fee and that it is a one-time fee. The final rule adopts § 226.5a(b)(2) as proposed. The Board believes that this additional information Start Printed Page 5289will allow consumers to better understand set-up and maintenance fees that are often imposed in connection with subprime credit cards. For example, the changes will provide consumers with additional information about how often the fees will be imposed by identifying which fees are one-time fees, which fees are periodic fees (such as monthly fees), and which fees are annual fees.

In addition, application fees that are charged regardless of whether the consumer receives credit currently are not considered fees as imposed for the issuance or availability of a credit card, and thus are not disclosed in the table. See current comment 5a(b)(2)-3 and § 226.4(c)(1). The Board proposed to delete the exception for these application fees and require that they be disclosed in the table as fees imposed for the issuance or availability of a credit card. Comment 5a(b)(2)-3 is adopted as proposed with stylistic changes. The Board believes that consumers should be aware of these fees when they are shopping for a credit card.

Currently, and under the June 2007 and May 2008 Proposals, comment 5a(b)(2)-2 provides that fees for optional services in addition to basic membership privileges in a credit or charge card account (for example, travel insurance or card-registration services) shall not be disclosed in the table if the basic account may be opened without paying such fees. The Board is aware that some subprime cards may charge a fee for an additional card on the account, beyond the first card on the account. For example, if there were two primary cardholders listed on the account, only one card on the account would be issued, and the cardholders would be charged a fee for another card if the cardholders request an additional card, so that each cardholder would have his or her own card. The Board is amending comment 5a(b)(2)-2 to clarify that issuing a card to each primary cardholder (not authorized users) is considered a basic membership privilege and fees for additional cards, beyond the first card on the account, must be disclosed as a fee for issuance or availability. Thus, a fee to obtain an additional card on the account beyond the first card (so that each primary cardholder would have his or her own card) must be disclosed in the table as a fee for issuance or availability under § 226.5a(b)(2). This fee must be disclosed even if the fee is optional in that the fee is charged only if the cardholder requests one or more additional cards.

5a(b)(3) Fixed Finance Charge; Minimum Interest Charge

Currently, § 226.5a(b)(3), which implements TILA Section 127(c)(1)(A)(ii)(II), requires that card issuers must disclose any minimum or fixed finance charge that could be imposed during a billing cycle. Card issuers typically impose a minimum charge (e.g., $0.50) in lieu of interest in those months where a consumer would otherwise incur an interest charge that is less than the minimum charge (a so-called “minimum interest charge”).

In the June 2007 Proposal, the Board proposed to retain the minimum finance charge disclosure in the table but refer to the charge as a “minimum interest charge” or “minimum charge” in the table, as discussed in the section-by-section analysis to Appendix G. Although minimum charges currently may be small, the Board was concerned that card issuers may increase these charges in the future. Also, the Board noted that it was aware of at least one credit card product for which no APR is charged, but each month a fixed charge is imposed based on the outstanding balance (for example, $6 charge per $1,000 balance). If the minimum finance charge disclosure were eliminated from the table, card issuers that offer this type of pricing would no longer be required to disclose the fixed charge in the table and consumers would not receive important information about the cost of the credit card. The Board also did not propose a de minimis minimum finance charge threshold. The Board was concerned that this approach could undercut the uniformity of the table, and could be misleading to consumers. The Board also proposed to amend § 226.5a(b)(3) to require card issuers to disclose in the table a brief description of the minimum finance charge, to give consumers context for when this charge will be imposed. See also proposed comment 5a(b)(3)-1.

In response to the June 2007 Proposal, several industry commenters recommended that the Board delete this disclosure from the table unless the minimum finance charge is over a certain nominal amount. They indicated that in most cases, the minimum finance charge is so small as to be irrelevant to consumers. They believed that it should only be in the table if the minimum finance charge is a significant amount. Consumer groups agreed with the Board's proposal to require the disclosure of the minimum finance charge in all cases and not to allow issuers to exclude the minimum finance charge from the table if the charge was under a certain specific amount.

In consumer testing conducted by the Board in March 2008, participants were asked to compare disclosure tables for two credit card accounts and decide which account they would choose. In one of the disclosure tables, a small minimum finance charge, labeled as a “minimum interest charge,” was disclosed. In the other disclosure table, no minimum finance charge was disclosed. None of the participants indicated that the small minimum finance charge on one card but not on the other would impact their decision to choose one card over the other.

Based on this consumer testing, the Board proposed in May 2008 to revise proposed § 226.5a(b)(3) to provide that an issuer must disclose in the table any minimum or fixed finance charge in excess of $1.00 that could be imposed during a billing cycle and a brief description of the charge, pursuant to the Board's authority under TILA Section 127(c)(5) which authorizes the Board to add or modify § 226.5a disclosures as necessary to carry out the purposes of TILA. 15 U.S.C. 1637(c)(5). The proposed rule would have continued to require disclosure in the table if any minimum or fixed finance charge was over this de minimis amount to ensure that consumers are aware of larger minimum or fixed finance charges that might impact them. Under the proposal, the $1.00 amount would have been adjusted to the next whole dollar amount when the sum of annual percentage changes in the Consumer Price Index in effect on June 1 of previous years equals or exceeds $1.00. See proposed comment 5a(b)(3)-2. This approach in adjusting the dollar amount that triggers the disclosure of a minimum or fixed finance charge is similar to TILA's rules for adjusting a dollar amount of fees that trigger additional protections for certain home-secured loans. TILA Section 103(aa), 15 U.S.C. 1602(aa). Under the proposal, at the issuer's option, the issuer would have been allowed to disclose in the table any minimum or fixed finance charge below the threshold. This flexibility was intended to facilitate compliance when adjustments are made to the dollar threshold. For example, if an issuer has disclosed a $1.50 minimum finance charge in its application and solicitation table at the time the threshold is increased to $2.00, the issuer could continue to use forms with the minimum finance charge disclosed, even though the issuer would no longer be required to do so.

In response to the May 2008 Proposal, industry commenters generally supported this aspect of the proposal. One industry commenter suggested a Start Printed Page 5290$5.00 threshold, because with the proposed $1.00 threshold, when operational costs are considered, for most banks it will be simpler to disclose any and all minimum or fixed finance charges. Another industry commenter suggested eliminating the minimum or fixed finance charge disclosure altogether, and adding a disclosure for cards that charge a monthly fee in lieu of the APR. In addition, one industry commenter suggested that the Board eliminate the minimum or fixed finance charge disclosure and monitor if issuers change their minimum or fixed finance charge calculations as a result. Consumer group commenters generally opposed the proposal because issuers would no longer be required to disclose an important cost to consumers (especially subprime consumers, where the fee might be significant in relation to the small initial available credit on subprime cards).

The minimum interest charge was also tested in the Board's qualitative consumer testing. In the two rounds of consumer testing conducted by the Board after the May 2008 Proposal, participants were asked to compare disclosure tables for two credit card accounts. In one of the disclosure tables, a small minimum interest charge was disclosed. In the other disclosure table, no minimum interest charge was disclosed. Participants were specifically asked whether the minimum interest charge would influence which card they would choose. Of the participants who understood what a minimum interest charge was, almost all said that the minimum interest charge would not play a significant role in their decision whether or not to apply for the card that disclosed the minimum interest charge because of the small amount of the fee.

The final rule retains the $1.00 threshold, as proposed, in § 226.5a(b)(3) with several modifications. Pursuant to the Board's authority under TILA Section 127(c)(5), the final rule retains the $1.00 threshold for minimum interest charges because the Board believes that when the minimum interest charge is a de minimis amount (i.e., $1.00 or less, as adjusted for inflation), disclosure of the minimum interest charge is not information that consumers will use to shop for a card. 15 U.S.C. 1637(c)(5). The final rule limits the $1.00 threshold to apply only to minimum interest charges, which are charges in lieu of interest in those months where a consumer would otherwise incur an interest charge that is less than the minimum charge. Fixed finance charges must be disclosed regardless of whether they are equal to or less than $1.00. For example, for credit card products described above where no APR is charged, but each month a fixed charge is imposed based on the outstanding balance (e.g., $6 charge per $1,000 balance), this fixed charge must be disclosed regardless of whether the charge is equal to or less than $1.00. The Board is limiting the $1.00 threshold to minimum interest charges because the Board believes that minimum interest charges are imposed infrequently, and most likely are not imposed month after month on an account, unlike fixed finance charges.

In addition, in a technical edit, the final rule is amended to specify that the $1.00 amount would be adjusted periodically by the Board to reflect changes in the Consumer Price Index. The final rule specifies that the Board shall calculate each year a price level adjusted minimum interest charge using the Consumer Price Index in effect on the June 1 of that year. When the cumulative change in the adjusted minimum value derived from applying the annual Consumer Price level to the current minimum interest charge threshold has risen by a whole dollar, the minimum interest charge will be increased by $1.00. Comments 5a(b)(3)-1 and -2 are also adopted with technical modifications.

5a(b)(4) Transaction Charges

Section 226.5a(b)(4), which implements TILA Section 127(c)(1)(A)(ii)(III), requires that card issuers disclose any transaction charge imposed on purchases. In the June 2007 Proposal, the Board proposed to amend § 226.5a(b)(4) to explicitly exclude from the table fees charged for transactions in a foreign currency or that take place in a foreign country. In an effort to streamline the contents of the table, the Board proposed to highlight only those fees that may be important for a significant number of consumers. In consumer testing for the Board prior to the June 2007 Proposal, participants did not mention foreign transaction fees as important fees they use to shop. In addition, there are few consumers who may pay these fees with any frequency. Thus, in the June 2007 Proposal, the Board proposed to except foreign transaction fees from disclosure of transaction fees in an application or solicitation, but to include such fees in the proposed account-opening summary table to ensure that interested consumers can learn of the fees before using the card. See proposed § 226.6(b)(4).

In response to the June 2007 Proposal, some consumer group commenters recommended that the Board mandate disclosure of foreign transaction fees in the table required under § 226.5a. They questioned the utility of the Board requiring foreign transaction fees in the account-opening table required under § 226.6, but prohibiting those fees to be disclosed in the table under § 226.5a. They believed that consumers as well as the industry would be better served by eliminating the few differences between the disclosures required at the two stages. In addition, one industry commenter recommended that the table required under § 226.5a include foreign transaction fees. This commenter believed that the foreign transaction fee is relevant to any consumer who travels in other countries, and the ability to choose a credit card based on the presence of the fee is important. In addition, the commenter noted that the large amount of press attention that the issue has received suggests that the presence or absence of the fee is now of interest to a significant number of consumers.

In the May 2008 Proposal, the Board proposed to require that foreign transaction fees imposed by the card issuer must be disclosed in the table required under § 226.5a. Specifically, the Board proposed to withdraw proposed § 226.5a(b)(4)(ii), which would have precluded a card issuer from disclosing a foreign transaction fee in the table required by § 226.5a. In addition, the Board proposed to add comment 5a(b)(4)-2 to indicate that foreign transaction fees charged by the card issuer are considered transaction charges for the use of a card for purchases, and thus must be disclosed in the table required under § 226.5a.

In the May 2008 Proposal, the Board noted its concern about the inconsistency in requiring foreign transaction fees in the account-opening table required by § 226.6, but prohibiting that fee in the table required by § 226.5a. In the June 2007 Proposal, the Board proposed that issuers may substitute the account-opening table for the table required by § 226.5a. See proposed comment 5a-2. Under the June 2007 Proposal, circumstances could have arisen where one issuer substitutes the account-opening table for the table required under § 226.5a (and thus is required to disclose the foreign transaction fee) but another issuer provides the table required under § 226.5a (and thus is prohibited from disclosing the foreign transaction fee). If a consumer was comparing the disclosures for these two offers, it may appear to the consumer that the issuer providing the account-opening table charges a foreign transaction fee and the issuer providing the table required under § 226.5a does not, even though Start Printed Page 5291the second issuer may charge the same or a higher foreign transaction fee than the first issuer. Thus, to promote uniformity, the Board proposed in May 2008 to require issuers to disclose the foreign transaction fee in both the account-opening table required by § 226.6 and the table required by § 226.5a. See proposed comment 5a(b)(4)-2. The Board also proposed that foreign transaction fees would be disclosed in the table required by § 226.5a similar to how those fees are disclosed in the proposed account-opening tables published in the June 2007 Proposal. See proposed Model Forms and Samples G-17(A), (B) and (C).

In response to the May 2008 Proposal, most consumer group and industry commenters supported the Board's proposal to require issuers to disclose foreign transaction fees in the table required by § 226.5a. Nonetheless, some industry commenters opposed the proposal because they believed that consumers would not shop on these fees. One industry commenter indicated that disclosing the foreign transaction fee in the table only in connection with purchases may be misleading to consumers as some issuers also charge this fee on cash advances in foreign currencies or in foreign countries. This commenter noted that in the June 2007 Proposal, the Board identified this fee in proposed § 226.5a(b)(4)(ii) as “a fee imposed by the issuer for transactions made in a foreign currency or that take place in a foreign country.” This commenter encouraged the Board to adopt similar “transaction” language in the final rule for § 226.5a(b)(4).

Comment 5a(b)(4)-2 is adopted as proposed in the May 2008 Proposal with several modifications. As discussed above, the final rule requires issuers to disclose foreign transaction fees in the table required by § 226.5a, to be consistent with the requirement to disclose that fee in the account-opening table required by § 226.6. In addition, foreign transaction fees could be relevant to consumers who travel in other countries or conduct transactions in foreign currencies, and the ability to choose a credit card based on the presence of the fee may be important to those consumers.

The Board notes that § 226.5a(b)(4) requires issuers to disclose any transaction charge imposed by the card issuer for the use of the card for purchases. Thus, comment 5a(b)(4)-2 clarifies that a transaction charge imposed by the card issuer for the use of the card for purchases includes any fee imposed by the issuer for purchases in a foreign currency or that take place outside the United States or with a foreign merchant. As noted by one commenter on the May 2008 Proposal, some issuers also charge a foreign transaction fee on cash advances in foreign currencies or in foreign countries. Issuers that charge a foreign transaction fee on cash advances in foreign currencies or in foreign countries are required to disclose that fee under § 226.5a(b)(8), which requires the issuer to disclose in the table any fee imposed for an extension of credit in the form of cash or its equivalent. Comment 5a(b)(8)-2 is added to clarify that cash advance fees include any charge imposed by the card issuer for cash advances in a foreign currency or that take place in a foreign country. In addition, both comments 5a(b)(4)-2 and 5a(b)(8)-2 clarify that if an issuer charges the same foreign transaction fee for purchases and cash advances in a foreign currency or in a foreign country, the issuer may disclose this foreign transaction fee as shown in Samples G-10(B) and G-10(C). Otherwise, the issuer will need to revise the foreign transaction fee language shown in Samples G-10(B) and G-10(C) to disclose clearly and conspicuously the amount of the foreign transaction fee that applies to purchases and the amount of the foreign transaction fee that applies to cash advances. Moreover, both comments 5a(b)(4)-2 and 5a(b)(8)-2 include a cross reference to comment 4(a)-4 for guidance on when a foreign transaction fee is considered charged by the card issuer.

5a(b)(5) Grace Period

Currently, § 226.5a(b)(5), which implements TILA Section 127(c)(A)(iii)(I), requires that card issuers disclose in the § 226.5a table the date by which or the period within which any credit extended for purchases may be repaid without incurring a finance charge. Section 226.5a(a)(2)(iii), which implements TILA Section 122(c)(2)(C), requires credit card applications and solicitations under § 226.5a to use the term “grace period” to describe the date by which or the period within which any credit extended for purchases may be repaid without incurring a finance charge. 15 U.S.C. 1632(c)(2)(C). In the June 2007 Proposal, the Board proposed new § 226.5(a)(2)(iii) to extend this requirement to use the term “grace period” to all references to such a term for the disclosures required to be in the form of a table, such as the account-opening table.

In response to the June 2007 Proposal, one industry commenter recommended that the Board no longer mandate the use of the term “grace period” in the table. Although TILA specifically requires use of the term “grace period” in the § 226.5a table, this commenter urged the Board to use its exception authority to choose a term that is more understandable to consumers. This commenter pointed out that its research as well as that conducted by the Board and the GAO had demonstrated that the term is confusing as a descriptor of the interest-free period between the purchase and the due date for customers who pay their balances in full. This commenter suggested that the Board revise the disclosure of the grace period in the table to use the heading “interest-free period” instead of “grace period.”

In the May 2008 Proposal, the Board proposed to use its exemption authority to delete the requirement to use the term “grace period” in the table required by § 226.5a. 15 U.S.C. 1604(a) and (f) and 1637(c)(5). As the Board discussed in the June 2007 Proposal, consumer testing conducted for the Board prior to the June 2007 Proposal indicated that some participants misunderstood the term “grace period” to mean the time after the payment due date that an issuer may give the consumer to pay the bill without charging a late-payment fee. The GAO in its Report on Credit Card Rates and Fees found similar misunderstandings by consumers in its consumer testing. See page 50 of GAO Report. Furthermore, many participants in the GAO testing incorrectly indicated that the grace period was the period of time promotional interest rates applied. Nonetheless, in consumer testing conducted for the Board prior to the June 2007 Proposal, the Board found that participants tended to understand the term “grace period” more clearly when additional context was added to the language of the grace period disclosure, such as describing that if the consumer paid the bill in full each month, the consumer would have some period of time (e.g., 25 days) to pay the new purchase balance in full to avoid interest. Thus, the Board proposed to retain the term “grace period.”

As discussed above, in response to the June 2007 Proposal, one commenter performed its own testing with consumers on the grace period disclosure proposed by the Board. This commenter found that the term “grace period” was still confusing to the participants in its testing, even with the additional context given in the grace period disclosure proposed by the Board. The commenter found that consumers understood the term “interest-free period” to more accurately describe the interest-free period between the purchase and the due date Start Printed Page 5292for customers who pay their balances in full.

In consumer testing conducted by the Board prior to the June 2007 Proposal, the Board tested the phrase “interest-free period.” The Board found that some consumers believed the phase “interest-free period” referred to the period of time that a zero percent introductory rate would be in effect, instead of the grace period. Subsequently, in consumer testing conducted by the Board in March 2008, the Board tested disclosure tables for a credit card solicitation that used the phrase “How to Avoid Paying Interest on Purchases” as the heading for the row containing the information on the grace period. Participants in this testing generally seemed to understand this phrase to describe the grace period. In addition, in the March 2008 consumer testing, the Board also tested the phrase “Paying Interest” in the context of a disclosure relating to a check that accesses a credit card account, where a grace period was not offered on this access check. Specifically, the phrase “Paying Interest” was used as the heading for the row containing information that no grace period was offered on the access check. Participants seemed to understand this phrase to mean that no grace period was being offered on the use of the access check. Thus, in the May 2008 Proposal the Board proposed to revise proposed § 226.5a(b)(5) to require that issuers use the phrase “How to Avoid Paying Interest on Purchases,” or a substantially similar phrase, as the heading for the row describing the grace period. If no grace period on purchases is offered, when an issuer is disclosing this fact in the table, the issuer would have been required to use the phrase “Paying Interest,” or a substantially similar phrase, as the heading for the row describing that no grace period is offered.

Comments on this aspect of the May 2008 Proposal were mixed. Some consumer group and industry commenters supported the new headings. Some of these commenters suggested that the new headings be mandated, that is, the Board should not allow “substantially similar” phrases to be used. Other industry and consumer group commenters suggested that the Board retain the use of the term “grace period” because they claimed that consumers generally understand the “grace period” phrase. In addition, other industry commenters suggested that the Board mandate one row heading (regardless of whether there is a grace period or not) and that heading should be “interest-free period.” These commenters believed that the phrase “interest-free period” would help consumers better understand the “grace period” concept generally and would reinforce for consumers that they pay interest from the date of the transaction for transactions other than purchases.

In one of the rounds of consumer testing conducted by the Board after the May 2008 Proposal, the following three headings were tested for describing the “grace period” concept: “How to Avoid Paying Interest on Purchases,” “Grace Period” and “Interest-free Period.” Participants in this round of testing were asked which of the three headings most clearly communicates the information contained in that row of the table. Most of the participants selected the heading “How to Avoid Paying Interest on Purchases.” A few of the participants selected the heading “Interest-Free Period.” None of the participants selected “Grace Period” as the best heading. A few participants commented that the term “grace period” was misleading because some people might think of a “grace period” as a period of time after the due date that a consumer could pay without being considered late. In addition, the Board believes that the heading “How to Avoid Paying Interest on Purchases” communicates in plain language the concept of the “grace period,” without requiring consumers to understand a specific phrase like “grace period” or “interest-free period” to represent that concept.

In addition, in the consumer testing conducted after the May 2008 Proposal, the Board continued to test the phrase “Paying Interest” as a disclosure heading in the context of a check that accesses a credit card account, where no grace period was offered on this access check. When asked whether there was any way to avoid paying interest on transactions made with the access check, most participants in these rounds of testing understood the “Paying Interest” phrase to mean that no grace period was being offered on the use of the access check. Thus, the final rule in § 226.5a(b)(5) adopts the new headings as proposed in May 2008, pursuant to the Board's authority in TILA Section 105(a) to provide exceptions necessary or proper to effectuate the purposes of TILA. 15 U.S.C. 1604(a).

Although the heading of the row will change depending on whether or not a grace period for all purchases is offered on the account, the Board does not believe that different headings will significantly undercut a consumer's ability to compare terms of credit card accounts. Most issuers offer a grace period on all purchases; thus, most issuers will use the term “How to Avoid Paying Interest on Purchases.” Nonetheless, in those cases where a consumer is reviewing the tables for two credit card offers—one which has a row with the heading “How to Avoid Paying Interest on Purchases” and one with a row “Paying Interest”—the Board believes that consumers will recognize that the information in those two rows relate to the same concept of when consumers will pay interest on the account.

As discussed above, some commenters suggested that the new headings be mandated to promote uniformity of the table, that is, the Board should not allow “substantially similar” phrases to be used. The Board agrees that consistent headings are important to enable consumers to better compare grace periods for different offers. Section 226.5a(b)(5) specifies that in disclosing a grace period that applies to all types of purchases in the table, the phrase “How to Avoid Paying Interest on Purchases” must be used as the heading for the row describing the grace period. If a grace period is not offered on all types of purchases or is not offered on any purchases, in describing this fact in the table, the phrase “Paying Interest” must be used as the heading for the row describing this fact.

As discussed above, § 226.5a(b)(5) currently requires that card issuers disclose in the § 226.5a table the date by which or the period within which any credit extended for purchases may be repaid without incurring a finance charge. Comment 5a(b)(5)-1 provides that a card issuer may, but need not, refer to the beginning or ending point of any grace period and briefly state any conditions on the applicability of the grace period. For example, the grace period disclosure might read “30 days” or “30 days from the date of the periodic statement (provided you have paid your previous balance in full by the due date).”

In the June 2007 Proposal, the Board proposed to amend § 226.5a(b)(5) to require card issuers to disclose briefly any conditions on the applicability of the grace period. The Board also proposed to amend comment 5a(b)(5)-1 to provide guidance for how issuers may meet the requirements in proposed § 226.5a(b)(5). Specifically, proposed comment 5a(b)(5)-1 would have provided that an issuer that conditions the grace period on the consumer paying his or her balance in full by the due date each month, or on the consumer paying the previous balance in full by the due date the prior month will be deemed to meet requirements to disclose conditions on the applicability of the grace period by providing the Start Printed Page 5293following disclosure: “If you pay your entire balance in full each month, you have [at least] __ days after the close of each period to pay your balance on purchases without being charged interest.”

In response to the June 2007 Proposal, several commenters suggested that the Board revise the model language provided in proposed comment 5a(b)(5)-1 to describe the grace period. One commenter suggested the following language: “Your due date is [at least] 25 days after your bill is totaled each month. If you don't pay your bill in full by your due date, you will be charged interest on the remaining balance.” Other commenters also recommended that the Board revise the disclosure of the grace period to make clearer that the consumer must pay the total balance in full each month by the due date to avoid paying interest on purchases. In addition, some consumer groups commented that if the issuer does not provide a grace period, the Board should mandate specific language that draws the consumer's attention to this fact.

Two industry commenters to the June 2007 Proposal noted that the “grace period” description in proposed sample forms was conditioned on “if you pay your entire balance in full each month.” One commenter suggested deleting the phrase as unnecessary; another asked the Board to provide flexibility in the description for creditors that offer a grace period on purchases if the purchase (not the entire) balance is paid in full.

In the March 2008 consumer testing, the Board tested the following language to describe a grace period: “Your due date is [at least] __ days after the close of each billing cycle. We will not charge you interest on purchases if you pay your entire balance (excluding promotional balances) by the due date each month.” Participants that read this language appeared to understand it correctly. That is, they understood that they could avoid paying interest on purchases is they paid their bill by the due date each month. Thus, in May 2008, the Board proposed to amend comment 5a(b)(5)-1 to provide this language as guidance to issuers on how to disclose a grace period. The Board noted that currently issuers typically require consumers to pay their entire balance in full each month to qualify for a grace period on purchases. However, in May 2008, the Board and other federal banking agencies proposed to prohibit most issuers from requiring consumers to pay off promotional balances in order to receive any grace period offered on non-promotional purchases. See 73 FR 28904, May 19, 2008. Thus, consistent with this proposed prohibition, the language in proposed comment 5a(b)(5)-1 would have indicated that the entire balance (excluding promotional balances) must be paid each month to avoid interest charges on purchases.

Also, in the March 2008 consumer testing, the Board tested language to describe that no grace period was being offered. Specifically, in the context of testing a disclosure related to an access check for which a grace period was not offered, the Board tested the following language: “We will begin charging interest on these check transactions on the transaction date.” Most participants that read this language understood they could not avoid paying interest on this check transaction, and therefore, that no grace period was being offered on this check transaction. Thus, in May 2008, the Board proposed to add comment 5a(b)(5)-2 to provide guidance on how to disclose the fact that no grace period on purchases is offered on the account. Specifically, proposed comment 5a(b)(5)-2 would have provided that issuers may use the following language to describe that no grace period on purchases is offered, as applicable: “We will begin charging interest on purchases on the transaction date.”

In response to the May 2008 Proposal, several industry commenters urged the Board to provide flexibility for card issuers to amend the “grace period” language to allow for a more accurate description of the grace period as may be appropriate or necessary. For example, these commenters indicated that this flexibility is needed since promotional balances may be described with more particularity (or using different terminology) on billing statements and elsewhere, and also since there may be circumstances in which the grace period could be conditioned on additional factors, aside from payment of a balance in full. In addition, several industry commenters noted that if the interagency proposal to prohibit most issuers from treating a payment as late unless consumers have been provided a reasonable amount of time to make that payment is adopted, issuers may have two due dates each month—one for the grace period end date and one for when payments will be considered late. Issuers would need flexibility to amend the grace period language to reference clearly the grace period end date. Also, several consumer group commenters suggested that the Board not adopt the proposed model language when a grace period is not offered on purchases, namely “We will begin charging interest on purchases on the transaction date.” These commenters suggested instead that the Board mandate the following language: “No grace period.”

In consumer testing conducted by the Board after the May 2008 Proposal, the Board tested the following language describing the grace period: “Your due date is [at least] __ days after the close of each billing cycle. We will not charge you interest on purchases if you pay your entire outstanding balance (excluding promotional balances) by the due date each month.” When asked whether there was any way not to pay interest on purchase, most participants noticed the language describing the grace period and appeared generally to understand that they could avoid paying interest on purchases by paying their balance in full each month. Nonetheless, most participants did not understand the phrase “(excluding promotional balances).” In the context of testing a disclosure related to an access check for which a grace period was not offered, the Board tested the following language: “We will begin charging interest on these check transactions on the transaction date.” When asked where there was any way to avoid paying interest on these check transactions, most participants saw the above language and understood that there was no grace period for these check transactions.

Based on this testing, the Board adopts in comment 5a(b)(5)-1 the model language proposed in May 2008 for describing a grace period that is offered on all types of purchases, with one modification. Specifically, the phrase “(excluding promotional balances)” is deleted from the model language. Thus, the model language is revised to read: “Your due date is [at least] __ days after the close of each billing cycle. We will not charge you interest on purchases if you pay your entire balance by the due date each month.” As discussed in supplemental information to final rules issued by the Board and other federal banking agencies published elsewhere in today's Federal Register, the Board and the other federal banking agencies have withdrawn the proposal that would have prohibited most issuers from requiring consumers to pay off promotional balances in order to receive any grace period offered on non-promotional purchases. Thus, the phrase “(excluding promotional balances)” is deleted as unnecessary. In addition, other technical edits have been made to comment 5a(b)(5)-1.

The final rule adopts in comment 5a(b)(5)-2 the following model language proposed in May 2008 to describe that no grace period on any purchases is Start Printed Page 5294offered, as applicable: “We will begin charging interest on purchases on the transaction date.” Comment 5a(b)(5)-3 is added to clarify that if an issuer provides a grace period on some types of purchases but no grace period on others, the issuer, as appropriate, may combine and revise the model language in comments 5a(b)(5)-1 and -2 to describe to which types of purchases a grace period applies and to which types of purchases no grace period is offered.

The Board's language in 5a(b)(5)-1 for describing a grace period on all purchases, and in 5a(b)(5)-2 for describing that no grace period exists on any purchases is not mandatory. This model language is meant as a safe harbor for issuers. Credit card issuers may amend this language as necessary or appropriate to describe accurately the grace period (or lack of grace period) offered on purchases on the account.

5a(b)(6) Balance Computation Method

TILA Section 127(c)(1)(A)(iv) requires the Board to name not more than five of the most common balance computation methods used by credit card issuers to calculate the balance for purchases on which finance charges are computed. 15 U.S.C. 1637(c)(1)(A)(iv). If issuers use one of the balance computation methods named by the Board, § 226.5a(b)(6) requires that issuers must disclose the name of that balance computation method in the table as part of the disclosures required by § 226.5a, but issuers are not required to provide a description of the balance computation method. If the issuer uses a balance computation method that is not named by the Board, however, the issuer must disclose a detailed explanation of the balance computation method. See current § 226.5a(b)(6); § 226.5a(a)(2)(i). In the June 2007 Proposal, the Board proposed to retain a brief reference to the balance computation method, but move the disclosure from the table to directly below the table. See proposed § 226.5a(a)(2)(iii).

Commenters generally supported the proposal. Many consumers urged the Board to ban the use of a computation method commonly called “two-cycle” as unfair. A federal banking agency urged the Board to require “cautionary disclosures” where technical explanations were insufficient, such as a for a description of two-cycle billing. Two commenters suggested expanding the list of commonly-used methods in § 226.5a(g) to include the daily balance method. One industry commenter suggested eliminating the requirement to provide the name of the balance computation method, and requiring a toll-free telephone number or an optional reference to the creditor's Web site instead.

Currently, the Board in § 226.5a(g) has named four balance computation methods: (1) Average daily balance (including new purchases) or (excluding new purchases); (2) two-cycle average daily balance (including new purchases) or (excluding new purchases); (3) adjusted balance; and (4) previous balance. In the June 2007 Proposal, the Board proposed to retain these four balance computation methods.

In May 2008, the Board and other federal banking agencies proposed to prohibit most issuers from using a balance computation method commonly referred to as the “two-cycle” balance method. See 73 FR 28904, May 19, 2008. Nonetheless, in the May 2008 Regulation Z Proposal, the Board did not propose deleting the two-cycle average daily balance method from the list in § 226.5(g) because the prohibition would not have applied to all issuers, such as state-chartered credit unions that would not have been subject to the National Credit Union Administration's proposed rules.

In response to the May 2008 Proposal, several consumer groups suggested that the Board consider requiring issuers that use the two-cycle method to disclose that “this method is the most expensive balance computation method and is prohibited for most credit card issuers,” assuming that the banking agencies' proposed rules prohibiting most issuers from using the “two cycle” method goes forward. In addition, these consumer groups continued to advocate use of an “Energy Star” approach in describing the balance calculation methods, where each balance computation method would be rated on how expensive it is, and that rating would be disclosed.

The Board is adopting the requirement to disclose the name of the balance computation method used by the creditor beneath the table, as proposed. In consumer testing conducted for the Board prior to the June 2007 Proposal, virtually no participants understood the two balance computation methods used by most card issuers—the average daily balance method and the two-cycle average daily balance method—when those methods were just described by name. The GAO found similar results in its consumer testing. See GAO Report on Credit Card Rates and Fees, at pages 50-51. In the consumer testing conducted for the Board prior to the June 2007 Proposal, a version of the table was used which attempted to explain briefly that the “two-cycle average daily balance method” would be more expensive than the “average daily balance method” for those consumers that sometimes pay their bill in full and sometimes do not. Participants' answers suggested they did not understand this disclosure. They appeared to need more information about how balances are calculated.

In consumer testing conducted for the Board in March 2008, a version of the table was used which attempted to explain in more detail the “average daily balance method” and the “two-cycle average daily balance method” and the situation in which the two-cycle method results in higher interest charges—namely, in those months where a consumer paid his or her entire outstanding balance in full in one billing cycle but then does not pay the entire balance in full the following cycle. While participants that saw the table understood that under two-cycle billing, interest would be charged on balances during both the current and previous billing cycles, most participants did not understand that they would only be charged interest in the previous billing cycle if they had paid the outstanding balance in full for the previous cycle but not for the current cycle. Thus, most participants did not understand that two-cycle billing would not lead to higher interest charges than the “average daily balance method” if a consumer never paid in full.

TILA Section 122(c)(2) states that for certain disclosures set forth in Section TILA 127(c)(1)(A), including the balance computation method, the Board shall require that the disclosure of such information, to the extent the Board determines to be practicable and appropriate, be in the form of a table. 15 U.S.C. 1632(c)(2). The Board believes that it is no longer appropriate to continue to require issuers to disclose the balance computation method in the table, because the name of the balance computation method used by issuers does not appear to be meaningful to consumers and may distract from more important information contained in the table. Thus, the final rule retains a brief reference to the balance computation method, but moves the disclosure from the table to directly below the table. See § 226.5a(a)(2)(iii).

The final rule continues to require that issuers disclose the name of the balance computation method beneath the table because this disclosure is required by TILA Section 127(c)(1)(A)(iv). Consumers and others will have access to information about the balance calculation method used on the credit card account if they find it useful. Under final rules issued by the Board and other federal banking agencies published elsewhere in today's Start Printed Page 5295 Federal Register, most credit card issuers are prohibited from using the “two cycle” balance computation method. Nonetheless, this final rule retains the “two-cycle” disclosure because not all issuers are covered by the final rules published elsewhere in today's Federal Register which preclude use of the two-cycle balance computation method.

The Board is not requiring issuers that are permitted to and choose to use the two-cycle method to disclose that “this method is the most expensive balance computation method and is prohibited for most credit card issuers.” As discussed above, a statement that the two-cycle method is the most expensive balance computation method would be accurate only for those consumers who sometimes pay their bill in full and sometime do not. For consumers that never pay their bill in full, or always pay their bill in full, the interest paid under the two-cycle method is the same as paid under the one-cycle average daily balance method. For the same reasons, the Board is not requiring an “Energy Star” approach in describing the balance calculation methods, which would require each balance computation method to be rated on how expensive it is, and require that rating to be disclosed. Whether one balance computation method is more expensive than another would depend on how a consumer uses his or her account.

5a(b)(8) Cash Advance Fee

Currently, comment 5a(b)(8)-1 provides that a card issuer must disclose only those fees it imposes for a cash advance that are finance charges under § 226.4. For example, a charge for a cash advance at an ATM would be disclosed under § 226.5a(b)(8) unless a similar charge is imposed for ATM transactions not involving an extension of credit. In the June 2007 Proposal, the Board proposed to provide that all transaction fees on credit cards would be considered finance charges. Thus, the Board proposed to delete the current guidance discussed in comment 5a(b)(8)-1 as obsolete. As discussed in the section-by-section analysis to § 226.4, the final rule adopts the proposal that all transaction fees imposed by a card issuer on a cardholder are considered finance charges. Thus, the Board also deletes current comment 5a(b)(8)-1 as proposed.

A new comment 5a(b)(8)-1 is added to refer issuers to Samples G-10(B) and G-10(C) for guidance on how to disclose clearly and conspicuously the cash advance fee. In addition, as discussed in the section-by-section analysis to § 226.5a(b)(4), new comment 5a(b)(8)-2 is added to clarify that cash advance fees includes any charge imposed by the card issuer for cash advances in a foreign currency or that take place outside the United States or with a foreign merchant. In addition, comment 5a(b)(8)-2 clarifies that if an issuer charges the same foreign transaction fee for purchases and cash advances in a foreign currency or that take place outside the United States or with a foreign merchant, the issuer may disclose this foreign transaction fee as shown in Samples G-10(B) and (C). Otherwise, the issuer will need to revise the foreign transaction fee shown in Samples G-10(B) and (C) to disclose clearly and conspicuously the amount of the foreign transaction fee that applies to purchases and the amount of the foreign transaction fee that applies to cash advances. Moreover, comment 5a(b)(8)-2 provides a cross reference to comment 4(a)-4 for guidance on when a foreign transaction fee is considered charged by the card issuer.

In addition, consistent with the account-opening disclosures required in § 226.6, comment 5a(b)(8)-3 is added to clarify that any charge imposed on a cardholder by an institution other than the card issuer for the use of the other institution's ATM in a shared or interchange system is not a cash advance fee that must be disclosed in the table pursuant to § 226.5a(b)(8).

5a(b)(12) Returned-Payment Fee

Currently, § 226.5a does not require a card issuer to disclose a fee imposed when a payment is returned. In the June 2007 Proposal, the Board proposed to add § 226.5a(b)(12) to require issuers to disclose this fee in the table. Typically, card issuers will impose a fee and a penalty rate if a cardholder's payment is returned. As discussed above, the final rule adopts the Board's proposal to require card issuers to disclose in the table the reasons that a penalty rate may be imposed. See § 226.5a(b)(1)(iv). The final rule also requires card issuers to disclose the returned-payment fee, pursuant to the Board's authority under TILA Section 127(c)(5), so that consumers are told both consequences of returned payments. 15 U.S.C. 1637(c)(5). In addition, returned-payment fees are similar to late-payment fees in that returned-payment fees also can relate to a consumer not paying on time; if the only payment made by a consumer during a given billing cycle is returned, the return of the payment also could result in the consumer being deemed to have paid late. Late-payment fees are disclosed in the table and the Board believes that consumers also should be aware of returned-payment fees when shopping for a credit card. See section-by-section analysis to § 226.5a(a)(2).

Cross References to Penalty Rate

Card issuers often impose both a fee and penalty rate for the same behavior—such as a consumer paying late, exceeding the credit limit, or having a payment returned. In consumer testing conducted for the Board prior to the June 2007 Proposal, participants tended to associate paying penalty fees with certain behaviors (such as paying late or going over the credit limit), but they did not tend to associate rate increases with these same behaviors. By linking the penalty fees with the penalty rate, participants more easily understood that if they engage in certain behaviors, such as paying late, their rates may increase in addition to incurring a fee. Thus, in the June 2007 Proposal, the Board proposed to add § 226.5a(b)(13) to provide that if a card issuer may impose a penalty rate for any of the reasons that a penalty fee would be imposed (such as a late payment, going over the credit limit, or a returned payment), the issuer in disclosing the fee also must disclose that the penalty rate may apply, and must provide a cross reference to the penalty rate. Proposed Samples G-10(B) and G-10(C) would have provided guidance on how to provide these disclosures.

In response to the June 2007 Proposal, several industry commenters suggested that the cross reference be eliminated, as unnecessary and leading to “information overload.” In addition, one commenter suggested that the cross reference not be required if one late payment cannot cause the APR to increase. Alternatively, this commenter suggested that the conditions be disclosed with the cross reference, for example, “If two consecutive payments are late, your APRs may also be increased; see Penalty APR section above.”

In quantitative consumer testing conducted for the Board after the May 2008 Proposal, the Board investigated whether the presence of a cross reference from a penalty fee, specifically the over-the-limit fee, to the penalty APR improved consumers' awareness of the fact that a penalty rate could be applied to their accounts if they went over the credit limit. The results of the testing indicate that there was no statistically significant improvement in consumers' awareness that going over the limit could trigger penalty pricing when a cross reference was included. Because the testing suggests that cross-references from penalty fees to the Start Printed Page 5296penalty rate disclosure does not improve consumer understanding of the circumstances in which penalty pricing can be applied to their accounts, and due to concerns about “information overload,” proposed § 226.5a(b)(13) and comment 5a(b)(13)-1 have been withdrawn from the final rule. Thus, the final rule does not require cross-references from penalty fees to penalty rates in the § 226.5a table.

5a(b)(13) Required Insurance, Debt Cancellation or Debt Suspension Coverage

Credit card issuers often offer optional insurance or debt cancellation or suspension coverage with the credit card. Under the current rules, costs associated with the insurance or debt cancellation or suspension coverage are not considered “finance charges” if the coverage is optional, the issuer provides certain disclosures to the consumer about the coverage, and the issuer obtains an affirmative written request for coverage after the consumer has received the required disclosures. Card issuers frequently provide the disclosures discussed above on the application form with a space to sign or initial an affirmative written request for the coverage. Currently, issuers are not required to provide any information about the insurance or debt cancellation or suspension coverage in the table that contains the § 226.5a disclosures.

In the event that a card issuer requires the insurance or debt cancellation or debt suspension coverage (to the extent permitted by state or other applicable law), the Board proposed new § 226.5a(b)(14) in the June 2007 Proposal to require that the issuer disclose any fee for this coverage in the table. In addition, proposed § 226.5a(b)(14) would have required that the card issuer also disclose a cross reference to where the consumer may find more information about the insurance or debt cancellation or debt suspension coverage, if additional information is included on or with the application or solicitation. Proposed Sample G-10(B) would have provided guidance on how to provide the fee information and the cross reference in the table. The final rule adopts new § 226.5a(b)(13) (renumbered from § 226.5a(b)(14)) as proposed. If insurance or debt cancellation or suspension coverage is required in order to obtain a credit card, the Board believes that fees required for this coverage should be highlighted in the table so that consumers are aware of these fees when considering an offer, because they will be required to pay the fee for this coverage every month in order to have the credit card.

5a(b)(14) Available Credit

Subprime credit cards often have substantial fees assessed when the account is opened. Those fees will be billed to the consumer as part of the first statement, and will substantially reduce the amount of credit that the consumer initially has available with which to make purchases or other transactions on the account. For example, for cards where a consumer is given a minimum credit line of $250, after the start-up fees have been billed to the account, the consumer may have less than $100 of available credit with which to make purchases or other transactions in the first month. In addition, consumers will pay interest on these fees until they are paid in full.

The federal banking agencies have received a number of complaints from consumers with respect to cards of this type. Complainants often claim that they were not aware of how little available credit they would have after all the fees were assessed. Thus, in the June 2007 Proposal, the Board proposed to add § 226.5a(b)(16) to inform consumers about the impact of these fees on their initial available credit. Specifically, proposed § 226.5a(b)(16) would have provided that if (1) a card issuer imposes required fees for the issuance or availability of credit, or a security deposit, that will be charged against the card when the account is opened, and (2) the total of those fees and/or security deposit equal 25 percent or more of the minimum credit limit applicable to the card, a card issuer must disclose in the table an example of the amount of the available credit that a consumer would have remaining after these fees or security deposit are debited to the account, assuming that the consumer receives the minimum credit limit offered on the relevant account. In determining whether the 25 percent threshold test is met, the issuer would have been required to consider only fees for issuance or availability of credit, or a security deposit, that are required. If certain fees for issuance or availability are optional, these fees would not have been required to be considered in determining whether the disclosure must be given. Nonetheless, if the 25 percent threshold test is met in connection with the required fees or security deposit, the issuer would have been required to disclose two figures—the available credit after excluding any optional fees from the amounts debited to the account, and the available credit after including any optional fees in the amounts debited to the account.

In addition, the Board proposed comment 5a(b)(16)-1 to clarify that in calculating the amount of available credit that must be disclosed in the table, an issuer must consider all fees for the issuance or availability of credit described in § 226.5a(b)(2), and any security deposit, that will be imposed and charged to the account when the account is opened, such as one-time issuance and set-up fees. For example, in calculating the available credit, issuers would have been required to consider the first year's annual fee and the first month's maintenance fee (if applicable) if they are charged to the account immediately at account opening. Proposed Sample G-10(C) would have provided guidance to issuers on how to provide this disclosure. (See proposed comment 5a(b)(16)-2).

As described above, a card issuer would have been required to consider only required fees for issuance or availability of credit, or a security deposit, that will be charged against the card when the account is opened in determining whether the 25 percent threshold test is met. A card issuer would not have been required to consider other kinds of fees, such as late fees or over-the-limit fees when evaluating whether the 25 percent threshold test is met. The Board solicited comment on whether there are other fees (other than fees required for issuance or availability of credit) that are typically imposed on these types of accounts when the account is opened, and should be included in determining whether the 25 percent threshold test is met.

In response to the June 2007 Proposal, several commenters suggested start-up fees should be banned in some instances. Several consumer groups and one member of Congress suggested that start-up fees that equal 25 percent or more of the available credit line be banned. Another consumer group suggested that start-up fees exceeding 5 percent of the available credit line be banned. In addition, several consumer groups suggested that the Board should prohibit security deposits from being charged to the account as an unfair practice.

Assuming the Board did not ban start-up fees, several consumer groups suggested that the threshold for the available credit disclosure be lowered to 5 percent instead of 25 percent. In contrast, several industry commenters suggested that the threshold be lowered to 10 percent or 15 percent. In addition, while some commenters supported the Board's proposal to consider only required start-up fees (and not optional Start Printed Page 5297fees) in deciding whether the 25 percent threshold is met, some consumer groups suggested that the threshold test be based on required and optional fees. Several consumer groups also recommended that the language of the available credit disclosure be shortened and a percentage be disclosed, as follows: “AVAILABLE CREDIT: The fees charged when you open this account will be $25 (or $40 with an additional card), which is 10% (or 16% with an additional card) of the minimum credit limit of $250. If you receive a $250 credit limit, you will have $225 in available credit (or $210 with an additional card).” These consumer groups also suggested that the available credit disclosure be required in advertisements as well, especially in the solicitation letter for direct mail and Internet applications and solicitations.

In May 2008, the Board and other federal banking agencies proposed to address concerns regarding subprime credit cards by prohibiting institutions from financing security deposits and fees for credit availability (such as account-opening fees or membership fees) if those charges would exceed 50 percent of the credit limit during the first twelve months and from collecting at account opening fees that are in excess of 25 percent of the credit limit in effect on the consumer's account when opened. See 73 FR 28904, May 19, 2008. In the supplementary information to the May 2008 Regulation Z Proposal, the Board indicated that if such an approach is adopted as proposed, appropriate revisions would be made to ensure consistency among the regulatory requirements and to facilitate compliance when the Board adopted revisions to the Regulation Z rules for open-end (not home-secured) credit.

In response to the May 2008 Regulation Z Proposal, several commenters again suggested that the threshold for the available credit disclosure be reduced to 5 percent or 10 percent. Another consumer group commenter suggested that the Board always require the available credit disclosure if there are start-up fees on the account, including annual fees. In addition, several consumer group commenters reiterated their comments on the June 2007 Proposal that the threshold test for when the available credit disclosure must be given should be based on required and optional fees.

Under final rules issued by the Board and other federal banking agencies published elsewhere in today's Federal Register, most credit card issuers are precluded from financing security deposits and fees for credit availability if those charges would exceed 50 percent of the credit limit during the first six months and from collecting at account opening, fees that are in excess of 25 percent of the credit line in effect on the consumer's account when opened. Notwithstanding these substantive provisions, the Board believes that for subprime cards, a disclosure of available credit is needed in the table to inform consumers about the impact of start-up fees on the initial available credit.

The final rule adopts § 226.5a(b)(16) with several modifications, and renumbers the provision as § 226.5a(b)(14). Specifically, the final rule amends the proposal to provide that fees or security deposits that are not charged to the account are not subject to the disclosure requirements in § 226.5a(b)(14). In addition, comment 5a(b)(14)-1 (proposed as comment 5a(b)(16)-1) is revised from the proposal to clarify that in calculating the amount of the available credit including optional fees, if optional fees could be charged multiple times, the issuer shall assume that the optional fee is only imposed once. For example, if an issuer charges a fee for each additional card issued on the account, the issuer in calculating the amount of the available credit including optional fees must assume that the cardholder requests only one additional card. Also, comment 5a(b)(14)-1 is revised to specify that in disclosing the available credit, an issuer must round down the available credit amount to the nearest whole dollar.

The final rule also differs from the proposal in that it contains a 15 percent threshold for when the credit availability disclosure must be given, namely, when required fees for issuance or availability of credit, or a security deposit, that will be charged against the card when the account is opened equal 15 percent or more of the minimum credit limit applicable to the card. The Board lowered the threshold to 15 percent to address commenters' concerns that a lower threshold would better inform consumers about offers of credit where large portions of the available credit on a new account are taken up by fees before the consumer has the opportunity to use the account. The Board has not lowered the threshold to 5 percent or 10 percent as suggested by some other commenters. The Board believes that a 15 percent threshold will ensure that consumers will receive the disclosure in connection with subprime credit card products, but that the disclosure will generally not be required in connection with a prime credit card account, for which credit limits are higher and less fees are charged when the account is opened. The Board believes that the disclosure is most useful to consumers when a substantial portion of the minimum credit line is not available because required start-up fees (or a required security deposit) are charged to the account. The available credit disclosure may not be as meaningful to consumers, when those consumers are receiving 90 to 95 percent of the minimum credit line in available credit at account opening.

In addition, the Board retained in the final rule that the available credit disclosure must be given if required start-up fees (or a required security deposit) charged against the account at account-opening equal 15 percent or more of the minimum credit line. Optional start-up fees are not considered when determining whether the 15 percent threshold is met. Nonetheless, if the 15 percent threshold is met in connection with the required fees or security deposit, the issuer must disclose two figures—the available credit after excluding any optional fees from the amounts debited to the account, and the available credit after including any optional fees in the amounts debited to the account (assuming that each optional fee is only charged once). The Board believes that it is appropriate not to consider optional fees when determining whether the 15 percent threshold is initially met because consumers are not required to incur these fees to obtain the credit card account. Consistent with the proposal, the final rule also requires an issuer to consider only fees for the issuance or availability of credit when determining whether the 15 percent threshold is met; other types of fees such as late-payment fees or over-the-limit fees are not required to be considered.

Moreover, the final rule does not adopt the language for the available credit disclosure suggested by several consumer groups. The Board believes that including percentages in the disclosure, as suggested by those consumer groups, would be confusing to consumers. The final rule also does not require that issuers provide the available credit disclosure in the solicitation letter for direct mail and Internet applications and solicitations, as suggested by several consumer group commenters. In consumer testing conducted by the Board, participants generally noticed and understood the available credit disclosure in the table required by § 226.5a. Thus, the Board does not believe that repeating that disclosure in the solicitation letter for direct mail and Internet applications and solicitations is needed. Sample Start Printed Page 5298G-10(C) sets forth an example of how the available credit disclosure may be made.

5a(b)(15) Web Site Reference

In June 2007, the Board proposed to revise § 226.5a to require that credit card issuers must disclose in the table a reference to a Board Web site and a statement that consumers can find on this Web site educational materials on shopping for and using credit card accounts. See proposed § 226.5a(b)(17). Such materials would expand those already available on choosing a credit card at the Board's Web site.[17] The Board recognized that some consumers may need general education about how credit cards work and an explanation of typical account terms that apply to credit cards. In the consumer testing conducted for the Board, participants showed a wide range of understanding about how credit cards work generally, with some participants showing a firm understanding of terms that relate to credit card accounts, while others had difficulty expressing basic financial concepts, such as how the interest rate differs from a one-time fee. The Board's current Web site explains some basic financial concepts—such as what an APR is—as well as terms that typically apply to credit card accounts. Through the Web site, the Board may continue to expand the explanation of other credit card terms, such as grace periods, that may be difficult to explain concisely in the disclosures given with applications and solicitations.

In response to the June 2007 Proposal, several industry commenters questioned whether consumers would use the Web site resource, and suggested that the Board either not require the Web site disclosure or place the disclosure outside of the table to avoid “information overload.” Consumer groups generally supported placing the Web site disclosure in the table, and requested that the Board provide an alternative information source for those consumers who lack Internet access, such as a toll-free telephone number at which consumers can obtain a free copy of similar information.

The final rule adopts § 226.5a(b)(15) (proposed as § 226.5a(b)(17)). As part of consumer testing, participants were asked whether they would use a Board Web site to obtain additional information about credit cards generally. Some participants indicated they might use the Web site, while others indicated that it was unlikely they would use such a Web site. Although it is hard to predict from the results of the testing how many consumers might use the Board's Web site, and recognizing that not all consumers have access to the Internet, the Board believes that this Web site may be helpful to some consumers as they shop for a credit card and manage their account once they obtain a credit card. Thus, the final rule requires a reference to a Board Web site to be included in the table because this is a cost-effective way to provide consumers with additional information on credit cards. The Board is not requiring creditors to also disclose a toll-free telephone number at which consumers can obtain a free copy of similar information from the Board. The Board anticipates that consumers are not likely to use a toll-free telephone number to request educational materials in these instances because they will not want to delay applying for a credit card until the materials are delivered. Thus, such a requirement would not significantly benefit consumers on the whole.

Payment Allocation and Other Suggested Disclosures Under § 226.5a(b)

Payment allocation. Currently, many credit card issuers allocate payments in excess of the minimum payment first to balances that are subject to the lowest APR. For example, if a cardholder made purchases using a credit card account and then initiated a balance transfer, the card issuer might allocate a payment (less than the amount of the balances) to the transferred balance portion of the account if that balance was subject to a lower APR than the purchases. Card issuers often will offer a discounted initial rate on balance transfers (such as 0 percent for an introductory period) with a credit card solicitation, but not offer the same discounted rate for purchases. In addition, the Board is aware of at least one issuer that offers the same discounted initial rate for balance transfers and purchases for a specified period of time, where the discounted rate for balance transfers (but not the discounted rate for purchases) may be extended until the balance transfer is paid off if the consumer makes a certain number of purchases each billing cycle. At the same time, issuers typically offer a grace period for purchases if a consumer pays his or her bill in full each month. Card issuers, however, do not typically offer a grace period on balance transfers or cash advances. Thus, on the offers described above, a consumer cannot take advantage of both the grace period on purchases and the discounted rate on balance transfers. The only way for a consumer to avoid paying interest on purchases—and thus have the benefit of the grace period—is to pay off the entire balance, including the balance transfer subject to the discounted rate.

In the consumer testing conducted for the Board prior to the June 2007 Proposal, many participants did not understand how payments would be allocated and that they could not take advantage of the grace period on purchases and the discounted rate on balance transfers at the same time. Model forms were tested that included a disclosure attempting to explain this to consumers. Nonetheless, testing showed that a significant percentage of participants still did not fully understand how payment allocation can affect their interest charges, even after reading the disclosure tested. In the supplementary information accompanying the June 2007 Proposal, the Board indicated its plans to conduct further testing of the disclosure to determine whether the disclosure could be improved to more effectively communicate to consumers how payment allocation can affect their interest charges.

In the June 2007 Proposal, the Board proposed to add § 226.5a(b)(15) to require card issuers to explain payment allocation to consumers. Specifically, the Board proposed that issuers explain how payment allocation would affect consumers, if an initial discounted rate were offered on balance transfers or cash advances but not purchases. The Board proposed that issuers must disclose to consumers (1) that the initial discounted rate applies only to balance transfers or cash advances, as applicable, and not to purchases; (2) that payments will be allocated to the balance transfer or cash advance balance, as applicable, before being allocated to any purchase balance during the time the discounted initial rate is in effect; and (3) that the consumer will incur interest on the purchase balance until the entire balance is paid, including the transferred balance or cash advance balance, as applicable.

In response to the June 2007 Proposal, several commenters recommended the Board test a simplified payment allocation disclosure that covers cases other than low rate balance transfers offered with a credit card. In consumer testing conducted for the Board in March 2008, the Board tested the following payment allocation disclosure: “Payments may be applied to balances with lower APRs first. If you have balances at higher APRs, you may pay more in interest because these balances cannot be paid off until all lower-APR balances are paid in full Start Printed Page 5299(including balance transfers you make at the introductory rate).” Some participants understood from prior experience that issuers typically will apply payments to lower APR balances first and the fact that this method causes them to incur higher interest charges. For those participants that did not know about payment allocation methods from prior experience, the disclosure tested was not effective in explaining payment allocation to them.

In May 2008, the Board and other federal banking agencies proposed substantive provisions on how issuers may allocate payments. 73 FR 28904, May 19, 2008. Specifically, under that proposal, when different annual percentage rates apply to different balances, most issuers would have been required to allocate amounts paid in excess of the minimum payment using one of three specified methods or a method that is no less beneficial to consumers. Furthermore, when an account has a discounted promotional rate balance or a balance on which interest is deferred, most issuers would have been required to give consumers the full benefit of that discounted rate or deferred interest plan by allocating amounts in excess of the minimum payment first to balances on which the rate is not discounted or interest is not deferred (except, in the case of a deferred interest plan, for the last two billing cycles during which interest is deferred). Most issuers also would have been prohibited from denying consumers a grace period on non-promotional purchases (if one is offered) solely because they have not paid off a balance at a promotional rate or a balance on which interest is deferred.

In the supplementary information to the May 2008 Regulation Z Proposal, the Board indicated it would withdraw the proposal to require a card issuer to explain payment allocation to consumers in the table, if the substantive provisions on payment allocation proposed by the Board and other federal banking agencies in May 2008 were adopted.

In response to the May 2008 Regulation Z Proposal, several consumer group commenters suggested that the Board retain a payment allocation disclosure, even if the substantive provisions on payment allocation were adopted. Specifically, these commenters suggested that the Board require issuers to disclose which of the three proposed payment allocation methods they will use when there is no promotional rate on the account. Also, these commenters indicated that issuers should be required to disclose how they apply the minimum payment. These commenters suggested that the payment allocation disclosures could appear outside the table required by § 226.5a. Furthermore, these commenters suggested that some consumers might understand these disclosures and use them. In addition, these commenters indicated that disclosure of the payment allocation method would allow consumer groups to know which method an issuer is using and the consumer groups could rate the methods, to help consumers understand which card is better for the consumer.

In consumer testing conducted for the Board after May 2008, different versions of disclosures explaining payment allocation were tested, including language adapted from current credit card disclosures. Before participants were shown any disclosures explaining payment allocation, they were asked a series of questions designed to determine whether they had prior knowledge of payment allocation methods. This portion of the testing consisted of showing a hypothetical example to participants and asking them, based on their prior experience, (i) how they believed the card issuer would allocate the payment and (ii) how the participant would want the payment allocated. Participants were then shown language explaining how a hypothetical card issuer would allocate payments. Each disclosure that was used in testing indicated that the issuer would apply payments to balances with lower APRs before balances with higher APRs. Consumers were then shown the same hypothetical example and asked the same series of questions. More information about the specific disclosures tested and the results of the testing are available in the December 2008 Macro Report on Quantitative Testing.

Most participants who answered both questions correctly before being shown the disclosure, suggesting that they had prior knowledge of payment allocation, answered the questions correctly after reviewing the disclosure. Some of these participants, however, gave incorrect responses to questions that they had answered correctly before reviewing the disclosures, suggesting that the disclosure was detrimental to these participants' understanding of payment allocation practices. Only a small percentage of consumers who did not understand payment allocation prior to reviewing the disclosure, gave the correct responses after reviewing the disclosure. None of the versions of the disclosure that were tested performed significantly better than any of the others.

The final rule does not require a disclosure regarding payment allocation in the table. As described above, the consumer testing conducted on behalf of the Board suggests that disclosures of payment allocation practices have only a minor positive impact on consumer comprehension. In addition, the Board and other federal banking agencies are substantively addressing payment allocation practices in rules published elsewhere in today's Federal Register. Specifically, the Board and other federal banking agencies are requiring issuers to allocate amounts paid in excess of the minimum payment using one of two specified methods. These substantive rules regarding payment allocation would permit issuers to use payment allocation methods that may be more complicated to disclose than the relatively simple example used in consumer testing, i.e., application of payments to balances with lower APRs before balances with higher APRs. Consequently, the Board does not believe that disclosure requirements would be helpful as a supplement to the substantive rules. Finally, even if consumers were able to understand payment allocation disclosures, it is unclear whether they would be able to evaluate whether one payment allocation method is better than another at the time they are shopping for a credit card because which payment allocation method is the most beneficial to a given consumer would depend on how that consumer uses the account.

Additional disclosures. In response to the June 2007 Proposal, several commenters suggested that the Board require in the table information about the minimum payment formula, credit limit, any security interest, reasons terms on the account may change, and all fees imposed on the account.

1. Minimum payment formula. In response to the June 2007 Proposal, several consumer groups urged the Board to require issuers to disclose in the table the minimum payment formula. They believed that this would allow consumers to understand what portion of principal balance repayment is being included in the minimum payment. Several industry commenters supported the Board's proposal not to require the minimum payment formula in the table. The final rule does not require the minimum payment formula in the table. In the consumer testing conducted for the Board, participants did not tend to mention the minimum payment formula as one of the terms on which they shop for a card. In addition, minimum payment formulas used by card issuers can be complicated and Start Printed Page 5300would be hard to describe concisely in the table.

2. Credit limit. Card issuers often state a credit limit in a cover letter sent with an application or solicitation. Frequently, this credit limit is not disclosed as a specific amount but, instead, is stated as an “up to” amount, indicating the maximum credit limit for which a consumer may qualify. The actual credit limit for which a consumer qualifies depends on the consumer's creditworthiness and other factors such as income, which is evaluated after the consumer submits the application or solicitation. As explained in the supplementary information to the June 2007 Proposal, the Board did not propose to include the credit limit in the table. As explained above, in most cases, the credit limit for which a consumer qualifies depends on the consumer's creditworthiness, which is fully evaluated after the consumer submits the application or solicitation. In addition, in consumer testing conducted for the Board prior to the June 2007 Proposal, participants were not generally confused by the “up to” credit limit. Most participants understood that the “up to” amount on the solicitation letter was a maximum amount, rather than the amount the issuer was promising them. Almost all participants tested understood that the credit limit for which they would qualify depended on their creditworthiness, such as credit history.

In response to the June 2007 Proposal, several consumer group commenters suggested that the Board require issuers to disclose the credit limit in the table required by § 226.5a. Several consumer groups suggested that the Board include the credit limit in the table because it is a key factor for many consumers in shopping for a credit card. These groups also suggested that the Board require issuers to state a specific credit limit, and not an “up to” amount. One industry commenter also suggested that the Board require issuers to disclose in the table the range of credit limits that are being offered. This commenter pointed out that currently credit card issuers generally have a range of credit limits in mind when marketing a card, and while the range is often disclosed in the marketing materials, the maximum and minimum credit lines are not necessarily found in the same place in the marketing materials or disclosed with the same prominence.

In May 2008, the Board and other federal banking agencies proposed that financial institutions that make “firm offers of credit” as defined in the FCRA and that advertise multiple APRs or “up to” credit limits would be required to disclose in the solicitation the factors that determine whether a consumer will qualify for the lowest APR and highest credit limit advertised. See 73 FR 28904, May 19, 2008. As discussed elsewhere in today's Federal Register, the Board and other federal banking agencies have not adopted a requirement that creditors disclose in the solicitation the factors that determine whether a consumer will qualify for the lowest APR and highest credit limit advertised.

Similarly, the Board has not included in the final rule a requirement that issuers disclose the credit limit in either the table required by § 226.5a or the solicitation. The Board's consumer testing indicates that consumers generally understand from prior experience that their credit limits will depend on their credit histories. Thus, the final rule does not require a disclosure of the credit limit in the § 226.5a table or the solicitation.

3. Security interest. In response to the June 2007 Proposal, several consumer group commenters suggested that any required security interest should be disclosed in the table. These commenters suggest that if a security interest is required, the disclosure in the table should describe it briefly, such as “in items purchased with card” or “required $200 deposit.” These commenters indicated that a security deposit is a very important consideration in credit shopping, especially for low-income consumers. In addition, they stated that many credit cards issued by merchants are secured by the goods that the consumer purchases, but consumers are often unaware of the security interest.

The final rule does not require issuers to disclose in the table any required security interest. Credit card-issuing merchants may include in their account agreements a security interest in the goods that are purchased with the card. Any such security interest must be disclosed at account-opening pursuant to § 226.6(b)(5), as discussed below. It is not apparent that consumers would shop on whether a retail card has this type of security interest. Requiring or allowing this type of security interest to be disclosed in the table may distract from important information in the table, and contribute to “information overload.” Thus, in an effort to streamline the information that may appear in the table, the final rule does not include this disclosure in the table.

With respect to security deposits, if a consumer is required to pay a security deposit prior to obtaining a credit card and that security deposit is not charged to the account but is paid by the consumer from separate funds, a card issuer must necessarily disclose to the consumer that a security deposit is required, so that the consumer knows to submit the deposit in order to obtain the card. A security deposit in these instances is likely to be sufficiently highlighted in the materials accompanying the application or solicitation, and does need to appear in the table. Nonetheless, the Board recognizes that a security deposit may need to be highlighted when the deposit is not paid from separate funds but is charged to the account when the account is opened, particularly when the security deposit may significantly decrease consumers' available credit when the account is opened. Thus, as described above, the final rule provides that if (1) a card agreement requires payment of a fee for issuance or availability of credit, or a security deposit, (2) the fee or security deposit will be charged to the account when it is opened, and (3) the total of those fees and security deposit equal 15 percent or more of the minimum credit limit offered with the card, the card issuer must disclose in the table an example of the amount of the available credit that a consumer would have remaining after these fees or security deposit are debited to the account, assuming that the consumer receives the minimum credit limit offered on the card.

4. Reasons terms may change. In response to the June 2007 Proposal, several commenters suggested that the Board should require in the table a disclosure of the reasons issuers may change terms on the account. Typically, a credit card issuer will reserve the right to change terms on the account at any time for any reason. These commenters believed that a disclosure of the issuer's ability to change terms for any reason at any time would alert consumers to the practice at the outset of the relationship and could promote competition among issuers regarding use of the practice.

The Board is not requiring in the table a disclosure of the reasons issuers may change terms on the account. In consumer testing conducted by the Board in March 2008, participants were asked to compare two credit card offers where the offers contained different account terms, such as APRs and fees. In addition, one of these offers included a disclosure in the table that the card issuer could change APRs “at any time for any reason,” while the other offer did not include this disclosure. While about half of the participants indicated they considered it a positive factor that one of the offers did not include a disclosure that APRs could change at any time for any reason, this fact did not Start Printed Page 5301ultimately impact which offer they chose.

Thus, it does not appear consumers would shop for a credit card based on this disclosure, and allowing this disclosure in the table may distract from more important information in the table, and contribute to “information overload.” Nonetheless, the Board believes that it is important for consumers to be properly informed when terms on their accounts are changing, and the final rule contains provisions relating to change-in-terms notices and penalty rate notices that are designed to achieve this goal. See section-by-section analysis to § 226.9(c) and (g). In addition, the Board and other federal banking agencies have issued final rules published elsewhere in today's Federal Register that generally prohibit the application of increased rates to existing balances. The Board believes that the substantive protection provided by these rules mitigates the impact of many rate increases, and decreases the need for an up-front disclosure of the issuer's reservation of the right to change terms.

5. Fees. In response to the June 2007 Proposal, several consumer groups suggested that in addition to the fees that the Board has proposed to be included in the table, the Board should require that any fee that a creditor charges to more than 5 percent of its cardholders be disclosed in the table. In addition, one member of Congress suggested that issuers be required to disclose in the table fees to pay by phone or on the Internet.

As described above, under the final rule, issuers will be required to disclose certain transaction fees and penalty fees, such as cash advance fees, balance transfer fees, late-payment fees, and over-the-limit fees, in the table because these fees are frequently paid by consumers, and consumers in testing and comment letters have indicated these fees are important for shopping purposes. The Board is not requiring issuers to disclose other fees in the table, such as fees to pay by phone or on the Internet, because these fees tend to be imposed less frequently and are not fees on which consumers tend to shop. In consumer testing conducted for the Board prior to the June 2007 Proposal, participants tended to mention cash advance fees, balance transfer fees, late-payment fees, and over-the-limit fees as the most important fees they would want to know when shopping for a credit card. In addition, most participants understood that issuers were allowed to impose additional fees, beyond those disclosed in the table. Thus, the Board believes it is important to highlight in the table the fees that most consumers want to know when shopping for a card, rather than including infrequently-paid fees, to avoid creating “information overload” such that consumers could not easily identify the fees that are most important to them. In addition, the Board is not imposing a requirement that issuers disclose in the table any fee that the issuer charges to more than 5 percent of the cardholders for the card. This would undercut the uniformity of the table. For example, although most issuers may charge a certain fee, such as a fee to pay by phone, requiring issuers to disclose a fee if the issuer charges it to more than 5 percent of the cardholders for the card, could mean that some issuers would disclose the fee to pay by phone and some would not, even though most issuers charge this fee. The Board recognizes that fees can change over time, and the Board plans to monitor the market and update the fees required to be disclosed in the table as necessary.

In addition, in response to the June 2007 Proposal, one federal banking agency suggested that the Board include a disclosure in the table when an issuer may impose an over-the-limit or other penalty fee based on circumstances that result solely from the imposition of other fees or finance charges, or if the contract permits it to impose penalty fees in consecutive cycles based on a single failure by the consumer to abide by the terms of the account. The Board is not requiring this disclosure in the table. The Board believes that consumers are not likely to consider this information in shopping for a credit card. Requiring this disclosure in the table may distract from important information in the table, and contribute to “information overload.”

5a(c) Direct Mail and Electronic Applications

5a(c)(1) General

Electronic applications and solicitations. As discussed above, the Bankruptcy Act amended TILA Section 127(c) to require that solicitations to open a card account using the Internet or other interactive computer service must contain the same disclosures as those made for applications or solicitations sent by direct mail. 15 U.S.C. 1637(c)(7). The interim final rules adopted by the Board in 2001 revised § 226.5a(c) to apply the direct mail rules to electronic applications and solicitations. In the June 2007 Proposal, the Board proposed to retain these provisions in § 226.5a(c)(1). (Current § 226.5a(c) would be revised and renumbered as new § 226.5a(c)(1).) The final rule adopts new § 226.5a(c)(1) as proposed.

The Bankruptcy Act also requires that the disclosures for electronic offers must be “updated regularly to reflect the current policies, terms, and fee amounts.” In the June 2007 Proposal, the Board proposed to revise § 226.5a(c) to implement the “updated regularly” standard in the Bankruptcy Act with regard to the accuracy of variable rates. As proposed, a new § 226.5a(c)(2) would have been added to address the accuracy of variable rates in direct mail and electronic applications and solicitations. This new section would have required issuers to update variable rates disclosed on mailed applications and solicitations every 60 days and variable rates disclosed on applications and solicitations provided in electronic form every 30 days, and to update other terms when they change. As proposed, § 226.5a(c)(2) consisted of two subsections.

Section 226.5a(c)(2)(i) would have provided that § 226.5a disclosures mailed to a consumer must be accurate as of the time the disclosures are mailed. This section also would have provided that an accurate variable APR is one that is in effect within 60 days before mailing. Section 226.5a(c)(2)(ii) would have provided that § 226.5a disclosures provided in electronic form (except for a variable APR) must be accurate as of the time they are sent to a consumer's e-mail address, or as of the time they are viewed by the public on a Web site. As proposed, this section would have provided that a variable APR is accurate if it is in effect within 30 days before it is sent, or viewed by the public. Many of the provisions included in proposed § 226.5a(c)(2) were incorporated from current § 226.5a(b)(1). To eliminate redundancy, the Board proposed to revise § 226.5a(b)(1) by deleting § 226.5a(b)(1)(ii), (b)(1)(iii), and comment 5a(c)-1.

In response to the June 2007 Proposal, one commenter suggested that all variable APR accuracy standards should be simplified to allow for disclosures to be modified every 60 days. This commenter suggested that issuers should be able to follow a 60-day standard for accuracy for APR disclosures no matter how they are delivered to ease the burden of compliance. This commenter also indicated that issuers often mail a solicitation for a credit card to a consumer and post the same offer on a Web site or e-mail it to the consumer. The disclosures for the same offer could be different, if the rate mailed is 60 days old and the offer on the Web site is 30 Start Printed Page 5302days old. This commenter also indicated that having to create changes to the direct mail documents for offers delivered electronically is inefficient and costly. On the other hand, one consumer group commenter suggested that all electronic disclosures should be accurate as of the date when given, including variable rate APRs.

The Board adds § 226.5a(c)(2) and deletes § 226.5a(b)(1)(ii), (b)(1)(iii), and comment 5a(c)-1 as proposed. The Board believes the 30-day and 60-day accuracy requirements for variable rates strike an appropriate balance between seeking to ensure consumers receive updated information and avoiding imposing undue burdens on creditors. The Board believes it is unnecessary for creditors to disclose to consumers the exact variable APR in effect on the date the application or solicitation is accessed by the consumer, because consumers generally understand that variable rates are subject to change. Moreover, it would be costly and operationally burdensome for creditors to comply with a requirement to disclose the exact variable APR in effect at the time the application or solicitation is accessed. The obligation to update the other terms when they change ensures that consumers receive information that is accurate and current, and should not impose significant burdens on issuers. These terms generally do not fluctuate with the market like variable rates. In addition, the Board understands that issuers typically change other terms infrequently, perhaps once or twice a year.

5a(d) Telephone Applications and Solicitations

5a(d)(1) Oral Disclosure

Section 226.5a(d) specifies rules for providing cost disclosures in oral applications and solicitations initiated by a card issuer. Pursuant to TILA Section 127(c)(2), card issuers generally must provide certain cost disclosures during the oral conversation in which the application or solicitation is given. Alternatively, an issuer is not required to give the oral disclosures if the card issuer either does not impose a fee for the issuance or availability of a credit card (as described in § 226.5a(b)(2)) or does not impose such a fee unless the consumer uses the card, provided that the card issuer provides the disclosures later in a written form. 15 U.S.C. 1637(c)(2).

Consumer-initiated calls. In response to the June 2007 Proposal, several consumer group commenters suggested that the requirements to provide oral disclosures in § 226.5a(d)(1) should not be limited to applications and solicitations initiated by the card issuer. Instead, the Board should require oral disclosures for all calls resulting in an application or solicitation for a credit card—even if the consumer rather than the issuer initiates the telephone call. Consistent with the statutory requirement in TILA Section 127(c)(2), the final rule in § 226.5a(d)(1) continues to limit the requirement to provide oral disclosure to situations where oral applications and solicitations are initiated by a card issuer. 15 U.S.C. 1637(c)(2).

Written applications. In response to the June 2007 Proposal, several consumer group commenters suggested that the Board require that all applications be made in writing. They indicated that while an issuer could offer the credit card over the phone, the consumer should be required to sign an application to ensure that he or she actually applied for the card and not a thief or errant household member. The final rule does not require all applications for credit cards to be made in writing. Allowing oral applications and solicitations is consistent with the statutory provision in TILA Section 127(c)(2). 15 U.S.C. 1637(c)(2).

Available credit disclosure. Currently, under § 226.5a(d)(1), if the issuer provides the disclosures orally, the issuer must provide information required to be disclosed under § 226.5a(b)(1) through (b)(7). This includes information about (1) APRs; (2) fees for issuance or availability of credit; (3) minimum or fixed finance charges; (4) transaction charges for purchases; (5) grace period on purchases; (6) balance computation method; and (7) as applicable, a statement that charges incurred by use of the charge card are due when the periodic statement is received.

In the June 2007 Proposal, the Board did not propose to revise § 226.5a(d)(1). In response to the June 2007 Proposal, some consumer group commenters urged the Board to revise § 226.5a(d)(1) to require issuers that are marketing credit cards by telephone to disclose certain additional information to consumers at the time of the phone call, such as the cash advance fee, the late-payment fee, the over-the-limit fee, the balance transfer fee, information about penalty rates, any fees for required insurance, and the disclosure about available credit in proposed § 226.5a(b)(16).

In the May 2008 Proposal, the Board proposed to amend § 226.5a(d)(1) to require that if an issuer provides the oral disclosures, the issuer must also disclose orally, if applicable, the information about available credit in proposed § 226.5a(b)(16) pursuant to the Board's authority under TILA Section 127(c)(5) to add or modify § 226.5a disclosures as necessary to carry out the purposes of TILA. 15 U.S.C. 1637(c)(5). In response to the May 2008 Proposal, commenters generally supported this aspect of the proposal.

The final rule amends § 226.5a(d)(1), as proposed. Currently, issuers that provide the oral disclosures must inform consumers about the fees for issuance and availability of credit that are applicable to the card. The Board believes that the information about available credit would complement this disclosure, by disclosing to consumers the impact of these fees on the available credit.

Other oral disclosures. In response to the June 2007 Proposal, several consumer groups suggested that issuers should be required to provide all of the disclosures required by proposed § 226.5a(b)(1) through (b)(17) orally with respect to an oral application or solicitation, including cash advance fees, late-payment fees, over-the-limit fees, balance transfer fees, and fees for required insurance. In the supplementary information to the May 2008 Proposal, the Board did not propose to require issuers to provide orally a disclosure of the fees described above. The Board was concerned that requiring this information in oral conversations about credit cards would lead to “information overload” for consumers. In response to the May 2008 Proposal, consumer groups still believed that consumers should receive this information when making the decision whether to apply for a card. They further suggested that the solution to “information overload” was to require a written application to be made whenever there is a telephone credit card application or solicitation. As explained above, the final rule does not require applications for credit cards to be made in writing. Allowing oral applications and solicitations is consistent with the statutory provision in TILA Section 127(c)(2). 15 U.S.C. 1637(c)(2).

5a(d)(2) Alternative Disclosure

Section 226.5a(d) specifies rules for providing cost disclosures in oral applications and solicitations initiated by a card issuer. Card issuers generally must provide certain cost disclosures orally during the conversation in which the application or solicitation is communicated to the consumer. Alternatively, an issuer is not required to give the oral disclosures if the card Start Printed Page 5303issuer either does not impose a fee for the issuance or availability of a credit card (as described in § 226.5a(b)(2)) or does not impose such a fee unless the consumer uses the card, provided that the card issuer provides the disclosures later in a written form. Specifically, the issuer must provide the disclosures required by § 226.5a(b) in a tabular format in writing within 30 days after the consumer requests the card (but in no event later than the delivery of the card), and disclose the fact that the consumer need not accept the card or pay any fee disclosed unless the consumer uses the card. In the June 2007 Proposal, the Board proposed to add comment 5a(d)-2 to indicate that an issuer may disclose in the table that the consumer is not required to accept the card or pay any fee unless the consumer uses the card.

Account is not approved. In response to the June 2007 Proposal, one commenter suggested that the Board clarify that the written alternative disclosures would only be necessary if the application for the account is approved. The Board notes that current comment 5a(d)-1 indicates that the oral and alternative written disclosure requirements do not apply in situations where no card will be issued because, for example, the consumer indicates that he or she does not want the card, or the card issuer decides either during the telephone conversation or later not to issue the card. This comment is retained in the final rule.

Substitution of account-opening table for table required by § 226.5a. In response to the June 2007 Proposal, one commenter suggested that the Board clarify that the account-opening table may substitute for the written alternative disclosures set forth in § 226.5a(d)(2). In the June 2007 Proposal, comment 5a-2 provided, in part, that issuers in complying with § 226.5a(d)(2) may substitute the account-opening table in lieu of the disclosures required by § 226.5a, if the issuer provides the disclosures required by § 226.6 on or with the application or solicitation. See proposed § 226.6(b)(4). Because the written alternative disclosures are not provided with the application or solicitation, the Board recognizes that proposed comment 5a-2 might have led to confusion about whether the account-opening table described in § 226.6(b)(1) may be substituted for the written alternative disclosures. In the final rule, the Board has revised comment 5a-2 to delete the reference to the alternative written disclosures in § 226.5a(d). Instead, the Board adds new comment 5a(d)-3 to indicate that issuers may substitute the account-opening table described in § 226.6(b)(1) in lieu of the alternative written disclosures described in § 226.5a(d)(2).

Mailing of written alternative disclosures. In response to the June 2007 Proposal, several consumer group commenters suggested that the Board require issuers to provide the written alternative disclosures in the mailing that delivers the card, and should impose requirements that will ensure that the disclosures are prominent. Otherwise, issuers may make the written alternative disclosures in separate mailings, in an obscure part of the cover letter with the card, or in other ways that are designed not to attract consumers' attention. The final rule does not contain this provision. The Board expects that issuers will substitute the account-opening table described in § 226.6(b)(1) in lieu of the written alternative disclosures described in § 226.5a(d)(2). Card issuers typically mail account-opening disclosures with the card.

Right to reject account. As described above, an issuer is not required to give the oral disclosures if the card issuer either does not impose a fee for the issuance or availability of a credit card (as described in § 226.5a(b)(2)) or does not impose such a fee unless the consumer uses the card, provided that the card issuer provides the disclosures later in a written form. 15 U.S.C. 1637(c)(2). In the final rule, § 226.5a(d)(2) is revised to be consistent with the right to reject the account given in § 226.5(b)(1)(iv) with respect to account-opening disclosures. As discussed in the section-by-section analysis to § 226.5(b)(1)(iv), the final rule amends § 226.5(b)(1)(iv) to provide that creditors may collect or obtain the consumer's promise to pay a membership fee before the account-opening disclosures are provided, if the consumer can reject the plan after receiving the disclosures. In addition, as discussed in the section-by-section analysis to § 226.6(b)(2)(xiii), the final rule also requires creditors to disclose in the account-opening table described in § 226.6(b)(1) the right to reject described in § 226.5(b)(1)(iv) if required fees for the availability or issuance of credit, or a security deposit, equal 15 percent or more of the actual credit limit offered on the account at account opening. See § 226.6(b)(2)(xiii).

The Board expects that issuers will provide the account-opening table described in § 226.6(b)(1) in lieu of the alternative written disclosures described in § 226.5a(d)(2). The final rule revises comment 5a(d)-2 to specify that the right to reject the plan referenced in § 226.5a(d)(2) with respect to the alternative written disclosures is the same as the right to reject the plan described in § 226.5(b)(1)(iv) with respect to account-opening disclosures. An issuer may substitute the account-opening summary table described in § 226.6(b)(1) in lieu of the written alternative disclosures specified in § 226.5a(d)(2)(ii). In that case, the disclosure about the right to reject specified in § 226.5a(d)(2)(ii)(B) must appear in the table, if the issuer is required to do so pursuant to § 226.6(b)(2)(xiii). Otherwise, the disclosure specified in § 226.5a(d)(2)(ii)(B) may appear either in or outside the table containing the required credit disclosures.

5a(d)(3) Accuracy

As proposed in June 2007 Proposal, § 226.5a(d)(3) would have provided guidance on the accuracy of telephone disclosures. Current comment 5a(b)(1)-3 specifies that for variable-rate disclosures in telephone applications and solicitations, the card issuer must provide the rates currently applicable when oral disclosures are provided. For the alternative disclosures under § 226.5a(d)(2), an accurate variable APR is one that is: (1) In effect at the time the disclosures are mailed or delivered; (2) in effect as of a specified date (which rate is then updated from time to time, for example, each calendar month); or (3) an estimate in accordance with § 226.5(c). Current comment 5a(b)(1)-3 was proposed to be moved to § 226.5a(d)(3) under the June 2007 Proposal, except that the option of estimating a variable APR would have been eliminated as the least meaningful of the three options. Proposed § 226.5a(d)(3) also would have specified that if an issuer discloses a variable APR as of a specified date, the issuer must update the rate on at least a monthly basis, the frequency with which variable rates on most credit card products are adjusted. The Board also proposed to amend § 226.5a(d)(3) to specify that oral disclosures under § 226.5a(d)(1) must be accurate when given, consistent with the requirement in § 226.5(c) that disclosures must reflect the terms of the legal obligation between the parties. For the alternative disclosures, the proposal would have specified that terms other than variable APRs must be accurate as of the time they are mailed or delivered.

In response to the June 2007 Proposal, one commenter indicated that the accuracy standard for oral disclosures could potentially require an issuer to update rates on a daily basis. This commenter believed that this proposed rule would create unnecessary burden Start Printed Page 5304on creditors and would provide little benefit to consumers since the rates do not generally vary by much from one day to the next. The Board understands that issuers typically adjust variable rates for most credit card products on a monthly basis, so as a practical matter, issuers will only need to update the oral disclosures on a monthly basis in order to meet the requirement that oral disclosures be accurate when given. Section 226.5a(d)(3) is adopted as proposed.

5a(e) Applications and Solicitations Made Available to General Public

TILA Section 127(c)(3) and § 226.5a(e) specify rules for providing disclosures in applications and solicitations made available to the general public such as “take-one” applications and applications in catalogs or magazines. 15 U.S.C. 1637(c)(3). These applications and solicitations must either contain: (1) The disclosures required for direct mail applications and solicitations, presented in a table; (2) a narrative that describes how finance charges and other charges are assessed; or (3) a statement that costs are involved, along with a toll-free telephone number to call for further information.

Narrative that describes how finance charges and other charges are assessed. TILA Section 127(c)(3)(D) and § 226.5a(e)(2) allow issuers to meet the requirements of § 226.5a for take-one applications and solicitations by giving a narrative description of certain account-opening disclosures (such as information about how finance charges and other charges are assessed), a statement that the consumer should contact the card issuer for any change in the required information and a toll-free telephone number or a mailing address for that purpose. 15 U.S.C. 1637(c)(3)(D). Currently, this information does not need to be in the form of a table, but may be a narrative description, as is also currently allowed for account-opening disclosures. In the June 2007 Proposal, the Board proposed to require that certain account-opening information (such as information about key rates and fees) must be given in the form of a table. Therefore, the Board also proposed that card issuers give this same information in a tabular form in take-one applications and solicitations. Specifically, the Board proposed to delete § 226.5a(e)(2) and comments 5a(e)(2)-1 and -2 as obsolete. Under the proposal, card issuers that provide cost disclosures in take-one applications and solicitations would have been required to provide the disclosures in the form of a table, for which they could use the account-opening summary table. See § 226.5a(e)(1) and comment 5a-2. As discussed in the section-by-section analysis to § 226.6(b)(1), the final rule requires creditors to provide certain account-opening information in the form of a table. Accordingly, the Board deletes current § 226.5a(e)(2) and current comments 5a(e)(2)-1 and -2 as proposed, pursuant to the Board's authority under TILA Section 127(c)(5). 15 U.S.C. 1637(c)(5). Current § 226.5a(e)(3) and comment 5a(e)(3)-1 are renumbered accordingly.

5a(e)(4) Accuracy

For applications or solicitations that are made available to the general public, if a creditor chooses to provide the cost disclosures on the application or solicitation, § 226.5a(b)(1)(ii) currently requires that any variable APR disclosed must be accurate within 30 days before printing. In the June 2007 Proposal, the Board proposed to move this provision to § 226.5a(e)(4). In addition, proposed § 226.5a(e)(4) also would have specified that other disclosures must be accurate as of the date of printing. The final rule adopts § 226.5a(e)(4) and accompanying commentary as proposed.

5a(f) In-Person Applications and Solicitations

Card issuer and person extending credit are not the same. Existing § 226.5a(f) and its accompanying commentary contain special charge card rules that address circumstances in which the card issuer and the person extending credit are not the same person. (These provisions implement TILA Section 127(c)(4)(D), 15 U.S.C. 1637(c)(4)(D).) The Board understands that these types of cards are no longer being offered. Thus, in the June 2007 Proposal, the Board proposed to delete these provisions and Model Clause G-12 from Regulation Z as obsolete, recognizing that the statutory provision in TILA Section 127(c)(4)(D) will remain in effect if these products are offered in the future. The Board also requested comment on whether these provisions should be retained in the regulation. Under the June 2007 Proposal, a commentary provision referencing the statutory provision would have been added to § 226.5(d), which addresses disclosure requirements for multiple creditors. See section-by-section analysis to § 226.5(d). The final rule deletes current § 226.5a(f), accompanying commentary, and Model Clause G-12 as proposed.

In-person applications and solicitations. In the June 2007 Proposal, the Board proposed a new § 226.5a(f) and accompanying commentary to address in-person applications and solicitations initiated by the card issuer. For in-person applications, a card issuer initiates a conversation with a consumer inviting the consumer to apply for a card account, and if the consumer responds affirmatively, the issuer takes application information from the consumer. For example, in-person applications include instances in which a retail employee, in the course of processing a sales transaction using the customer's bank credit card, invites the customer to apply for the retailer's credit card and the customer submits an application.

For in-person solicitations, a card issuer makes an in-person offer to a consumer to open an account that does not require an application. For example, in-person solicitations include instances where a bank employee offers a preapproved credit card to a consumer who came into the bank to open a checking account.

Currently, in-person applications in response to an invitation to apply are exempted from § 226.5a because they are considered applications initiated by consumers. (See current comments 5a(a)(3)-2 and 5a(e)-2.) On the other hand, in-person solicitations are not specifically addressed in § 226.5a. Neither in-person applications nor solicitations are specifically addressed in TILA.

In the June 2007 Proposal, the Board proposed to cover in-person applications and solicitations under § 226.5a, pursuant to the Board's authority under TILA Section 105(a) to make adjustments that are necessary to effectuate the purposes of TILA. 15 U.S.C. 1604(a). In the June 2007 Proposal, existing comment 5a(a)(3)-2 (which would be moved to comment 5a(a)(5)-1) and comment 5a(e)-2 would have been revised to be consistent with § 226.5a(f). No comments were received on these proposed changes.

Thus, the Board adopts these changes as proposed pursuant to its TILA Section 105(a) authority. 15 U.S.C. 1604(a). Requiring in-person applications and solicitations to include credit terms under § 226.5a would help serve TILA's purpose to provide meaningful disclosure of credit terms so that a consumer will be able to compare more readily the various credit terms available to him or her, and avoid the uninformed use of credit. 15 U.S.C. 1601(a). Also, the Board understands that card issuers routinely provide § 226.5a disclosures in these circumstances; therefore, any additional compliance burden would be minimal.

Card issuers must provide the disclosures required by § 226.5a in the form of a table, and those disclosures Start Printed Page 5305must be accurate either when given (consistent with the direct mail rules) or when printed (consistent with one option for the take-one rules). See § 226.5a(c) and (e)(1). These two alternatives provide issuers flexibility, while also providing consumers with the information they need to make informed credit decisions.

5a(g) Balance Computation Methods Defined

TILA Section 127(c)(1)(A)(iv) calls for the Board to name not more than five of the most common balance computation methods used by credit card issuers to calculate the balance for purchases on which finance charges are computed. 15 U.S.C. 1637(c)(1)(A)(iv). If issuers use one of the balance computation methods named by the Board, the issuer must disclose that name of the balance computation method as part of the disclosures required by § 226.5a and is not required to provide a description of the balance computation method. If the issuer uses a balance computation method that is not named by the Board, the issuer must disclose a detailed explanation of the balance computation method. See current § 226.5a(b)(6). Currently, the Board has named four balance computation methods: (1) Average daily balance (including new purchases) or (excluding new purchases); (2) two-cycle average daily balance (including new purchases) or (excluding new purchases); (3) adjusted balance; and (4) previous balance. In the June 2007 and May 2008 Proposals, the Board proposed to retain these four balance computation methods.

In response to the June 2007 Proposal, several industry commenters suggested that the Board add the “daily balance method” to the list of balance computation methods listed in the regulation. These commenters indicated that the “daily balance method” is one of the most common balance computation methods used by card issuers. Currently, comment 5a(g)-1 provides that card issuers using the daily balance method may disclose it using the name average daily balance (including new purchases) or average daily balance (excluding new purchases), as appropriate. Alternatively, such card issuers may explain the method. The final rule revises § 226.5a(g) to include daily balance method as one of the balance computation methods named in the regulation. As a result, card issuers may disclose “daily balance method” as the name of the balance computation method used as part of the disclosures required by § 226.5a, and are not required to provide a description of the balance computation method. The Board deletes current comment 5a(g)-1, which provides that card issuers using the daily balance method may disclose it using the name average daily balance (including new purchases) or average daily balance (excluding new purchases), as appropriate. See also § 226.6(b)(2)(vi) and § 226.7(b)(5), which allow creditors using balance calculation methods identified in § 226.5a(g) to provide abbreviated disclosures at account opening and on periodic statements.

In addition, in response to the May 2008 Proposal, several industry commenters requested that if the proposal by the Board and other federal banking agencies to prohibit certain issuers from using the two-cycle balance computation method was adopted, the Board should include a cross reference in § 226.5a(g) indicating that some issuers are not allowed to use the two-cycle balance computation method described in § 226.5a(g). Under rules issued by the Board and other federal banking agencies published elsewhere in today's Federal Register, most credit card issuers are prohibited from using the two-cycle balance computation method described in § 226.5a(g). Comment 5a(g)-1 is amended to specify that some issuers may be prohibited from using the two-cycle balance computation method described in § 226.5a(g)(2)(i) and (ii) and to cross reference the rules issued by the federal banking agencies, as described above.

Section 226.6 Account-Opening Disclosures

TILA Section 127(a), implemented in § 226.6, requires creditors to provide information about key credit terms before an open-end plan is opened, such as rates and fees that may be assessed on the account. Consumers' rights and responsibilities in the case of unauthorized use or billing disputes are also explained. 15 U.S.C. 1637(a). See also Model Forms G-2 and G-3 in Appendix G to part 226. For a discussion about account-opening disclosure rules and format requirements, see the section-by-section analysis to § 226.6(a) for HELOCs subject to § 226.5b, and § 226.6(b) for open-end (not home-secured) plans.

6(a) Rules Affecting Home-Equity Plans

Account-opening disclosure and format requirements for HELOCs subject to § 226.5b were unaffected by the June 2007 Proposal, consistent with the Board's plan to review Regulation Z's disclosure rules for home-secured credit in a separate rulemaking. To facilitate compliance, the substantively unrevised rules applicable only to HELOCs are grouped together in § 226.6(a), as discussed in this section-by-section analysis to § 226.6(a). (See redesignation table below.)

Commenters supported the proposed organizational changes to ease compliance. All disclosure requirements applying exclusively to HELOCs subject to § 226.5b are set forth in § 226.6(a), as proposed. Rules relating to the disclosure of finance charges currently in § 226.6(a)(1) through (a)(4) are moved to § 226.6(a)(1)(i) through (a)(1)(iv); those rules and accompanying official staff interpretations are substantively unchanged. Rules relating to the disclosure of other charges are moved from current § 226.6(b) to § 226.6(a)(2), and specific HELOC-related disclosure requirements are moved from current § 226.6(e) to § 226.6(a)(3). Rules of general applicability to open-end credit plans relating to security interests and billing error disclosure requirements are moved without substantive change from current § 226.6(c) and (d) (proposed as § 226.6(c)(1) and (c)(2) in the June 2007 Proposal) to § 226.6(a)(4) and (a)(5), to ease compliance.

Several technical revisions to commentary provisions described in the June 2007 Proposal are adopted for clarity and in some cases for consistency with corresponding comments to § 226.6(b)(4), which addresses rate disclosures for open-end (not home-secured) plans; these revisions are not intended to be substantive. See, for example, comments 6(a)(1)(ii)-1 and 6(b)(4)(i)(B)-1, which address disclosing ranges of balances. For the reasons set forth in the section-by-section analysis to § 226.6(b)(3), the Board updates references to “free-ride period” as “grace period” in the regulation and commentary to § 226.6(a), without any intended substantive change.

Also, commentary provisions that currently apply to open-end plans generally but are inapplicable to HELOCs are not included in the commentary provisions related to § 226.6(a), as proposed. For example, guidance in current 6(a)(2)-2 regarding a creditor's general reservation of the right to change terms is not included in comment 6(a)(1)(ii)-2, because § 226.5b(f)(1) prohibits “rate-reservation” clauses for HELOCs.

Model forms and clauses. Revisions to current forms and a new form that creditors offering HELOCs may use are adopted as proposed. In response to comments received on the June 2007 Proposal, the Board proposed in May 2008 to add a new paragraph to Appendix G-1 (Balance Computation Start Printed Page 5306Methods Model Clauses) to part 226 to describe the daily balance computation method. A new Appendix G-1(A) to part 226 was also proposed for creditors offering open-end (not home-secured) plans. See section-by-section analysis to § 226.6(b)(4)(i)(D).

For the reasons set forth in the May 2008 Proposal, the Board is adopting the revisions to Appendix G-1 to part 226, retitled as Balance Computation Methods Model Clauses (Home-equity Plans) to ease compliance, as proposed. Comment App. G-1 is revised to clarify that a creditor offering HELOCs may use the model clauses in Appendix G-1 or G-1(A), at the creditor's option.

In addition, for the reasons discussed in the section-by-section analysis to §§ 226.12 and 226.13, model language has been added to Model Clause G-2 (Liability for Unauthorized Use Model Clause), Model Form G-3 (Long-form Billing-error Rights Model Form Home-equity Plans) and Model Form G-4 (Alternative Billing-error Rights Model Form Home-equity Plans) regarding consumers' use of electronic communication relating to unauthorized transactions or billing disputes. Like with Model Clauses G-1 and G-1(A), the Board is adding new forms G-3(A) and G-4(A) for creditors offering open-end (not home-secured) plans, which a creditor offering HELOCs may use, at the creditor's option. See comment app. G-3.

6(b) Rules Affecting Open-end (not Home-secured) Plans

All account-opening disclosure requirements applying to open-end (not home-secured) plans are set forth in § 226.6(b). The Board is adopting two significant revisions to account-opening disclosures for open-end (not home-secured) plans, which are set forth in § 226.6(b), as proposed. The revisions (1) require a tabular summary of key terms to be provided before an account is opened (see § 226.6(b)(1) and (b)(2)), and (2) reform how and when cost disclosures must be made (see § 226.6(b)(3) for content, § 226.5(b) and § 226.9(c) for timing).

In response to comments received on the June 2007 Proposal, § 226.6(b) has been reorganized in the final rule for clarity. Rules relating to the account-opening tabular summary are set forth in § 226.6(b)(1) and (b)(2) and mirror, to the extent applicable, the organization and text of disclosure requirements for the tabular summary required to accompany credit or charge card applications or solicitations in § 226.5a. General disclosure requirements about costs imposed as part of the plan are set forth in § 226.6(b)(3), and additional requirements for disclosing rates are at § 226.6(b)(4). Rules about disclosures for optional credit insurance or debt cancellation or suspension coverage are set forth at § 226.6(b)(5). Rules of general applicability to open-end credit plans relating to security interests and billing error disclosure requirements, also are moved to § 226.6(b)(5) without substantive change from current § 226.6(c) and (d) (proposed as § 226.6(c)(1) and (c)(2) in the June 2007 Proposal), to ease compliance.

6(b)(1) Format for Open-end (not Home-secured) Plans

As provided by Regulation Z, creditors may, and typically do, include account-opening disclosures as a part of an account agreement document that also contains other contract terms and state law disclosures. The agreement is typically lengthy and in small print. The June 2007 Proposal would have introduced format requirements for account-opening disclosures for open-end (not home-secured) plans at § 226.6(b)(4), based on proposed format and content requirements for the tabular disclosures provided with direct mail applications for credit and charge cards under § 226.5a. Proposed forms under G-17 in Appendix G would have illustrated the account-opening tables. The proposal sought to summarize key information most important to informed decision-making in a table similar to that required on or with credit and charge card applications and solicitations. TILA disclosures that are typically lengthy or complex and less often utilized in determining how to use an account, such as how variable rates are determined, could continue to be integrated with the account agreement terms but could not be placed in the table. Uniformity in the presentation of key information promotes consumers' ability to compare account terms.

Commenters generally supported format rules that focus on presenting essential information in a simplified way. Consumer groups supported the use of a tabular format similar to the summary table required under § 226.5a, to ease consumers' ability to find important information in a uniform format, and as a means for consumers to compare terms that are offered with terms they actually receive. A state consumer protection body urged the Board to develop a glossary and, along with some consumer groups, to mandate use of uniform terms so that creditors use the same term to identify fees.

Industry commenters voiced a number of concerns about the account-opening summary table. Some suggested the purposes of TILA disclosures are different at application and account-opening, and a table at account-opening is redundant since consumers have already made their credit decisions. Some suggested that other techniques to summarize information, such as an index or table of contents, should be permitted. In particular, industry commenters asked for additional flexibility to disclose risk-based APRs outside the summary table, such as in a welcome letter or documents accompanying the account agreement, or on a sales receipt when an open-end plan is established at a retail store in connection with the purchase of goods or services. Others believed the information was too simple and could be misleading to consumers and in any event would quickly become outdated. To combat out-of-date disclosures, one creditor suggested requiring a “real time” version of account terms on-line, with a paper copy available upon request.

For the reasons stated in this section-by-section analysis to § 226.6, the Board is adopting the formatting requirements generally as proposed, with revisions noted below. In response to commenters' suggestions, the regulatory text (moved from proposed § 226.6(b)(4) to § 226.6(b)(1) and (b)(2)) more closely tracks the regulatory text in § 226.5a, to ease compliance.

The Board's revisions to rules affecting open-end (not home-secured) plans contain a limited number of specific words or phrases that creditors are required to use. The Board, however, has not adopted a glossary of terms nor mandated use of terms as defined in such a glossary, to provide flexibility to creditors. Although the Board is supportive of creditors that provide real-time account agreements on their Web sites, the Board believes requiring all creditors to do so would be overly burdensome at this time, and has not adopted such a requirement.

Open-end (not home-secured) plans not involving a credit card. The June 2007 Proposal would have applied the tabular summary requirement to all open-end credit products, except HELOCs. Such products include credit card accounts, traditional overdraft credit plans, personal lines of credit, and revolving plans offered by retailers without a credit card.

In response to the June 2007 Proposal, some industry commenters asked the Board to limit any new disclosure rules to credit card accounts. They acknowledged that credit card accounts typically have complex terms, and a tabular summary is an effective way to present key disclosures. In contrast, these commenters noted that other Start Printed Page 5307open-end (not home-secured) products such as personal lines of credit or overdraft plans have very few of the cost terms required to be disclosed. Alternatively, if the Board continued to apply the new requirements to open-end plans other than HELOCs, commenters asked that the Board consider publishing model forms to ease compliance.

The Board believes that the benefits to consumers from receiving a concise and uniform summary of rates and important fees for these other types of open-end plans outweigh the costs, such as developing the new disclosures and revising them as needed. In the May 2008 Proposal, the Board proposed Sample Form 17(D), which would have illustrated disclosures for an open-end (not home-secured) plan not involving a credit card, to address commenters' requests for guidance.

Some consumer groups supported the requirement for a summary table for open-end (not home-secured) plans that are not credit card accounts. They believe the summary table will help consumers understand the terms of their credit agreements. An industry commenter also supported a model form for creditors' use but suggested adding additional terms to the form such as a fee for returned payment, or variable-rate disclosures. One industry commenter strongly objected to the requirement for a summary table. This commenter believes creditors will incur substantial costs to comply with the requirement and the commenter was not convinced that a tabular format is the only way creditors may provide accurate and meaningful disclosures.

For the reasons set forth above, the final rule, pursuant to the Board's TILA Section 105(a) authority, applies the tabular summary requirement to all open-end credit products, except HELOCs, as proposed. Sample Form 17(D) is adopted, with some revisions. The name of the balance calculation method and billing error summary were inadvertently omitted in the May 2008 Proposal below the table in the proposed sample form, and they properly appear in the final form. The Board notes that § 226.6(b)(2) requires creditors to disclose in the account-opening table the items in that section, to the extent applicable. Thus, for example, if a creditor offered an overdraft protection line of credit with a variable rate, the creditor must provide the applicable variable-rate disclosures, even though such disclosures do not appear in Sample Form 17(D).

Comparison to summary table provided with credit card applications. The summary tables proposed in June 2007 to accompany credit and charge card applications and solicitations and to be provided at account opening were similar but not identical. Under the June 2007 Proposal, at the card issuer's option, a card issuer providing a table that satisfies the requirements of § 226.6 could satisfy the requirements of § 226.5a by providing the account-opening table.

In response to the June 2007 Proposal, some commenters urged the Board to require identical disclosure requirements under § 226.6 and § 226.5a. Others supported greater flexibility. As discussed below, the disclosure requirements for the two summary tables remain very similar but are not identical in all respects. The final rule includes comment 6(b)(1)-1, adopted substantially as proposed as comment 6(b)(4)-1, which provides guidance on how the summary table for § 226.5a differs from the table for § 226.6. For clarity, rules under § 226.5a that do not apply to account-opening disclosures are specifically noted.

6(b)(1)(iii) Fees that Vary by State

For disclosures required to be provided with credit card applications and solicitations, if the amount of a fee such as a late-payment fee or returned-payment fee varies by state, card issuers currently may disclose a range of fees and a statement that the amount of the fee varies by state. See § 226.5a(a)(4). In the June 2007 Proposal, the Board noted that a goal of the proposed account-opening summary table is to provide to a consumer specific key information about the terms of the account and that permitting creditors to disclose a range of fees seems not to meet that standard. Thus, the proposal would have required creditors to disclose the amount of the fee applicable to the consumer. The Board solicited comment on whether there are any operational issues presented by the proposal.

One commenter discussed operational issues for creditors that are licensed to do business under state law and must vary late-payment fees, for example, according to state law. Although the letter focused on late-payment fee disclosures on the periodic statement, one alternative suggested to stating fees applicable to the consumer's account was to permit such creditors to refer to a disclosure where fees arranged by applicable states would be identified.

Upon further consideration of the issues related to disclosing fees in the account-opening table fees that vary by state, the Board is adopting a rule that requires creditors to disclose specific fees applicable to the consumer's account in the account-opening table, with a limited exception. In general, a creditor must disclose the fee applicable to the consumer's account; listing all fees for multiple states in the account-opening summary table is not permissible. The Board is concerned that such an approach would detract from the purpose of the table: To provide key information in a simplified way.

Currently, creditors licensed to do business under state laws commonly disclose at account opening as part of the account agreement or disclosure statement a matrix of fees applicable to residents of various states. Creditors that provide account-opening disclosures by mail can more easily generate account-opening summaries with rates and specific fees that apply to the consumer. However, for creditors with retail stores in a number of states, it is not practicable to require fee-specific disclosures to be provided when an open-end (not home-secured) plan is established in person in connection with the purchase of goods or services. If the Board were to impose such a requirement, retail stores may need to keep on hand copies of disclosures for all states, because consumers from one state can, and commonly do, shop and obtain credit cards at retail locations in other states. In addition, a retail store creditor would need to rely on its employees to determine at the point of sale which state's disclosures should be provided to each consumer who opens an open-end (not home-secured) plan.

Thus, the final rule provides in § 226.6(b)(1)(iii) that creditors imposing fees such as late-payment fees or returned-payment fees that vary by state and providing the disclosures required by § 226.6(b) in person at the time the open-end (not home-secured) plan is established in connection with financing the purchase of goods or services may, at the creditor's option, disclose in the account-opening table either (1) the specific fee applicable to the consumer's account, or (2) the range of the fees, if the disclosure includes a statement that the amount of the fee varies by state and refers the consumer to the account agreement or other disclosure provided with the account-opening summary table where the amount of the fee applicable to the consumer's account is disclosed, for example in a list of fees for all states. Currently, creditors that establish open-end plans at point of sale provide account-opening disclosures at point of sale before the first transaction, and commonly provide an additional set of account-opening disclosures when, for example, a credit card is sent to the Start Printed Page 5308consumer. The Board believes that this practice would continue and that the account-opening disclosures provided later, for example with the credit card, would contain the specific rates and fees applicable to the consumer's account, as the creditor must provide for consumers who open accounts other than at the point of sale.

6(b)(2) Required Disclosures for Account-opening Table for Open-end (not Home-secured) Plans

Fees. Under the June 2007 Proposal, fees to be highlighted in the account-opening summary were identified in § 226.6(b)(4)(iii). The proposed list of fees and categories of fees was intended to be exclusive. The Board noted that it considered these fees, among the charges that TILA covers, to be the most important fees, at least in the current marketplace, for consumers to know about before they start to use an account. The fees identified in proposed § 226.6(b)(4)(iii) included charges that a consumer could incur and which a creditor likely would not otherwise be able to disclose in advance of the consumer engaging in the behavior that triggers the cost, such as fees triggered by a consumer's use of a cash advance check or by a consumer's late payment. Transaction fees imposed for transactions in a foreign currency or that take place in a foreign country also would have been among the fees to be disclosed at account opening.

Industry commenters generally supported the proposal. Some consumer groups believe it would be a mistake to adopt a static list of fees to be disclosed in the account-opening table. They stated the credit card market is dynamic, and a static list would encourage creditors to establish new fees that would not be disclosed as prominently as those in the table. These commenters suggested the Board also require creditors to disclose in the account-opening table any fee that a creditor charges to more than 5 percent of its cardholders.

The Board is adopting in § 226.6(b)(2) the list of fees proposed in § 226.4(b)(4)(iii) as the exclusive list of fees and categories of fees that must be disclosed in the table, although § 226.6(b)(2) has been reorganized to more closely track the requirements of § 226.5a. Accordingly, the fees required to be disclosed in the table are those identified in § 226.6(b)(2)(ii) through (b)(2)(iv) and (b)(2)(vii) through (b)(2)(xii); that is, fees for issuance or availability of credit, minimum or fixed finance charges, transaction fees, cash advance fees, late-payment fees, over-the-limit fees, balance transfer fees, returned-payment fees, and fees for required insurance, debt cancellation or debt suspension coverage.

The Board intends this list of fees to be exclusive, for two reasons. An exclusive list eases compliance and reduces the risk of litigation; creditors have the certainty of knowing that as new services (and associated fees) develop, fees not required to be disclosed in the summary table under the final rule need not be highlighted in the account-opening summary unless and until the Board requires their disclosure after notice and public comment. And as discussed in the section-by-section analysis to § 226.5(a)(1) and (b)(1), charges required to be highlighted in the account-opening table must be provided in a written and retainable form before the first transaction and before being increased or newly introduced. Creditors have more flexibility regarding disclosure of other charges imposed as part of an open-end (not home-secured) plan.

The exclusive list of fees also benefits consumers. The list focuses on fees consumer testing conducted for the Board showed to be most important to consumers. The list is manageable and focuses on key information rather than attempting to be comprehensive. Since consumers must be informed of all fees imposed as part of the plan before the cost is incurred, not all fees need to be included in the account-opening table provided at account opening.

Payment allocation. Section 226.6(b)(4)(vi) of the June 2007 Proposal would have required creditors to disclose in the account-opening tabular summary, if applicable, the information regarding how payments will be allocated if the consumer transfers balances at a low rate and then makes purchases on the account. The payment allocation disclosure requirements proposed for the account-opening table mirrored the proposed requirements in proposed § 226.5a(b)(15) to be provided in the table given at application or solicitation.

In May 2008, the Board and other federal banking agencies proposed limitations on how creditors may allocate payments on outstanding credit card balances. See 73 FR 28904, May 19, 2008. The Board indicated in the May 2008 Regulation Z Proposal that if the proposed limitations were adopted, the Board contemplated withdrawing proposed § 226.6(b)(4)(vi). For the reasons discussed in the section-by-section analysis to § 226.5a(b), the Board is withdrawing proposed § 226.6(b)(4)(vi).

6(b)(2)(i) Annual Percentage Rate

Section 226.6(b)(2)(i) (proposed at § 226.6(b)(4)(ii)) sets forth disclosure requirements for rates that would apply to accounts. Except as noted below, the disclosure requirements for APRs in the account-opening table are adopted for the same reasons underlying, and consistent with, the disclosure requirements adopted for APRs in the table provided with credit card applications and solicitations. See section-by-section analysis to § 226.5a(b)(1).

Periodic rates and index and margin values are not permitted to be disclosed in the table, for the same reasons underlying, and consistent with, the proposed requirements for the table provided with credit card applications and solicitations. See comments 5a(b)(1)-2 and -8. The index and margin must be provided in the credit agreement or other account-opening disclosures pursuant to § 226.6(b)(4). Creditors also must continue to disclose periodic rates, as a cost imposed as part of the plan, before the consumer agrees to pay or becomes obligated to pay for the charge, and these disclosures could be provided in the credit agreement or other disclosure, as is likely currently the case.

The rate disclosures required for the account-opening table differ from those required for the table provided with credit card applications and solicitations. For applications and solicitations, creditors may provide a range of APRs or specific APRs that may apply, where the APR is based at least in part on a later determination of the consumer's creditworthiness. At account opening, creditors must disclose the specific APRs that will apply to the account as proposed, with a limited exception.

Similar to the discussion in the section-by-section analysis to § 226.6(b)(1)(iii), the APR that some creditors may charge vary by state. In general, a creditor must disclose the APR applicable to the consumer's account. Listing all APRs for multiple states in the account-opening summary box is not permissible. The Board is concerned that such an approach would detract from the purpose of the table: to provide key information in a simplified way. However, for creditors with retail stores in a number of states, it is not practicable to require APR-specific disclosures to be provided when an open-end (not home-secured) plan is established in person in connection with the purchase of goods or services. Thus, the Board provides in § 226.6(b)(2)(i)(E) that creditors Start Printed Page 5309imposing APRs that vary by state and providing the disclosures required by § 226.6(b) in person at the time the open-end (not home-secured) plan is established in connection with financing the purchase of goods or services may, at the creditor's option, disclose in the account-opening table either (1) the specific APR applicable to the consumer's account, or (2) the range of the APRs, if the disclosure includes a statement that the APR varies by state and refers the consumer to the account agreement or other disclosure provided with the account-opening summary table where the APR applicable to the consumer's account is disclosed, for example in a list of APRs for all states. Currently, creditors that establish open-end plans at point of sale provide account-opening disclosures at point of sale before the first transaction, and commonly provide an additional set of disclosures when, for example, a credit card is sent to the consumer. The Board believes that this practice would continue and that the account-opening summary provided with the additional set of disclosures would contain the APRs applicable to the consumer's account, as the creditor must provide for consumers who open accounts other than at point of sale.

This limited exception does not extend to rates that vary due to creditors' pricing policies. Creditors that offer risk-based APRs commonly offer one or two rates, or perhaps three or four, as opposed to retail creditors that may offer a dozen or more rates, based on varying state laws. The multiplicity of rates and the training required for retail sales staff to identify correctly which state law governs the potential account holder increases these creditors' risk of inadvertent noncompliance. Creditors that choose to offer risk-based pricing, however, are better able to manage their potential risk of noncompliance. The exception is intended to have a limited scope because the Board believes consumers benefit by knowing, at account-opening, the actual rates that will apply to their accounts.

Discounted and premium initial rates. Currently, a discounted initial rate may, but is not required to, be disclosed in the table accompanying a credit or charge card application or solicitation. Card issuers that choose to include such a rate must also disclose the time period during which the discounted initial rate will remain in effect. See § 226.5a(b)(1)(ii). Creditors, however, must disclose these terms in account-opening disclosures. The June 2007 Proposal would have required any initial temporary rate, the circumstances under which that rate expires, and the rate that will apply after the temporary rate expires to be disclosed in the account-opening table. See proposed § 226.6(b)(4)(ii)(B).

The final rule regarding the disclosure of temporary initial rates differs from the proposal in several ways, two of which are technical. As discussed above, the text of the disclosure requirements has been revised to more closely track the regulatory text under § 226.5a. Therefore, § 226.6(b)(2)(i)(B) and (b)(2)(i)(C), which set forth disclosure requirements for discounted initial rates and premium initial rates, replace proposed text in § 226.6(b)(4)(ii)(B) regarding initial temporary rates and are consistent with § 226.5a(b)(1)(ii) and (b)(1)(iii). For consistency, discounted initial rates are referred to as “introductory” rates as that term in defined in § 226.16(g)(2)(ii).

Under § 226.6(b)(2)(i)(B) and consistent with § 226.5a, creditors that offer a temporary discounted initial rate must disclose in the account-opening table the rate that otherwise would apply after the temporary rate expires. Also, to be consistent with § 226.5a, creditors under the final rule may, but generally are not required to (except as discussed below), disclose discounted initial rates in the account-opening table. Creditors that choose to include such a rate must also disclose the time period during which the discounted initial rate will remain in effect. Under § 226.6(b)(2)(i)(D)(2), if a creditor discloses discounted initial rates in the account-opening table, the creditor must also disclose directly beneath the table the circumstances under which the discounted initial rate may be revoked and the rate that will apply after revocation.

As discussed in the section-by-section analysis to § 226.5a(b)(1), § 226.6(b)(2)(i) of the final rule has been revised to provide that issuers subject to the final rules issued by the Board and other federal banking agencies published elsewhere in today's Federal Register must disclose any introductory rate applicable to the account in the table. This requirement is intended to promote consistency with those final rules, which require issuers to state at account opening the annual percentage rates that will apply to each category of transactions on a consumer credit card account. Thus, § 226.6(b)(2)(i)(F) has been added to the final rule to clarify that an issuer subject to 12 CFR 227.24 or similar law must disclose in the account-opening table any introductory rate that will apply to a consumer's account. A conforming change has been made to § 226.6(b)(2)(i)(B).

Similarly, and for the same reasons stated above, § 226.6(b)(2)(i)(F) also requires that card issuers subject to the final rules issued by the Board and other federal banking agencies published elsewhere in today's Federal Register disclose in the table any rate that will apply after a premium initial rate expires. Section 226.6(b)(2)(i)(C) also has been revised for consistency.

If a creditor that is not subject to 12 CFR 227.24 or similar law does not disclose a discounted initial rate (and thus also does not disclose the reasons the rate may be revoked and the rate that will apply after revocation) in the account-opening table, the creditor must provide these disclosures at any time before the consumer agrees to pay or becomes obligated to pay for a charge based on the rate, pursuant to the disclosure timing requirements of § 226.5(b)(1)(ii). Creditors may provide disclosures of these charges in writing but creditors are not required to do so; only those charges identified in § 226.6(b)(2) that must appear in the account-opening table must be provided in writing. The Board expects, however, that for contract law or other reasons, most creditors as a practical matter will disclose the discounted initial rate in writing at account-opening. See section-by-section analysis to § 226.5(a)(1) above.

The Board believes aligning the disclosure requirements for the account-opening summary table with the requirements for the application summary table will ease compliance without lessening consumer protections. Many creditors will continue to disclose discounted initial rates, including issuers subject to the final rules issued by the Board and other federal banking agencies published elsewhere in today's Federal Register, and how an initial rate could be revoked in the account-opening table or in writing as part of the account-opening disclosures.

6(b)(2)(iii) Fixed Finance Charge; Minimum Interest Charge

TILA Section 127(a)(3), which is currently implemented in § 226.6(a)(4), requires creditors to disclose in account-opening disclosures the amount of the finance charge, including any minimum or fixed amount imposed as a finance charge. 15 U.S.C. 1637(a)(3). In the June 2007 Proposal, the Board would have required creditors to disclose in account-opening disclosures the amount of any finance charges in § 226.6(b)(1)(i)(A), and further required creditors to disclose any minimum finance charge in the account-opening table in § 226.6(b)(4)(iii)(D). In May 2008, the Board proposed to require Start Printed Page 5310card issuers to disclose in the table provided with applications or solicitations minimum or fixed finance charges in excess of $1.00 that could be imposed during a billing cycle and a brief description of the charge under the heading “minimum interest charge” or “minimum charge,” as discussed in the section-by-section analysis to Appendix G, for the reasons discussed in the section-by-section analysis to proposed § 226.5a(b)(3). At the card issuer's option, the card issuer could disclose in the table any minimum or fixed finance charge below the threshold. The Board proposed the same disclosure requirements to apply to the account-opening table for the same reasons.

For the reasons discussed in the section-by-section analysis to § 226.5a(b)(3), § 226.6(b)(2)(iii) is revised and new comment 6(b)(2)(iii)-1 is added, consistent with § 226.5a(b)(3). As noted in the section-by-section analysis to § 226.5a(b)(3), under the June 2007 Proposal, card issuers may substitute the account-opening table for the table required by § 226.5a. Conforming the fixed finance charge and minimum interest charge disclosure requirement for the two tables promotes consistency and uniformity. Because minimum interest charges of $1.00 or less would no longer be required to be disclosed in the account-opening table, these charges could be disclosed at any time before the consumer agrees to pay or becomes obligated to pay for the charge, pursuant to the disclosure timing requirements of § 226.5(b)(1)(ii). Creditors may provide disclosures of these charges in writing but are not required to do so. See section-by-section analysis to § 226.5(a)(1) above. The Board believes creditors will continue to disclose minimum interest charges of $1.00 or less in writing at account opening, to meet the timing requirement to disclose the fee before the consumer becomes obligated for the charge. In addition, creditors that choose to charge more than $1.00 would be required to include the cost in the account-opening table. Thus, the Board is adopting § 226.6(b)(2)(iii) (proposed in May 2008 as § 226.6(b)(4)(iii)(D)) with technical changes described in the section-by-section analysis to § 226.5a(b)(3).

6(b)(2)(v) Grace Period

Under TILA, creditors providing disclosures with applications and solicitations must discuss grace periods on purchases; at account opening, creditors must explain grace periods more generally. 15 U.S.C. 1637(c)(1)(A)(iii); 15 U.S.C. 1637(a)(1). Section 226.6(b)(4)(iv) in the June 2007 Proposal would have required creditors to state for all balances on the account, whether or not a period exists in which consumers may avoid the imposition of finance charges, and if so, the length of the period.

In May 2008, as discussed in the section-by-section analysis to § 226.5(a)(2) and to § 226.5a(b)(5), the Board proposed to revise provisions relating to the description of grace periods. Under the proposal, § 226.6(b)(4)(iv) would have been revised and comment 6(b)(4)(iv)-1 added, consistent with the proposed revisions to § 226.5a(b)(5) and commentary. The heading “How to Avoid Paying Interest [on a particular feature]” would have been used where a grace period exists for that feature. The heading “Paying Interest” would have been used if there is no grace period on any feature of the account. A reference to required use of the phrase “grace period” in comment 6(b)(4)-3 of the June 2007 Proposal was proposed to be withdrawn.

Comments received on the proposed text of headings and the results of consumer testing are discussed in the section-by-section analysis to § 226.5a(b)(5). For the reasons stated in the section-by-section analysis to and consistent with § 226.5a(b)(5), the final rule (moved to § 226.6(b)(2)(v)) requires the heading “How to Avoid Paying Interest” to be used for the row that describes a grace period, and the heading “Paying Interest” to be used for the row that describes no grace period.

The final rule differs from the proposal in that the heading “Paying Interest” must be used for the heading in the account-opening table if any one feature on the account does not have a grace period. Comments 6(b)(2)(v)-1 through -3 provide language creditors may use to describe features that have grace periods and features that do not, and guidance on complying with § 226.6(b)(2)(v) when some features on an account have a grace period but others do not. See Samples G-17(B) and G-17(C).

As stated above under TILA, card issuers must disclose any grace period for purchases, which most credit cards currently offer, in the table provided on or with credit card applications or solicitations, and creditors must disclose at account opening whether or not grace periods exist for all features of an account. Cash advance and balance transfer features on credit card accounts typically do not offer grace periods. Under the final rule, the row heading describing grace periods in the account-opening table will likely be uniform among creditors, “Paying Interest.” The Board recognizes that this row heading may not be consistent with the row heading describing grace periods for purchases in the table provided on or with credit card applications and solicitations. However, the Board does not believe that different headings will significantly undercut a consumer's ability to compare the terms of a credit card account to the terms that were offered in the solicitation. Currently most issuers offer a grace period on all purchase balances; thus, most issuers will use the term “How to Avoid Paying Interest on Purchases” in the table provided on or with credit card applications and solicitations. Nonetheless, when a consumer is reviewing the application and account-opening tables for a credit card account—the former having a row with the heading “How to Avoid Paying Interest on Purchases” and the latter having a row “Paying Interest” because no grace period is offered on balance transfers and cash advances—the Board believes that consumers will recognize that the information in those two rows relate to the same concept of when consumers will pay interest on the account.

6(b)(2)(vi) Balance Computation Methods

TILA requires creditors to explain as part of the account-opening disclosures the method used to determine the balance to which rates are applied. 15 U.S.C. 1637(a)(2). In June 2007, the Board proposed § 226.6(b)(4)(ix), which would have required that the name of the balance computation method used by the creditor be disclosed beneath the table, along with a statement that an explanation of the method is provided in the account agreement or disclosure statement. To determine the name of the balance computation method to be disclosed, the June 2007 Proposal would have required creditors to refer to § 226.5a(g) for a list of commonly-used methods; if the method used was not among those identified, creditors would be required to provide a brief explanation in place of the name.

Commenters generally supported the proposal. See section-by-section analysis to § 226.5a(b)(6) regarding the comments received on proposed disclosures of the name of balance computation method below the summary table provided on or with credit card applications or solicitations. Consistent with the reasons discussed in the section-by-section analysis to § 226.5a(b)(6), the Board adopts § 226.6(b)(2)(vi) (proposed as § 226.6(b)(4)(ix)) to require that the name of the balance computation method used by a creditor be disclosed Start Printed Page 5311beneath the table, along with a statement that an explanation of the method is provided in the account agreement or disclosure statement. Unlike § 226.5a(b)(6), creditors are required in § 226.6(b)(2)(vi) to disclose the balance computation method used for each feature on the account. Samples G-17(B) and G-17(C) provide guidance on how to disclose the balance computation method where the same method is used for all features on the account.

6(b)(2)(viii) Late-Payment Fee

Under the June 2007 Proposal, creditors were required to disclose penalty fees such as late-payment fees in the account-opening summary table. If the APR may increase due to a late payment, the proposal required creditors to disclose that fact. Cross references were proposed to aid consumer understanding. See proposed § 226.6(b)(4)(iii)(C).

In response to the proposal, one federal banking agency suggested that in addition to the amount of the fee, the Board should consider additional cautionary disclosures to aid in consumer understanding, such as that late fees imposed on an account may cause the consumer to exceed the credit limit on the account. To keep the table manageable in size, the Board is not adopting a requirement to include cautionary information about the consequences of paying late beyond the requirement to provide information about penalty rates.

Cross References to Penalty Rate

For the reasons stated in the supplementary information regarding proposed § 226.5a(b)(13), the Board has withdrawn a requirement in proposed § 226.6(b)(4)(iii)(C) which provided that if a creditor may impose a penalty rate for one or more of the circumstances for which a late-payment fee, over-the-limit fee, or returned-payment fee is charged, the creditor must disclose the fact that the penalty rate also may apply and a cross reference to the penalty rate.

6(b)(2)(xii) Required Insurance, Debt Cancellation or Debt Suspension Coverage

For the reasons discussed in the section-by-section analysis to § 226.5a(b)(13), as permitted by applicable law, creditors that require credit insurance, or debt cancellation or debt suspension coverage, as part of the plan are required to disclose the cost of the product and a reference to the location where more information about the product can be found with the account-opening materials, as applicable. See § 226.6(b)(2)(xii).

6(b)(2)(xiii) Available Credit

The Board proposed in June 2007 a disclosure targeted at subprime card accounts that assess substantial fees at account opening and leave consumers with a limited amount of available credit. Proposed § 226.6(b)(4)(vii) would have applied to creditors that require fees for the availability or issuance of credit, or a security deposit, that in the aggregate equal 25 percent or more of the minimum credit limit offered on the account. If that threshold is met, a creditor would have been required to disclose in the table an example of the amount of available credit the consumer would have after the fees or security deposit are debited to the account, assuming the consumer receives the minimum credit limit. The account-opening disclosures regarding available credit also would have been required for credit and charge card applications or solicitations. See proposed § 226.5a(b)(16). The requirement in proposed § 226.6(b)(4)(vii) would have applied to all open-end (not home-secured) credit for which the threshold is met, unlike § 226.5a(b)(14) (proposed as § 226.5a(b)(16)), which only applies to card issuers.

Commenters generally supported the proposal, which is generally adopted as proposed with several revisions noted below. See section-by-section analysis to § 226.5a(b)(14) regarding comments received on the proposed disclosure of available credit in the summary table provided on or with credit card applications or solicitations. Consistent with § 226.5a(b)(14), § 226.6(b)(2)(xiii) of the final rule (proposed as § 226.6(b)(4)(vii)) reduces the threshold for determining whether the available credit disclosure must be given to 15 percent or more of the minimum credit limit offered on the account.

Notice of right to reject plan. In May 2008, the Board proposed an additional disclosure to inform consumers about their right to reject a plan when set-up fees have been charged before the consumer receives account-opening disclosures. See section-by-section analysis to § 226.5(b)(1)(iv). Creditors would have been required to provide consumers with notice about the right to reject the plan in such circumstances. The Board intended to target the disclosure requirement to creditors offering subprime credit card accounts. Comment 6(b)(4)(vii)-1 also was proposed to provide creditors with model language to comply with the disclosure requirement.

Both industry and consumer group commenters that addressed the provision generally supported the proposed notice. See section-by-section analysis to § 226.5(b)(1)(iv) for a discussion of comments received regarding the circumstances under which a consumer could reject a plan. Regarding the notice itself, one industry commenter suggested adding to the notice information about how the consumer could contact the creditor to reject the plan. One commenter suggested expanding the disclosure requirement to the table provided with credit and charge card applications and solicitations; another suggested requiring the notice on the first billing statement.

The final rule adopts the requirement to provide a notice disclosure in the account-opening table to inform consumers about their right to reject a plan until the consumer has used the account or made a payment on the account after receiving a billing statement, when set-up fees have been charged before the consumer receives account-opening disclosures. The final rule provides model language creditors may use to comply with the disclosure requirement, as proposed. The final rule does not include a requirement that the creditor provide information about how to contact the creditor to reject the plan; the Board believes such a requirement would add to the length of the disclosure and is readily available to consumers in other account-opening materials. The Board also declines to require the notice on or with an application or solicitation or on the first billing statement; the Board believes the most effective time for the notice to be given is after the consumer has chosen to apply for the card account and before the consumer has used or had the opportunity to use the card.

Actual credit limit. The available credit disclosure proposed in June 2007 would have been triggered if start-up fees, or a security deposit financed by the creditor, in the aggregate equal 25 percent or more of the minimum credit limit offered on the account, consistent with the proposed disclosure in the summary table required on or with credit or charge card applications or solicitations. Some consumer groups urged the Board to base the disclosure on the actual credit limit received, rather than the minimum credit limit on the account. As discussed in the section-by-section analysis to § 226.5a(b)(14), final rules issued by the Board and other federal banking agencies published elsewhere in today's Federal Register address card issuers' ability to finance certain fee amounts.Start Printed Page 5312

The final rule, consistent with the proposal, bases the threshold for whether the available disclosure is required to be given on the minimum credit limit offered on the plan. Specifically, the final rule requires that the available credit disclosure be given in the account-opening table if the creditor requires fees for the availability or issuance of credit, or a security deposit, that in the aggregate equal 15 percent or more of the minimum credit limit offered on the plan. The Board believes that it is important that a consumer receive consistent disclosures in the table provided with an application or solicitation and in the account-opening table, regardless of the actual credit limit for which the consumer is approved. For example, if a creditor offers an open-end plan with a minimum credit limit of $300 and imposes start-up fees of $45, that creditor would be required to include the available credit disclosure in the table provided with applications and solicitations. If a consumer applies for that account and receives an initial credit limit of $400, the $45 in start-up fees would be less than 15% of the consumer's line. However, the Board believes that the consumer still should receive the available credit disclosure at account-opening so that the consumer is better able to compare the terms of the account he or she received with the terms of the offer.

Although, as discussed above, a creditor must determine whether the 15 percent threshold is met with reference to the minimum credit limit offered on the plan, the final rule requires creditors to base the available credit disclosure for the account-opening summary table, if required, on the actual credit limit received. The Board believes a disclosure of available credit based on the actual credit limit provides consumers with accurate information that is helpful in understanding the available credit remaining. Creditors typically state the credit limit for the account with account-opening materials, and permitting creditors to disclose in the table the minimum credit limit offered on the account—likely a different dollar amount than the actual credit limit—could result in confusion. The Board understands that creditors offering accounts that would be subject to the available credit disclosure typically establish a limited number of credit limits on such accounts. Therefore, for creditors that use pre-printed forms, the requirement should not be overly burdensome.

6(b)(2)(xiv) Web Site Reference

For the reasons stated under § 226.5a(b)(15), the Board adopts § 226.6(b)(2)(xiv) (proposed at § 226.6(b)(4)(viii)), which requires card issuers to provide a reference to the Board's Web site for additional information about shopping for and using credit card accounts.

6(b)(2)(xv) Billing Error Rights Reference

All creditors offering open-end plans must provide notices of billing rights at account opening. See current § 226.6(d). This information is important, but lengthy. The Board proposed § 226.6(b)(4)(x) in June 2007 to draw consumers' attention to the notices by requiring a statement that information about billing rights and how to exercise them is provided in the account-opening disclosures. Under the proposal, the statement, along with the name of the balance computation method, would have been required to be located directly below the table. The Board received no comments on the billing error rights reference and is adopting the requirement as proposed.

6(b)(3) Disclosure of Charges Imposed as Part of Open-End (Not Home-Secured) Plans

Currently, the rules for disclosing costs related to open-end plans create two categories of charges covered by TILA: Finance charges (§ 226.6(a)) and “other charges” (§ 226.6(b)). According to TILA, a charge is a finance charge if it is payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor “as an incident to the extension of credit.” The Board implemented the definition by including as a finance charge under Regulation Z, any charge imposed “as an incident to or a condition of the extension of credit.” TILA also requires a creditor to disclose, before opening an account, “other charges which may be imposed as part of the plan * * * in accordance with regulations of the Board.” The Board implemented the provision virtually verbatim, and the staff commentary interprets the provision to cover “significant charges related to the plan.” 15 U.S.C. 1605(a), § 226.4; 15 U.S.C. 1637(a)(5), § 226.6(b), current comment 6(b)-1.

The terms “finance charge” and “other charge” are given broad and flexible meanings in the current regulation and commentary. This ensures that TILA adapts to changing conditions, but it also creates uncertainty. The distinctions among finance charges, other charges, and charges that do not fall into either category are not always clear. As creditors develop new kinds of services, some creditors find it difficult to determine if associated charges for the new services meet the standard for a “finance charge” or “other charge” or are not covered by TILA at all. This uncertainty can pose legal risks for creditors that act in good faith to classify fees. Examples of charges that are included or excluded charges are in the regulation and commentary, but they cannot provide definitive guidance in all cases.

The June 2007 Proposal would have created a single category of “charges imposed as part of an open-end (not home-secured) plan” as identified in proposed § 226.6(b)(1)(i). These charges include finance charges under § 226.4(a) and (b), penalty charges, taxes, and charges for voluntary credit insurance, debt cancellation or debt suspension coverage.

Under the June 2007 Proposal, charges to be disclosed also would have included any charge the payment or nonpayment of which affects the consumer's access to the plan, duration of the plan, the amount of credit extended, the period for which credit is extended, or the timing or method of billing or payment. Proposed commentary provided examples of charges covered by the provision, such as application fees and participation fees (which affect access to the plan), fees to expedite card delivery (which also affect access to the plan), and fees to expedite payment (which affect the timing and method of payment).

Three examples of types of charges that are not imposed as part of the plan were listed in proposed § 226.6(b)(1)(ii). These examples would have included charges imposed on a cardholder by an institution other than the card issuer for the use of the other institution's ATM; and charges for a package of services that includes an open-end credit feature, if the fee is required whether or not the open-end credit feature is included and the non-credit services are not merely incidental to the credit feature. Proposed comment 6(b)(1)(ii)-1 provided examples of fees for packages of services that would have been considered to be imposed as part of the plan and fees for packages of services that would not. This comment is substantively identical to current comment 6(b)-1.v.

Commenters generally supported deemphasizing the distinction between finance charges and other charges. One trade association urged the Board to identify costs as “interest” or “fees,” the labels proposed to describe costs on Start Printed Page 5313periodic statements, rather than “costs imposed as part of the plan,” to ease compliance and consumer understanding.

Some industry commenters urged the Board to provide a specific and finite list of fees that must be disclosed, to avoid litigation risk. They stated the proposed categories of charges considered to be part of the plan were not sufficiently precise. They asked for additional guidance on what fees might be captured as fees for failure to use the card as agreed (except amounts payable for collection activity after default), or that affect the consumer's access to the plan, for example. One industry trade association asked the Board to clarify that creditors would be deemed to be in compliance with the regulation if the creditor disclosed a fee that was later deemed to be not a part of the plan.

The Board is adopting the requirement to disclose costs imposed as part of the plan as proposed, but renumbered for organizational clarity. General rules are set forth in § 226.6(b)(3)(i), charges imposed as part of the plan are identified in § 226.6(b)(3)(ii), and charges imposed that are not part of the plan are identified in § 226.6(b)(3)(iii). The final rule continues to use the term “charges.” Although the Board's consumer testing indicates that consumers' understanding of costs incurred during a statement period improves when labeled as “fees” or “interest” on periodic statements, the Board believes the general term “charges,” which encompasses interest and fees, is an efficient description of the requirement, and eases compliance by not requiring creditors to recite “fees and interest” wherever the term “charges” otherwise would appear.

As the Board acknowledged in the June 2007 Proposal, the disclosure requirements do not completely eliminate ambiguity about what are TILA charges. The commentary provides examples to ease compliance. To further mitigate ambiguity the rule provides a complete list in new § 226.6(b)(2) of which charges and categories of charges must be disclosed in writing at account opening (or before they are increased or newly introduced). See §§ 226.5(b)(1) and 226.9(c)(2) for timing rules. Any fees aside from those fees or categories of fees identified in § 226.6(b)(2) are not required to be disclosed in writing at account opening. However, if they are not disclosed in writing at account opening, other charges imposed as part of an open-end (not home-secured) plan must be disclosed in writing or orally at a time and in a manner that a consumer would be likely to notice them before the consumer agrees to or becomes obligated to pay the charge. This approach is intended in part to reduce creditor burden. For example when a consumer orders a service by telephone, creditors presumably disclose fees related to that service at that time for business reasons and to comply with other state and federal laws.

Moreover, compared to the approach reflected in the current regulation, the broad application of the statutory standard of fees “imposed as part of the plan” should make it easier for a creditor to determine whether a fee is a charge covered by TILA, and reduce litigation and liability risks. Comment 6(b)(3)(ii)-3 is added to provide that if a creditor is unsure whether a particular charge is a cost imposed as part of the plan, the creditor may, at its option, consider such charges as a cost imposed as part of the plan for Truth in Lending purposes. In addition, this approach will help ensure that consumers receive the information they need when it would be most helpful to them.

Comment 6(b)(3)(ii)-2 has been revised from the June 2007 Proposal. The comment, as proposed in June 2007 as comment 6(b)(1)(i)-2, included a fee to receive paper statements as an example of a fee that affects the plan. This example is not included in the final rule. Creditors are required to provide periodic statements in writing in connection with open-end plans, and the Board did not intend with the inclusion of this example to express a view on the permissibility of charging consumers a fee to receive paper statements.

Section 226.6(b)(3) applies to all open-end plans except HELOCs subject to § 226.5b. It retains TILA's general requirements for disclosing costs for open-end plans: Creditors are required to continue to disclose the circumstances under which charges are imposed as part of the plan, including the amount of the charge (e.g., $3.00) or an explanation of how the charge is determined (e.g., 3 percent of the transaction amount). For finance charges, creditors currently must include a statement of when the finance charge begins to accrue and an explanation of whether or not a “grace period” or “free-ride period” exists (a period within which any credit that has been extended may be repaid without incurring the charge). Regulation Z has generally referred to this period as a “free-ride period.” To use consistent terminology to describe the concept, the Board is updating references to “free-ride period” as “grace period” in the regulation and commentary, without any intended substantive change, as proposed. Comment 6(b)(3)-2 is revised to provide that although the creditor need not use any particular descriptive phrase or term to describe a grace period, the descriptive phrase or term must be sufficiently similar to the disclosures provided pursuant to §§ 226.5a and 226.6(b)(2) to satisfy a creditor's duty to provide consistent terminology under § 226.5(a)(2).

6(b)(4) Disclosure of Rates for Open-End (Not Home-Secured) Plans

Rules for disclosing rates that affect the amount of interest that will be imposed are consolidated in § 226.6(b)(4) (proposed at § 226.6(b)(2)). (See redesignation table below.) Headings have been added for clarity.

6(b)(4)(i)

Currently, creditors must disclose finance charges attributable to periodic rates. These costs are typically interest charges but may include other costs such as premiums for required credit insurance. For clarity, the text of § 226.6(b)(4)(i) uses the term “interest” rather than “finance charge” and is adopted as proposed.

6(b)(4)(i)(D) Balance Computation Method

Section § 226.6(b)(4)(i) sets forth rules relating to the disclosure of rates. Section § 226.6(b)(4)(i)(D) (currently § 226.6(a)(3) and proposed in June 2007 as § 226.6(b)(2)(i)(D)) requires creditors to explain the method used to determine the balance to which rates apply. 15 U.S.C. 1637(a)(2).

The June 2007 Proposal would have required creditors to continue to explain the balance computation methods in the account-opening agreement or other disclosure statement. The name of the balance computation method and a reference to where the explanation can be found would have been required along with the account-opening summary table. Commenters generally supported the Board's approach, and the Board is adopting the requirement to provide an explanation of balance computation methods in the account agreement or other disclosure statement, as proposed. See also the section-by-section analysis to § 226.6(b)(2)(vi).

Model clauses. Model clauses that explain commonly used balance computation methods, such as the average daily balance method, are at Appendix G-1 to part 226. In the June 2007 Proposal, the Board requested comment on whether model clauses for methods such as “adjusted balance” and “previous balance” should be deleted as obsolete, and more broadly, whether Start Printed Page 5314Model Clauses G-1 should be eliminated entirely because creditors no longer use the model clauses.

One trade association asked that all model clauses be retained. In response to other comments received on the June 2007 Proposal, the Board proposed in May 2008 to add a new model clause to Model Clauses G-1 for the “daily balance” method. In addition, the Board proposed new Model Clauses G-1(A) for open-end (not home-secured) plans. The clauses in G-1(A) differ from the clauses in G-1 by referring to “interest charges” rather than “finance charges” to explain balance computation methods. Commenters did not specifically address this aspect of the May 2008 Proposal.

Based on the comments received on both proposals, the Board is adopting Model Clauses G-1(A). See section-by-section analysis to § 226.6(a) regarding Model Clauses G-1.

Current comment 6(a)(3)-2 clarifies that creditors may, but need not, explain how payments and other credits are allocated to outstanding balances as part of explaining a balance computation method. Two examples are deleted from the comment (renumbered in this final rule as 6(b)(4)(i)(D)-2), to avoid any unintended confusion or conflict with rules limiting how creditors may allocate payments on outstanding credit balances, published elsewhere in today's Federal Register.

6(b)(4)(ii) Variable-Rate Accounts

New § 226.6(b)(4)(ii) sets forth the rules for variable-rate disclosures now contained in footnote 12. In addition, guidance on the accuracy of variable rates provided at account opening is moved from the commentary to the regulation and revised, as proposed. Currently, comment 6(a)(2)-3 provides that creditors may provide the current rate, a rate as of a specified date if the rate is updated from time to time, or an estimated rate under § 226.5(c). In June 2007, the Board proposed an accuracy standard for variable rates disclosed at account opening; the rate disclosed would have been accurate if it was in effect as of a specified date within 30 days before the disclosures are provided. Creditors' option to provide an estimated rate as the rate in effect for a variable-rate account would have been eliminated under the proposal. Current comment 6(a)(2)-10, which addresses discounted variable-rate plans, was proposed as comment 6(b)(2)(ii)-5, with technical revisions but no substantive changes.

The June 2007 Proposal also would have required that, in describing how a variable rate is determined, creditors must disclose the applicable margin, if any. See proposed § 226.6(b)(2)(ii)(B).

The Board is adopting the rules for variable-rate disclosures provided at account-opening, as proposed. As to accuracy requirements, the Board believes 30 days provides sufficient flexibility to creditors and reasonably current information to consumers. The Board believes creditors are provided with sufficient flexibility under the proposal to provide a rate as of a specified date, so the use of an estimate would not be appropriate.

Comment 6(b)(4)(ii)-5 (proposed as 6(b)(2)(ii)-5) is adopted, with revisions consistent with the rule adopted under § 226.6(b)(2)(i)(B), which permits but does not require creditors, except those subject to 12 CFR § 227.24 or similar law, to disclose temporary initial rates in the account-opening summary table. However, creditors must comply with the general requirement to disclose charges imposed as part of the plan before the charge is imposed. The Board believes creditors not subject to 12 CFR § 227.24 or similar law will continue to disclose initial rates as part of the account agreement for contract and other reasons.

Pursuant to its TILA Section 105(a) authority, the Board is also adopting in § 226.6(b)(4)(ii)(B) the requirement to disclose any applicable margin when describing how a variable rate is determined. The Board believes creditors already state the margin for purposes of contract or other law and are currently required to disclose margins related to penalty rates, if applicable. No particular format requirements apply. Thus, the Board does not expect the revision will add burden.

6(b)(4)(iii) Rate Changes Not Due to Index or Formula

The June 2007 Proposal would have consolidated existing rules for rate changes that are specifically set forth in the account agreement but are not due to changes in an index or formula, such as rules for disclosing introductory and penalty rates. See proposed § 226.6(b)(2)(iii). In addition to requiring creditors to identify the circumstances under which a rate may change (such as the end of an introductory period or a late payment), the June 2007 Proposal would have required creditors to disclose how existing balances would be affected by the new rate. The change was intended to improve consumer understanding as to whether a penalty rate triggered by, for example, a late payment would apply not only to outstanding balances for purchases but to existing balances that were transferred at a low promotional rate. If the increase in rate is due to an increased margin, proposed comment 6(b)(2)(iii)-2 would require creditors to disclose the increase; the highest margin can be stated if more than one might apply.

Comment 6(b)(4)(iii)-1 (proposed as comment 6(b)(2)(iii)-1) is adopted with revisions consistent with the rule adopted under § 226.6(b)(2)(i)(B), which permits but does not require creditors to disclose temporary initial rates in the account-opening summary table, except as provided in § 226.6(b)(2)(i)(F). The effect of making the disclosure permissive is that creditors may disclose initial rates at any time before those rates are applied. However, the Board believes creditors will continue to disclose initial rates as part of the account agreement for contract and other reasons and to comply with the general requirement to disclose charges imposed as part of the plan before the charge is imposed.

Balances to which rates apply. The June 2007 Proposal would have required creditors to inform consumers whether any new rate would apply to balances outstanding at the time of the rate change. In May 2008, the Board and other federal banking agencies proposed rules to prohibit the application of a penalty rate to outstanding balances, with some exceptions. Elsewhere in today's Federal Register, the Board and other federal banking agencies are adopting the rule, with some revisions. To conform the requirements of § 226.6 to the rules addressing the application of a penalty rate to outstanding balances, creditors are required under § 226.6(b)(4)(iii)(D) and (b)(4)(iii)(E) to inform consumers about the balance to which the new rate will apply and the balance to which the current rate at the time of the change will apply. Comment 6(b)(4)(iii)-3 is conformed accordingly.

Credit privileges permanently terminated. Under current rules, comment 6(a)(2)-11 provides that creditors need not disclose increased rates that may apply if credit privileges are permanently terminated. That rule was retained in the June 2007 Proposal, but was moved to § 226.6(b)(4)(ii)(C) and comment 6(b)(2)(iii)-2.iii., to be consistent with § 226.5a(b)(1)(iv) in the June 2007 Proposal. In May 2008, the Board proposed to eliminate that exception; accordingly, references to increased rates upon permanently terminated credit privileges in paragraph iii. to comment 6(b)(2)(iii)-2 would have been removed.

For the reasons stated in the section-by-section analysis to § 226.5a(b)(1), the Board is eliminating the exception: Start Printed Page 5315creditors that increase rates when credit privileges are permanently terminated must disclose that increased rate in the account-opening table.

6(b)(5) Additional Disclosures for Open-end (not Home-secured) Plans

6(b)(5)(i) Voluntary Credit Insurance; Debt Cancellation or Suspension

As discussed in the section-by-section analysis to § 226.4, the Board is adopting revisions to the requirements to exclude charges for voluntary credit insurance or debt cancellation or debt suspension coverage from the finance charge. See § 226.4(d). Creditors must provide information about the voluntary nature and cost of the credit insurance or debt cancellation or suspension product, and about the nature of coverage for debt suspension products. Because creditors must obtain the consumer's affirmative request for the product as a part of the disclosure requirements, the Board expects the disclosures required under § 226.4(d) will be provided at the time the product is offered to the consumer.

In June 2007, the Board proposed § 226.6(b)(3) to require creditors to provide the disclosures required under § 226.4(d) to exclude voluntary credit insurance or debt cancellation or debt suspension coverage from the finance charge. One commenter asked the Board to clarify that the disclosures are required to be provided only to those consumers that purchase the product and not to all consumers to whom the product was made available.

Section 226.6(b)(5)(i) (proposed as § 226.6(b)(3)) is adopted as proposed, with technical revisions for clarity in response to commenters' concerns. Comment 6(b)(5)(i)-1 is added to provide that creditors comply with § 226.6(b)(5)(i) if they provide disclosures required to exclude the cost of voluntary credit insurance or debt cancellation or debt suspension coverage from the finance charge in accordance with § 226.4(d). For example, if the § 226.4(d) disclosures are given at application, creditors need not repeat those disclosures when providing other disclosures required to be given at account opening.

6(b)(5)(ii) Security Interests

Regulatory text regarding the disclosure of security interests (currently at § 226.6(c) and proposed at § 226.6(c)(1)) is retained without change. Comments to § 226.6(b)(5)(ii) (currently at § 226.6(c) and proposed as § 226.6(c)(1)) are revised for clarity, without any substantive change.

6(b)(5)(iii) Statement of Billing Rights

Creditors offering open-end plans must provide information to consumers at account opening about consumers' billing rights under TILA, in the form prescribed by the Board. 15 U.S.C. 1637(a)(7). This requirement is implemented in the Board's Model Form G-3. In June 2007, the Board revised Model Form G-3 to improve its readability, proposed as Model Form G-3(A). The proposed revisions were not based on consumer testing, although design techniques and changes in terminology were used to facilitate improved consumer understanding of TILA's billing rights. Under the June 2007 Proposal, creditors offering HELOCs subject to § 226.5b could continue to use current Model Form G-3 or G-3(A), at the creditor's option.

Model Form G-3 is retained and Model Form G-3(A) is adopted, with some revisions. As discussed in the section-by-section analysis to §§ 226.12(b) and 226.13(b), the Board clarified that creditors may choose to permit a consumer, at the consumer's option, to communicate with the creditor electronically when notifying the creditor about possible unauthorized transactions or other billing disputes. The use of electronic communication in these circumstances applies to all open-end credit plans; thus, additional text that provides instructions for a consumer, at the consumer's option, to communicate with the creditor electronically has been added to Model Forms G-3 and G-3(A). In addition, technical changes have also been made to Model Form G-3(A) for clarity without intended substantive change, in response to comments received.

Technical revisions. The final rule adopts several technical revisions, as proposed in the June 2007 Proposal. The section is retitled “Account-opening disclosures” from the current title “Initial disclosures” to reflect more accurately the timing of the disclosures, as proposed. In today's marketplace, there are few open-end products for which consumers receive the disclosures required under § 226.6 as their “initial” Truth in Lending disclosure. See §§ 226.5a and 226.5b. The substance of footnotes 11 and 12 is moved to the regulation; the substance of footnote 13 is moved to the commentary. (See redesignation table below.)

In other technical revisions, as proposed, comments 6-1 and 6-2 are deleted. The substance of comment 6-1, which requires consistent terminology, is discussed more generally in § 226.5(a)(2). Comment 6-2 addresses certain open-end plans involving more than one creditor, and is deleted as obsolete. See section-by-section analysis to § 226.5a(f).

Section 226.7 Periodic Statement

TILA Section 127(b), implemented in § 226.7, identifies information about an open-end account that must be disclosed when a creditor is required to provide periodic statements. 15 U.S.C. 1637(b). For a discussion about periodic statement disclosure rules and format requirements, see the section-by-section analysis to § 226.7(a) for HELOCs subject to § 226.5b, and § 226.7(b) for open-end (not home-secured) plans.

7(a) Rules Affecting Home-Equity Plans

Periodic statement disclosure and format requirements for HELOCs subject to § 226.5b were unaffected by the June 2007 Proposal, consistent with the Board's plan to review Regulation Z's disclosure rules for home-secured credit in a future rulemaking. To facilitate compliance, the substantively unrevised requirements applicable only to HELOCs are grouped together in § 226.7(a). (See redesignation table below.)

For HELOCs, creditors are required to comply with the disclosure requirements under § 226.7(a)(1) through (a)(10). Except for the addition of an exception that HELOC creditors may utilize at their option (further discussed below), these rules and accompanying commentary are substantively unchanged from current § 226.7(a) through (k) and the June 2007 Proposal. As proposed, § 226.7(a) also provides that at their option, creditors offering HELOCs may comply with the requirements of § 226.7(b). The Board understands that some creditors may use a single processing system to generate periodic statements for all open-end products they offer, including HELOCs. These creditors would have the option to generate statements according to a single set of rules.

In technical revisions, the substance of footnotes referenced in current § 226.7(d) is moved to § 226.7(a)(4) and comment 7(a)(4)-6, as proposed.

7(a)(4) Periodic Rates

TILA Section 127(b)(5) and current § 226.7(d) require creditors to disclose all periodic rates that may be used to compute the finance charge, and an APR that corresponds to the periodic rate multiplied by the number of periods in a year. 15 U.S.C. 1637(b)(5); § 226.14(b). Currently, comment 7(d)-1 interprets the requirement to disclose all periodic rates that “may be used” to mean “whether or not [the rate] is applied Start Printed Page 5316during the billing cycle.” In June 2007, the Board proposed for open-end (not home-secured) plans a limited exception to TILA Section 127(b)(5) regarding promotional rates that were offered but not actually applied, to effectuate the purposes of TILA to require disclosures that are meaningful and to facilitate compliance.

For the reasons discussed in the section-by-section analysis to § 226.7(b)(4)(ii), under the June 2007 Proposal, creditors would have been required to disclose promotional rates only if the rate actually applied during the billing period. The Board noted that interpreting TILA to require the disclosure of all promotional rates would be operationally burdensome for creditors and result in information overload for consumers. The proposed exception did not apply to HELOCs covered by § 226.5b, and the Board requested comment on whether the class of transactions under the proposed exceptions should apply more broadly to include HELOCs subject to § 226.5b, and if so, why.

Commenters generally supported the proposal under § 226.7(b)(4). Although few commenters addressed the issue of whether the exception should also apply to HELOCs subject to § 226.5b, these commenters favored extending the exception to HELOCs because concerns about information overload on consumers and operational burdens on creditors apply equally in the context of HELOC disclosures. The Board is adopting the exception as it applies to open-end (not home-secured) plans as proposed, with minor changes to the description of the time period to which the promotional rate applies. For the reasons stated above and in the section-by-section analysis to § 226.7(b)(4), the Board also extends the exception to HELOCs subject to § 226.5b. Section 226.7(a)(4) and comment 7(a)(4)-1 are revised accordingly. Extending this exception to HELOCs does not require creditors offering HELOCs to revise any forms or procedures. Therefore, no additional burden is associated with revising the rules governing HELOC disclosures. Comment 7(a)(4)-5, which provides guidance when the corresponding APR and effective APR are the same, is revised to be consistent with a creditor's option, rather than a requirement, to disclose an effective APR, as discussed below.

7(a)(7) Annual Percentage Rate

The June 2007 Proposal included two alternative approaches to address concerns about the effective APR. The section-by-section analysis to § 226.7(b) discusses in detail the proposed approaches and the reasons for the Board's determination to adopt the proposed approach that eliminates the requirement to disclose the effective APR. Thus, under this approach, the effective APR is optional for creditors offering HELOCs. Section 226.7(a) expressly provides, however, that a HELOC creditor must provide disclosures of fee and interest in accordance with § 226.7(b)(6) if the creditor chooses not to disclose an effective APR. Comment 7(a)(7)-1 is revised to provide that creditors stating an annualized rate on periodic statements in addition to the corresponding APR required by § 226.7(a)(4) must calculate that additional rate in accordance with § 226.14(c), to avoid the disclosure of rates that may be calculated in different ways.

Currently and under the June 2007 Proposal, HELOC creditors disclosing the effective APR must label it as “annual percentage rate.” The final rule adds comment 7(a)(7)-2 to provide HELOC creditors with additional guidance in labeling the APR as calculated under § 226.14(c) and the periodic rate expressed as an annualized rate. HELOC creditors that choose to disclose an effective APR may continue to label the figure as “annual percentage rate,” and label the periodic rate expressed as an annualized rate as the “corresponding APR,” “nominal APR,” or a similar term, as is currently the practice. Comment 7(a)(7)-2 further provides that it is permissible to label the APR calculated under § 226.14(c) as the “effective APR” or a similar term. For those creditors, the periodic rate expressed as an annualized rate could be labeled “annual percentage rate,” consistent with the requirement under § 226.7(b)(4). If the two rates are different values, creditors must label the rates differently to comply with the regulation's standard to provide clear disclosures.

7(b) Rules Affecting Open-End (Not Home-Secured) Plans

The June 2007 Proposal contained a number of significant revisions to periodic statement disclosures for open-end (not home-secured) plans, grouped together in proposed § 226.7(b). The Board proposed for comment two alternative approaches to disclose the effective APR: The first approach attempted to improve consumer understanding of this rate and reduce creditor uncertainty about its computation. The second approach eliminated the requirement altogether. In addition, the Board proposed to add new paragraphs § 226.7(b)(11) and (b)(12) to implement disclosures regarding late-payment fees and the effects of making minimum payments in Section 1305(a) and 1301(a) of the Bankruptcy Act. TILA Section 127(b)(11) and (12); 15 U.S.C. 1637(b)(11) and (12).

Effective annual percentage rate.

Background on effective APR. TILA Section 127(b)(6) requires disclosure of an APR calculated as the quotient of the total finance charge for the period to which the charge relates divided by the amount on which the finance charge is based, multiplied by the number of periods in the year. 15 U.S.C. 1637(b)(6). This rate has come to be known as the “historical APR” or “effective APR.” TILA Section 127(b)(6) exempts a creditor from disclosing an effective APR when the total finance charge does not exceed 50 cents for a monthly or longer billing cycle, or the pro rata share of 50 cents for a shorter cycle. In such a case, TILA Section 127(b)(5) requires the creditor to disclose only the periodic rate and the annualized rate that corresponds to the periodic rate (the “corresponding APR”). 15 U.S.C. 1637(b)(5). When the finance charge exceeds 50 cents, the act requires creditors to disclose the periodic rate but not the corresponding APR. Since 1970, however, Regulation Z has required disclosure of the corresponding APR in all cases. See current § 226.7(d). Current § 226.7(g) implements TILA Section 127(b)(6)'s requirement to disclose an effective APR.

The effective APR and corresponding APR for any given plan feature are the same when the finance charge in a period arises only from application of the periodic rate to the applicable balance (the balance calculated according to the creditor's chosen method, such as average daily balance method). When the two APRs are the same, Regulation Z requires that the APR be stated just once. The effective and corresponding APRs diverge when the finance charge in a period arises (at least in part) from a charge not determined by application of a periodic rate and the total finance charge exceeds 50 cents. When they diverge, Regulation Z currently requires that both be stated.

The statutory requirement of an effective APR is intended to provide the consumer with an annual rate that reflects the total finance charge, including both the finance charge due to application of a periodic rate (interest) and finance charges that take the form of fees. This rate, like other APRs required by TILA, presumably was intended to provide consumers information about the cost of credit that would help consumers compare credit Start Printed Page 5317costs and make informed credit decisions and, more broadly, strengthen competition in the market for consumer credit. 15 U.S.C. 1601(a). There is, however, a longstanding controversy about the extent to which the requirement to disclose an effective APR advances TILA's purposes or, as some argue, undermines them.

As discussed in greater detail in the Board's June 2007 Proposal, industry and consumer groups disagree as to whether the effective APR conveys meaningful information. Creditors argue that the cost of a transaction is rarely, if ever, as high as the effective APR makes it appear, and that this tendency of the rate to exaggerate the cost of credit makes this APR misleading. Consumer groups contend that the information the rate provides about the cost of credit, even if limited, is meaningful. The effective APR for a specific transaction or set of transactions in a given cycle may provide the consumer a rough indication that the cost of repeating such transactions is high in some sense or, at least, higher than the corresponding APR alone conveys. Consumer advocates and industry representatives also disagree as to whether the effective APR promotes credit shopping. Industry and consumer group representatives find some common ground in their observations that consumers do not understand the effective APR well.

Industry representatives also claim that the effective APR imposes direct costs on creditors that consumers pay indirectly. They represent that the effective APR raises compliance costs when they introduce new services, including costs of: (1) Conducting legal analysis of Regulation Z to determine whether the fee for the new service is a finance charge and must be included in the effective APR; (2) reprogramming software if the fee must be included; and (3) responding to telephone inquiries from confused customers and accommodating them (e.g., with fee waivers or rebates).

Consumer research conducted for the Board prior to the June 2007 Proposal. As discussed in the June 2007 Proposal, the Board undertook research through a consultant on consumer awareness and understanding of the effective APR, and on whether changes to the presentation of the disclosure could increase awareness and understanding. The consultant used one-on-one cognitive interviews with consumers; consumers were provided mock disclosures of periodic statements that included effective APRs and asked questions about the disclosure designed to elicit their understanding of the rate. In the first round the statements were copied from examples in the market. For subsequent testing rounds, the language and design of the statements were modified to better convey how the effective APR differs from the corresponding APR. Several different approaches and many variations on those approaches were tested.

In most of the rounds, a minority of participants correctly explained that the effective APR for cash advances was higher than the corresponding APR for cash advances because a cash advance fee had been imposed. A smaller minority correctly explained that the effective APR for purchases was the same as the corresponding APR for purchases because no transaction fee had been imposed on purchases. A majority offered incorrect explanations or did not offer any explanation. Results changed at the final testing site, however, when a majority of participants evidenced an understanding that the effective APR for cash advances would be elevated for the statement period when a cash advance fee was imposed during that period, that the effective APR would not be as elevated for periods where a cash advance balance remained outstanding but no fee had been imposed, and that the effective APR for purchases was the same as the corresponding APR for purchases because no transaction fee had been imposed on purchases.

The form in the final round of testing prior to the June 2007 Proposal labeled the rate “Fee-Inclusive APR” and placed it in a table separate from the corresponding APR. The “Fee-Inclusive APR” table included the amount of interest and the amount of transaction fees. An adjacent sentence stated that the “Fee-Inclusive APR” represented the cost of transaction fees as well as interest. Similar approaches had been tried in some of the earlier rounds, except that the effective APR had been labeled “Effective APR.”

The Board's proposed two alternative approaches. After considering the concerns and issues raised by industry and consumer groups about the effective APR, as well as the results of the consumer testing, the Board proposed in June 2007 two alternative approaches for addressing the effective APR. The first approach attempted to improve consumer understanding of this rate and reduce creditor uncertainty about its computation. The second approach proposed to eliminate the requirement to disclose the effective APR.

1. First alternative proposal. Under the first alternative, the Board proposed to impose uniform terminology and formatting on disclosure of the effective APR and the fees included in its computation. See proposed § 226.7(b)(6)(iv) and (b)(7)(i). This proposal was based largely on a form developed through several rounds of one-on-one interviews with consumers. The Board also proposed under this alternative to revise § 226.14, which governs computation of the effective APR, in an effort to increase certainty about which fees the rate must include.

Under proposed § 226.7(b)(7)(i) and Sample G-18(B), creditors would have disclosed an effective APR for each feature, such as purchases and cash advances, in a table with the heading “Fee-Inclusive APR.” Creditors would also have indicated that the Fee-Inclusive APRs are “APRs that you paid this period when transactions or fixed fees are taken into account as well as interest.” A composite effective APR for two or more features would no longer have been permitted, as it is more difficult to explain to consumers. In addition to the effective APR(s) for each feature, the table would have included, by feature, the total of interest, labeled as “interest charges,” and the total of the fees included in the effective APR, labeled as “transaction and fixed charges.” To facilitate understanding, proposed § 226.7(b)(6)(iii) would have required creditors to label the specific fees used to calculate the effective APR either as “transaction” or “fixed” fees, depending on whether the fee relates to a specific transaction. Such fees would also have been disclosed in the list of transactions. If the only finance charges in a billing cycle are interest charges, the corresponding and effective APRs are identical. In those cases, creditors would have disclosed only the corresponding APRs and would not have been required to label fees as “transaction” or “fixed” fees since there would be no fees that are finance charges in such cases. These requirements would have been illustrated in forms under G-18 in Appendix G to part 226, and creditors would have been required to use the model form or a substantially similar form.

The proposal also sought to simplify computation of the effective APR, both to increase consumer understanding of the disclosure and facilitate creditor compliance. Proposed § 226.14(e) would have included a specific and exclusive list of finance charges that would be included in calculating the effective APR.[18]

Start Printed Page 5318

2. Second alternative proposal. Under the second alternative proposal, disclosure of the effective APR would no longer have been required. The Board proposed this approach pursuant to its exception and exemption authorities under TILA Section 105. Section 105(a) authorizes the Board to make exceptions to TILA to effectuate the statute's purposes, which include facilitating consumers' ability to compare credit terms and helping consumers avoid the uninformed use of credit. 15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes the Board to exempt any class of transactions (with an exception not relevant here) from coverage under any part of TILA if the Board determines that coverage under that part does not provide a meaningful benefit to consumers in the form of useful information or protection. 15 U.S.C. 1604(f)(1).

Under the second alternative proposal, disclosure of an effective APR would have been optional for creditors offering HELOCs, as discussed above in the section-by-section analysis to § 226.7(a)(7). For creditors offering open-end (not home-secured) plans, the regulation would have included no effective APR provision, and § 226.7(b)(7) would have been reserved.

Comments on the proposal. Many industry commenters supported the Board's second alternative proposal to eliminate the requirement to disclose the effective APR. Commenters supporting this alternative generally echoed the reasons given by the Board for this alternative in the June 2007 Proposal. For example, they contended that the effective APR cannot be used for shopping purposes because it is backward-looking and only purports to represent the cost of credit for a particular cycle; the effective APR confuses and misleads consumers; and the effective APR requirement imposes compliance costs and risks on creditors (for example, cost of legal analysis to determine whether new fees must be included in the effective APR, litigation risk, and costs of responding to inquiries from confused consumers).

Another argument commenters made in support of eliminating the effective APR was that the disclosure would be unnecessary, in light of the Board's proposal for disclosure of interest and fees totaled by period and year to date (see the section-by-section analysis to § 226.7(b)(6)). Some commenters also indicated that retaining the effective APR, in combination with the proposal to include all transaction fees in the finance charge, might result in a creditor violating restrictions on interest rates. Some commenters contended that the Board's proposal to rename the effective APR the “Fee-Inclusive APR” would not solve the problems of consumer misunderstanding and might in fact exacerbate such problems, although one industry commenter stated that if the Board decided to retain the effective APR requirement (which this commenter did not favor), the term “Fee-Inclusive APR” might represent an improvement.

Industry commenters also expressed concern about the Board's proposal to specify precisely the fees that are to be included in the effective APR calculation (in proposed § 226.14(e), as discussed above). One commenter said that if the effective APR requirement were to be retained, the Board would need to better clarify in § 226.14(e) which fees must be included. Another commenter stated that the proposed approach would not solve the problem of creditor uncertainty about which fees are to be included in the effective APR, because new types of fees will arise and create further uncertainty.

Other commenters, including consumer groups and government agencies, supported the Board's first alternative proposal to retain the effective APR requirement. Commenters supporting this alternative believe that consumers need the effective APR in order to be able to properly evaluate and compare costs of card programs; commenters also contended that if the effective APR were eliminated, creditors could impose additional fees that would escape effective disclosure. Many of these commenters urged not only that the effective APR requirement should be retained, but in addition that all fees, or at least more fees than under the current regulation (for example, late-payment fees and over-the-limit fees) should be included in its calculation.

Some commenters noted that even if the effective APR were retained, if the proposed approach (in proposed § 226.14(e)) of specifying the fees to be included in the effective APR were followed, creditors could introduce new fees that might qualify as finance charges, but might not be included in the effective APR. One commenter supporting retention suggested that the Board try further consumer testing of an improved disclosure format for the effective APR, but that if the testing showed that consumers still did not understand the effective APR, then it should be eliminated.

Consumer group commenters also expressed concern about the proposal to require disclosure of separate effective APRs for each feature on a credit card account. Commenters stated that such an approach would understate the true cost of credit, and would “dilute” the effect of multiple fees, because the fees would be shared among several different APRs. One creditor commenter also expressed concern about this proposal, stating that it would increase programming costs.

Additional consumer research. In March 2008, and again after the May 2008 Proposal, the Board conducted further consumer research using one-on-one interviews in the same manner as in the consumer research prior to the June 2007 Proposal, discussed above. Three rounds of testing were conducted. A majority of participants in all rounds did not offer a correct explanation of the effective APR; instead, they offered a variety of incorrect explanations, including that the effective APR represented: the interest rate paid on fee amounts; the interest rate if the consumer paid late (the penalty rate); the APR after the introductory period ends; or the year-to-date interest charges expressed as a percentage. Two different labels were used for the effective APR in the statements shown to participants: the “Fee-Inclusive APR” and the “APR including Interest and Fees”. The label that was used did not have a noticeable effect on participant comprehension.

In addition, in September 2008 the Board conducted additional consumer research using quantitative methods for the purpose of validating the qualitative research (one-on-one interviews) conducted previously. The quantitative consumer research involved surveys of 1,022 consumers at shopping malls in seven locations around the country. Two research questions were investigated; the first was designed to determine what percentage of consumers understand the significance of the effective APR. The interviewer pointed out the effective APR disclosure for a month in which a cash advance occurred, triggering a transaction fee and thus making the effective APR higher than the nominal APR (interest rate). The interviewer then asked what the effective APR would be in the next month, in which the cash advance balance was not paid off but no new cash advances occurred. A very small percentage of respondents gave the correct answer (that the effective APR would be the same as the nominal APR). Some consumers stated that the effective APR would be the same in the Start Printed Page 5319next month as in the current month, others indicated that they did not know, and the remainder gave other incorrect answers.

The second research question was designed to determine whether the disclosure of the effective APR adversely affects consumers' ability to correctly identify the current nominal APR on cash advances. Some consumers were shown a periodic statement disclosing an effective APR, while other consumers were shown a statement without an effective APR disclosure. Consumers were then asked to identify the nominal APR on cash advances. A greater percentage of consumers who were shown a statement without an effective APR than of those shown a statement with an effective APR correctly identified the rate on cash advances. This finding was statistically significant, as discussed in the December 2008 Macro Report on Quantitative Testing. Some of the consumers who did not correctly identify the rate on cash advances instead identified the effective APR as that rate.

The quantitative consumer research conducted by the Board validated the results of the qualitative testing conducted both before and after the June 2007 proposal; it indicates that most consumers do not understand the effective APR, and that for some consumers the effective APR is confusing and detracts from the effectiveness of other disclosures.

Final rule. After considering the comments on the proposed alternatives and the results of the consumer testing, the Board has determined that it is appropriate to eliminate the requirement to disclose an effective APR. The Board takes this action pursuant to its exception and exemption authorities under TILA Section 105.

Section 105(f) directs the Board to make an exemption determination in light of specific factors. 15 U.S.C. 1604(f)(2). These factors are: (1) The amount of the loan and whether the disclosure provides a benefit to consumers who are parties to the transaction involving a loan of such amount; (2) the extent to which the requirement complicates, hinders, or makes more expensive the credit process; (3) the status of the borrower, including any related financial arrangements of the borrower, the financial sophistication of the borrower relative to the type of transaction, and the importance to the borrower of the credit, related supporting property, and coverage under TILA; (4) whether the loan is secured by the principal residence of the borrower; and (5) whether the exemption would undermine the goal of consumer protection.

The Board has considered each of these factors carefully, and based on that review, has concluded that it has satisfied the criteria for the exemption determination. Consumer testing conducted prior to the June 2007 Proposal, in March 2008, and after the May 2008 Proposal indicates that consumers find the current disclosure of an APR that combines rates and fees to be confusing. The June 2007 Proposal would have required disclosure of the nominal interest rate and fees in a manner that is more readily understandable and comparable across institutions. The Board believes that this approach can better inform consumers and further the goals of consumer protection and the informed use of credit for all types of open-end credit.

The Board also considered whether there were potentially competing considerations that would suggest retention of the requirement to disclose an effective APR. First, the Board considered the extent to which “sticker shock” from the effective APR benefits consumers, even if the disclosure does not enable consumers to meaningfully compare costs from month to month or for different products. A second consideration is whether the effective APR may be a hedge against fee-intensive pricing by creditors, and if so, the extent to which it promotes transparency. On balance, however, the Board believes that the benefits of eliminating the requirement to disclose the effective APR outweigh these considerations.

The consumer testing conducted for the Board supports this determination. With the exception of one round of testing conducted prior to the June 2007 Proposal, the overall results of the testing demonstrated that most consumers do not correctly understand the effective APR. Some consumers in the testing offered no explanation of the difference between the corresponding and effective APR, and others appeared to have an incorrect understanding. The results were similar in the consumer testing conducted in March 2008 and in the qualitative and quantitative testing conducted after the May 2008 proposal; in all rounds of the testing, a majority of participants did not offer a correct explanation of the effective APR.

Even if some consumers have some understanding of the effective APR, the Board believes sound reasons support eliminating the requirement for its disclosure. Disclosure of the effective APR on periodic statements does not significantly assist consumers in credit shopping, because the effective APR disclosed on a statement on one credit card account cannot be compared to the nominal APR disclosed on a solicitation or application for another credit card account. In addition, even within the same account, the effective APR for a given cycle is unlikely to accurately indicate the cost of credit in a future cycle, because if any of several factors (such as the timing of transactions and payments and the amount carried over from the prior cycle) is different in the future cycle, the effective APR will be different even if the amounts of the transaction and the fee are the same in both cycles. As to contentions that the effective APR for a particular billing cycle provides the consumer a rough indication that the cost of repeating transactions triggering transaction fees is high in some sense, the Board believes the requirements adopted in the final rule to disclose interest and fee totals for the cycle and year-to-date will serve the same purpose. In addition, the interest and fee total disclosure requirements should address concerns that elimination of the effective APR would remove disincentives for creditors to introduce new fees.

The Board is adopting its second alternative proposal under which disclosure of an effective APR is not required. Under the second alternative proposal, § 226.7(b)(7) would have been reserved. In the final rule, proposed § 226.7(b)(14) (change-in-terms and increased penalty rate summary) is renumbered as § 226.7(b)(7). In addition, Sample G-18(B), as proposed in June 2007 as part of the first alternative proposal, is not adopted.

Format requirements for periodic statements. TILA and Regulation Z currently contain few formatting requirements for periodic statement disclosures. The Board proposed several proximity requirements in June 2007, based on consumer testing that showed targeted proximity requirements on periodic statements tended to improve the effectiveness of disclosures for consumers. Under the June 2007 Proposal, interest and fees imposed as part of the plan during the statement period would have been disclosed in a simpler manner and in a consistent location. Transactions would have been grouped by type, and fee and interest charge totals would have been required to be located with the transactions. If an advance notice of changed rates or terms is provided on or with a periodic statement, the June 2007 Proposal would have required a summary of the change beginning on the front of the first page of the periodic statement. The proposal would have linked by Start Printed Page 5320proximity the payment due date with the late payment fee and penalty rate that could be triggered by an untimely payment. The minimum payment amount also would have been linked by proximity with the new warning required by the Bankruptcy Act about the effects of making only minimum payments on the account. Grouping these disclosures together was intended to enhance consumers' informed use of credit.

Model clauses were proposed to illustrate the revisions, to facilitate compliance. The Board published for the first time proposed forms illustrating front sides of a periodic statement, as a compliance aid. The Board published Forms G-18(G) and G-18(H) to illustrate how a periodic statement might be designed to comply with the requirements of § 226.7. Proposed Forms G-18(G) and G-18(H) would have contained some additional disclosures that are not required by Regulation Z. The forms also would have presented information in some additional formats that are not required by Regulation Z.

Some consumer groups applauded the Board's prescriptive approach for periodic statement disclosures, to give effect to the Board's findings about presenting information in a manner that makes it easier for consumers to understand. A federal banking agency noted that standardized periodic statement disclosures may reduce consumer confusion that may result from variations among creditors.

Most industry commenters strongly opposed the Board's approach as being overly prescriptive and costly to implement. They strongly urged the Board to permit additional flexibility, or simply to retain the current requirement to provide “clear and conspicuous” disclosures. For example, these commenters asked the Board to eliminate any requirement that dictated the order or proximity of disclosures, along with any requirement that creditors' disclosures be substantially similar to model forms or samples. Although the Board's testing suggested certain formatting may be helpful to consumers, many commenters believe other formats might be as helpful. They stated that not all consumers place the same value on a certain piece of information, and creditors should be free to tailor periodic statements to the needs of their customers. Further, although participants in the Board's consumer testing may have indicated they preferred one format over another, commenters believe consumers are not confused by other formats, and the cost to reformat paper-based and electronic statements is not justified by the possible benefits. For example, commenters said the proposed requirements will require lengthier periodic statements, which is an additional ongoing expense independent of the significant one-time cost to redesign statements.

The final rule retains many of the formatting changes the Board proposed. In response to further consumer testing results and comments, however, the Board is providing flexibility to creditors where the changes proposed by the Board have not demonstrated consumer benefit sufficient to justify the expense to creditors of reformatting the periodic statement. For example, while the Board is adopting the proposal to group interest and fees, the Board is not adopting the requirement to group transactions (including credits) by transaction type. See the section-by-section analysis to § 226.7(b)(2), (b)(3), and (b)(6) below. Furthermore, if an advance notice of a change in rates or terms is provided on or with a periodic statement, the final rule requires that a summary of the change appear on the front of the periodic statement, but unlike the proposal, the summary is not required to begin on the front of the first page of the statement. See the section-by-section analysis to § 226.7(b)(7). Moreover, proximity requirements for certain information in the periodic statement have been retained, but the information does not need to be presented substantially similar to the Board's model forms. See the section-by-section analysis to § 226.7(b)(13).

Deferred interest plans. Current comment 7-3 provides guidance on various periodic statement disclosures for deferred-payment transactions, such as when a consumer may avoid interest charges if a purchase balance is paid in full by a certain date. The substance of comment 7-3, revised to conform to other proposed revisions in § 226.7(b), was proposed in June 2007 as comment 7(b)-1, which applies to open-end (not home-secured) plans. The comment permits, but does not require, creditors to disclose during the promotional period information about accruing interest, balances, interest rates, and the date in a future cycle when the balance must be paid in full to avoid interest.

Some industry commenters asked the Board to provide additional guidance about how and where this optional information may be disclosed if the Board adopts proposed formatting requirements for periodic statements. Some consumer commenters urged the Board to require creditors to disclose on each periodic statement the date when any promotional offer ends.

Comment 7(b)-1 is adopted as proposed, with technical revisions for clarity without any intended substantive change. For example, the transactions described in the comment are now referred to as “deferred interest” rather than “deferred-payment.” The comment also has been revised to note that it does not apply to card issuers that are subject to 12 CFR 227.24 or similar law which does not permit the assessment of deferred interest.

The Board believes the formatting requirements for periodic statements do not interfere with creditors' ability to provide information about deferred interest transactions or other promotions. Comment 7(b)-1, retained as proposed, clarifies that creditors are permitted, but not required, to disclose on each periodic statement the date in a future cycle when the balance on the deferred interest transaction must be paid in full to avoid interest charges. Similarly, subject to the requirement to provide clear and conspicuous disclosures, creditors may, but are not required to, disclose when promotional offers end. The final rule does not require creditors to disclose on each periodic statement the date when any promotional offer ends. The Board believes that many creditors currently provide such information prior to the end of the promotional period.

7(b)(2) Identification of Transactions

Under the June 2007 Proposal, § 226.7(b)(2) would have required creditors to identify transactions in accordance with rules set forth in § 226.8. This provision implements TILA Section 127(b)(2), currently at § 226.7(b). The section-by-section analysis to § 226.8 discusses the Board's proposal to revise and significantly simplify the rules for identifying transactions, which the Board adopts as proposed.

Under the June 2007 Proposal, the Board introduced a format requirement to group transactions by type, such as purchases and cash advances, based on consumer testing conducted for the Board. In consumer testing conducted prior to the June 2007 Proposal, participants in the Board's consumer testing found such groupings helpful. Moreover, participants noticed fees and interest charges more readily when transactions were grouped together, the fees imposed for the statement period were not interspersed among the transactions, and the interest and fees were disclosed in proximity to the transactions. Proposed Sample G-18(A) would have illustrated the proposal.

Most industry commenters opposed the proposed requirement to group Start Printed Page 5321transactions by type. Overall, commenters opposing this aspect of the proposal believe the cost to implement the change exceeds the benefit consumers might receive. Some commenters reported that their customers or consumer focus groups preferred chronological listings. Similarly, some commenters believe consumer understanding is enhanced by a chronological listing that permits fees related to a transaction, such as foreign transaction fees, to appear immediately below the transaction. Other commenters were concerned that under the proposal, creditors would no longer be able to disclose transactions grouped by authorized user, or by other sub-accounts such as for promotions.

In quantitative consumer testing conducted in the fall of 2008, the Board tested consumers' ability to identify specific transactions and fees on periodic statements that grouped transactions by transaction type versus those that listed transactions in chronological order. After they were shown either a grouped periodic statement or a chronological periodic statement, consumer testing participants were asked to identify the dollar amount of the first cash advance in the statement period. In order to test the effect of grouping fees, participants also were asked to identify the number of fees charged during the statement period. While testing evidence showed that the grouped periodic statement performed better among participants with respect to both questions, the improved performance of the grouped periodic statement was more significant with regard to consumers' ability to identify fees.

Based on these testing results and comments the Board received on the proposal to require transactions to be grouped by transaction type on periodic statements, the final rule requires creditors to group fees and interest together into a separate category but permits flexibility in how transactions may be listed. The Board believes that it is especially important for consumers to be able to identify fees and interest in order to assess the overall cost of credit. As further discussed below in the section-by-section analysis to § 226.7(b)(6), because testing evidence suggests that consumers can more easily find fees when they are grouped together under a separate heading rather than when they are combined with a consumer's transactions in a chronological list, the Board is adopting the proposal that would require the grouping of fees and interest on the statement.

With respect to grouping of transactions, such as purchases and cash advances, the Board believes that the modest improvement in consumers' ability to identify specific transactions in a grouped periodic statement may not justify the high cost to many creditors of reformatting periodic statements and coding transactions in order to group transactions by type. Furthermore, providing flexibility in how transactions may be presented would allow creditors to disclose transactions grouped by authorized user or by other sub-accounts, which consumers may find useful. In addition, in consumer testing conducted for the Board prior to the fall of 2008, most consumers indicated that they already review the transactions on their periodic statements. The Board expects that consumers will continue to review their transactions, and that consumers generally are aware of the transactions in which they have engaged during the billing period.

Accordingly, the Board has withdrawn the requirement to group transactions by type in proposed § 226.7(b)(2). Comment 7(b)(2)-1 has been revised from the proposal to permit, but not require, creditors to group transactions by type. Therefore, creditors may list transactions chronologically, group transactions by type, or organize transactions in any other way that would be clear and conspicuous to consumers. However, consistent with § 226.7(b)(6), all fees and interest must be grouped together under a separate heading and may not be interspersed with transactions.

7(b)(3) Credits

Creditors are required to disclose any credits to the account during the billing cycle. Creditors typically disclose credits among other transactions. The Board did not propose substantive changes to the disclosure requirements for credits in June 2007. However, consistent with the format requirements proposed in § 226.7(b)(2), the June 2007 Proposal would have required credits and payments to be grouped together. Proposed Sample G-18(A) would have illustrated the proposal.

Few commenters directly addressed issues related to disclosing credits on periodic statements, although many industry commenters opposed format requirements to group transactions (thus, credits) by type rather than in a chronological listing. In response to a request for guidance on the issue, comment 7(b)(3)-1 is modified from the proposal to clarify that credits may be distinguished from transactions in any way that is clear and conspicuous, for example, by use of debit and credit columns or by use of plus signs and/or minus signs.

As discussed in the section-by-section analysis to § 226.7(b)(2) above, the Board is not requiring creditors to group transactions by type. For the reasons discussed in that section and in the section-by-section analysis to § 226.7(b)(6) below, the Board is only requiring creditors to group fees and interest into a separate category, while credits, like transactions, may be presented in any manner that is clear and conspicuous to consumers.

Combined deposit account and credit account statements. Currently, comment 7(c)-2 permits creditors to commingle credits related to extensions of credit and credits related to non-credit accounts, such as for a deposit account. In June 2007, the Board solicited comment on the need for alternatives to the proposed format requirements to segregate transactions and credits, such as when a depository institution provides on a single periodic statement account activity for a consumer's checking account and an overdraft line of credit.

As discussed above in the section-by-section analysis to § 226.7(b)(2) above, the Board is not requiring creditors to segregate transactions and credits. Therefore, formatting alternatives for combined deposit account and credit account statements are no longer necessary. Comment 7(b)(3)-3, as renumbered in the June 2007 Proposal, is revised for clarity and is adopted as proposed.

7(b)(4) Periodic Rates

Periodic rates. TILA Section 127(b)(5) and current § 226.7(d) require creditors to disclose all periodic rates that may be used to compute the finance charge, and an APR that corresponds to the periodic rate multiplied by the number of periods in a year. 15 U.S.C. 1637(b)(5); § 226.14(b). In the June 2007 Proposal, the Board proposed to eliminate, for open-end (not home-secured) plans, the requirement to disclose periodic rates on periodic statements.

Most industry commenters supported the proposal, believing that periodic rates are not important to consumers. Some consumer groups opposed eliminating the periodic rate as a disclosure requirement, stating that it is easier for consumers to check the calculation of their interest charges when the rate appears on the statement. One industry commenter asked the Board to clarify that the rule would not prohibit creditors from providing, at their option, the periodic rate close to the APR and balance to which the rates relate.Start Printed Page 5322

The final rule eliminates the requirement to disclose periodic rates on periodic statements, as proposed, pursuant to the Board's exception and exemption authorities under TILA Section 105. Section 105(a) authorizes the Board to make exceptions to TILA to effectuate the statute's purposes, which include facilitating consumers' ability to compare credit terms and helping consumers avoid the uninformed use of credit. 15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes the Board to exempt any class of transactions (with an exception not relevant here) from coverage under any part of TILA if the Board determines that coverage under that part does not provide a meaningful benefit to consumers in the form of useful information or protection. 15 U.S.C. 1604(f)(1). Section 105(f) directs the Board to make this determination in light of specific factors. 15 U.S.C. 1604(f)(2). These factors are (1) the amount of the loan and whether the disclosure provides a benefit to consumers who are parties to the transaction involving a loan of such amount; (2) the extent to which the requirement complicates, hinders, or makes more expensive the credit process; (3) the status of the borrower, including any related financial arrangements of the borrower, the financial sophistication of the borrower relative to the type of transaction, and the importance to the borrower of the credit, related supporting property, and coverage under TILA; (4) whether the loan is secured by the principal residence of the borrower; and (5) whether the exemption would undermine the goal of consumer protection.

The Board considered each of these factors carefully, and based on that review and the comments received, determined that the exemption is appropriate. In consumer testing conducted for the Board prior to the June 2007 Proposal, consumers indicated they do not use periodic rates to verify interest charges. Consistent with the Board's June 2007 Proposal not to allow periodic rates to be disclosed in the tabular summary on or with credit card applications and disclosures, requiring periodic rates to be disclosed on periodic statements may detract from more important information on the statement, and contribute to information overload. Eliminating periodic rates from the periodic statement has the potential to better inform consumers and further the goals of consumer protection and the informed use of credit for open-end (not home-secured) credit.

The Board notes that under the final rule, creditors may continue to disclose the periodic rate, so long as the additional information is presented in a way that is consistent with creditors' duty to provide required disclosures clearly and conspicuously. See comment app. G-10.

Labeling APRs. Currently creditors are provided with considerable flexibility in identifying the APR that corresponds to the periodic rate. Current comment 7(d)-4 permits labels such as “corresponding annual percentage rate,” “nominal annual percentage rate,” or “corresponding nominal annual percentage rate.” The June 2007 Proposal would have required creditors offering open-end (not home-secured) plans to label the APR disclosed under proposed § 226.7(b)(4) as “annual percentage rate.” The proposal was intended to promote uniformity and to distinguish between this “interest only” APR and the effective APR that includes interest and fees, as proposed to be enhanced under one alternative in the June 2007 Proposal.

Commenters generally supported the proposal, and the labeling requirement is adopted as proposed. Forms G-18(F) and G-18(G) illustrate periodic statements that disclose an APR but no periodic rates.

Rates that “may be used.” Currently, comment 7(d)-1 interprets the requirement to disclose all periodic rates that “may be used” to mean “whether or not [the rate] is applied during the cycle.” For example, rates on cash advances must be disclosed on all periodic statements, even for billing periods with no cash advance activity or cash advance balances. The regulation and commentary do not clearly state whether promotional rates, such as those offered for using checks accessing credit card accounts, that “may be used” should be disclosed under current § 226.7(d) regardless of whether they are imposed during the period. See current comment 7(d)-2. The June 2007 Proposal included a limited exception to TILA Section 127(b)(5) to effectuate the purposes of TILA to require disclosures that are meaningful and to facilitate compliance.

Under § 226.7(b)(4)(ii) of the June 2007 Proposal, creditors would have been required to disclose promotional rates only if the rate actually applied during the billing period. For example, a card issuer may impose a 22 percent APR for cash advances but offer for a limited time a 1.99 percent promotional APR for advances obtained through the use of a check accessing a credit card account. Creditors are currently required to disclose, in this example, the 22 percent cash advance APR on periodic statements whether or not the consumer obtains a cash advance during the previous statement period. The proposal clarified that creditors are not required to disclose the 1.99 percent promotional APR unless the consumer used the check during the statement period. In the June 2007 Proposal, the Board noted its belief that interpreting TILA to require the disclosure of all promotional rates would be operationally burdensome for creditors and result in information overload for consumers. The proposed exception did not apply to HELOCs covered by § 226.5b.

Industry and consumer group commenters generally supported the proposal that requires promotional rates to be disclosed only if the rate actually applied during the billing period. Some consumer groups urged the Board to go further and prohibit creditors from disclosing a promotional rate that has not actually been applied, to avoid possible consumer confusion over a multiplicity of rates. For the reasons stated in the June 2007 Proposal and discussed above, the Board is adopting § 226.7(b)(4)(ii) as proposed, with minor changes to the description of the rate and time period, consistent with § 226.16(g). See also section-by-section analysis to § 226.7(a)(4), which discusses extending the exception to HELOCs subject to § 226.5b.

Combining interest and other charges. Currently, creditors must disclose finance charges attributable to periodic rates. These costs are typically interest charges but may include other costs such as premiums for required credit insurance. If applied to the same balance, creditors may disclose each rate, or a combined rate. See current comment 7(d)-3. As discussed below, consumer testing for the Board conducted prior to the June 2007 Proposal indicated that participants appeared to understand credit costs in terms of “interest” and “fees,” and the June 2007 Proposal would have required disclosures to distinguish between interest and fees. To the extent consumers associate periodic rates with “interest,” it seems unhelpful to consumers' understanding to permit creditors to include periodic rate charges other than interest in the dollar cost disclosed. Thus, in the June 2007 Proposal guidance permitting periodic rates attributable to interest and other finance charges to be combined would have been eliminated for open-end (not home-secured) plans.Start Printed Page 5323

Few comments were received on this aspect of the proposal. Some consumer groups strongly opposed the proposal if the Board determined to eliminate the effective APR, as proposed under one alternative in the June 2007 Proposal. They believe that because the required credit insurance premium is calculated as a percentage of the outstanding balance, creditors could understate the percentage consumers must pay for carrying a balance, which would conceal the true cost of credit.

The final rule provides that creditors offering open-end (not home-secured) plans that impose finance charges attributable to periodic rates (other than interest) must disclose the amount in dollars, as a fee, as proposed. See section-by-section analysis to § 226.7(b)(6) below. Many fees associated with credit card accounts or other open-end plans are a percentage of the transaction or balance, such as balance transfer or cash advance fees. The Board believes that disclosing fees such as for credit insurance premiums as a separate dollar amount rather than as part of a percentage provides consistency and, based on the Board's consumer testing, may be more helpful to many consumers.

In addition, a new comment 7(b)(4)-4 (proposed in June 2007 as comment 7(b)(4)-7) is added to provide guidance to creditors when a fee is imposed, remains unpaid, and interest accrues on the unpaid balance. The comment, adopted as proposed, provides that creditors disclosing fees in accordance with the format requirements of § 226.7(b)(6) need not separately disclose which periodic rate applies to the unpaid fee balance.

In technical revisions, the substance of footnotes referenced in § 226.7(d) is moved to the regulation and comment 7(b)(4)-5, as proposed.

7(b)(5) Balance on Which Finance Charge Is Computed

Creditors must disclose the amount of the balance to which a periodic rate was applied and an explanation of how the balance was determined. The Board provides model clauses creditors may use to explain common balance computation methods. 15 U.S.C. 1637(b)(7); current § 226.7(e); and Model Clauses G-1. The staff commentary to current § 226.7(e) interprets how creditors may comply with TILA in disclosing the “balance,” which typically changes in amount throughout the cycle, on periodic statements.

Amount of balance. The June 2007 Proposal did not change how creditors are required to disclose the amount of the balance on which finance charges are computed. Proposed comment 7(b)(5)-4 would have permitted creditors, at their option, not to include an explanation of how the finance charge may be verified for creditors that use a daily balance method. Currently, creditors that use a daily balance method are permitted to disclose an average daily balance for the period, provided they explain that the amount of the finance charge can be verified by multiplying the average daily balance by the number of days in the statement period, and then applying the periodic rate. The Board proposed to retain the rule permitting creditors to disclose an average daily balance but would have eliminated the requirement to provide the explanation. Consumer testing conducted for the Board prior to the June 2007 Proposal suggested that the explanation may not be used by consumers as an aid to calculate their interest charges. Participants suggested that if they attempted without satisfaction to calculate balances and verify interest charges based on information on the periodic statement, they would call the creditor for assistance. Thus, the final rule adopts comment 7(b)(5)-4, as proposed, which permits creditors, at their option, not to include an explanation of how the finance charge may be verified for creditors that use a daily balance method.

The June 2007 Proposal would have required creditors to refer to the balance as “balances subject to interest rate,” to complement proposed revisions intended to further consumers' understanding of interest charges, as distinguished from fees. The final rule adopts the required description as proposed. See section-by-section analysis to § 226.7(b)(6). Forms G-18(F) and 18(G) (proposed as Forms G-18(G) and G-18(H)) illustrate this format requirement.

Explanation of balance computation method. The June 2007 Proposal would have contained an alternative to providing an explanation of how the balance was determined. Under proposed § 226.7(b)(5), a creditor that uses a balance computation method identified in § 226.5a(g) would have two options. The creditor could: (1) Provide an explanation, as the rule currently requires, or (2) identify the name of the balance computation method and provide a toll-free telephone number where consumers may obtain more information from the creditor about how the balance is computed and resulting interest charges are determined. If the creditor uses a balance computation method that is not identified in § 226.5a(g), the creditor would have been required to provide a brief explanation of the method. The Board's proposal was guided by the following factors.

Calculating balances on open-end plans can be complex, and requires an understanding of how creditors allocate payments, assess fees, and record transactions as they occur during the cycle. Currently, neither TILA nor Regulation Z requires creditors to disclose on periodic statements all the information necessary to compute a balance, and requiring that level of detail appears not to be warranted. Although the Board's model clauses are intended to assist creditors in explaining common methods, consumers continue to find these explanations lengthy and complex. As stated earlier, consumer testing conducted prior to the June 2007 Proposal indicated that consumers call the creditor for assistance when they attempt without success to calculate balances and verify interest charges.

Providing the name of the balance computation method (or a brief explanation, if the name is not identified in § 226.5a(g)), along with a reference to where additional information may be obtained provides important information in a simplified way, and in a manner consistent with how consumers obtain further balance computation information.

Some consumer groups urged the Board to continue to require creditors to disclose the balance computation method on the periodic statement. They believe that the information is important for consumers that check creditors' interest calculations. Consumers, a federal banking agency and a member of Congress were among those who suggested banning a computation method commonly called “two-cycle.” As an alternative, the agency suggested requiring a cautionary disclosure on the periodic statement about the two-cycle balance computation method for those creditors that use the method.

Industry commenters generally favored the proposal, although one commenter would eliminate identifying the name of the balance computation method. Some commenters urged the Board to add “daily balance” method to § 226.5a(g), to enable creditors that use that balance computation method to take advantage of the alternative disclosure.

Some consumer groups further urged the Board to require creditors, when responding to a consumer who has called the creditor's toll-free number established pursuant to the proposed rules, to offer to mail consumers a Start Printed Page 5324document that provides a complete set of rules for calculating the balances and applying the periodic rate, and to post this information on creditors' Web sites. An industry commenter asked the Board to permit a creditor, in lieu of a reference to a toll-free telephone number, to reference the Board's Web site address that will be provided with the application and account-opening summary tables, or the creditor's Web site address, because a Web site can better provide accurate, clear, and consistent information about balance computation methods. The Board is adopting § 226.7(b)(5), as proposed for the reasons stated above. See also § 226.5a(g), which is revised to include the daily balance method as a common balance computation method. The Board is not requiring creditors also to refer to the creditor's Web site for an explanation of the balance computation method, or to mail written explanations upon consumers' request, to ease compliance. Consumers who do not understand the written or Web-based explanation will likely call the creditor in any event. However, a creditor could choose to disclose a reference to its Web site or provide a written explanation to consumers, at the creditor's option. Current comment 7(e)-6, which refers creditors to guidance in comment 6(a)(3)-1 about disclosing balance computation methods is deleted as unnecessary, as proposed. Elsewhere in today's Federal Register, the Board is adopting a rule that prohibits the two-cycle balance computation method as unfair for consumer credit card accounts. Therefore any cautionary disclosure is largely unnecessary.

7(b)(6) Charges Imposed

As discussed in the section-by-section analysis to § 226.6, the Board proposed in June 2007 to reform cost disclosure rules for open-end (not home-secured) plans, in part, to ensure that all charges assessed as part of an open-end (not home-secured) plan are disclosed before they are imposed and to simplify the rules for creditors to identify such charges. Consistent with the proposed revisions at account opening, the proposed revisions to cost disclosures on periodic statements were intended to simplify how creditors identify the dollar amount of charges imposed during the statement period.

Consumer testing conducted for the Board prior to the June 2007 Proposal indicated that most participants reviewing mock periodic statements could not correctly explain the term “finance charge.” The revisions proposed in June 2007 were intended to conform labels of charges more closely to common understanding, “interest” and “fees.” Format requirements were intended to help ensure that consumers notice charges imposed during the statement period.

Two alternatives were proposed: One addressed interest and fees in the context of an effective APR disclosure, the second assumed no effective APR is required to be disclosed.

Charges imposed as part of the plan. Proposed § 226.7(b)(6) would have required creditors to disclose the amount of any charge imposed as part of an open-end (not home-secured) plan, as stated in § 226.6(b)(3) (proposed as § 226.6(b)(1)). Guidance on which charges are deemed to be imposed as part of the plan is in § 226.6(b)(3) and accompanying commentary. Although coverage of charges was broader under the proposed standard of “charges imposed as part of the plan” than under current standards for finance charges and other charges, the Board stated its understanding that creditors have been disclosing on the statement all charges debited to the account regardless of whether they are now defined as “finance charges,” “other charges,” or charges that do not fall into either category. Accordingly, the Board did not expect the proposed change to affect significantly the disclosure of charges on the periodic statement.

Interest charges and fees. For creditors complying with the new cost disclosure requirements proposed in June 2007, the current requirement in § 226.7(f) to label finance charges as such would have been eliminated. See current § 226.7(f). Testing of this term with consumers conducted prior to the June 2007 Proposal found that it did not help them to understand charges. Instead, charges imposed as part of an open-end (not home-secured) plan would have been disclosed under the labels of “interest charges” or “fees.” Consumer testing also supplied evidence that consumers may generally understand interest as the cost of borrowing money over time and view other costs—regardless of their characterization under TILA and Regulation Z—as fees (other than interest). The Board's June 2007 Proposal was consistent with this evidence.

TILA Section 127(b)(4) requires creditors to disclose on periodic statements the amount of any finance charge added to the account during the period, itemized to show amounts due to the application of periodic rates and the amount imposed as a fixed or minimum charge. 15 U.S.C. 1637(b)(4). This requirement is currently implemented in § 226.7(f), and creditors are given considerable flexibility regarding totaling or subtotaling finance charges attributable to periodic rates and other fees. See current § 226.7(f) and comments 7(f)-1, -2, and -3. To improve uniformity and promote the informed use of credit, § 226.7(b)(6)(ii) of the June 2007 Proposal would have required creditors to itemize finance charges attributable to interest, by type of transaction, labeled as such, and would have required creditors to disclose, for the statement period, a total interest charge, labeled as such. Although creditors are not currently required to itemize interest charges by transaction type, creditors often do so. For example, creditors may separately disclose the dollar interest costs associated with cash advance and purchase balances. Based on consumer testing conducted prior to the June 2007 Proposal, the Board stated its belief that consumers' ability to make informed decisions about the future use of their open-end plans—primarily credit card accounts—may be promoted by a simply-labeled breakdown of the current interest cost of carrying a purchase or cash advance balance. The breakdown enables consumers to better understand the cost for using each type of transaction, and uniformity among periodic statements allows consumers to compare one account with other open-end plans the consumer may have.

Because the Board believes that consumers benefit when interest charges are itemized by transaction type, which many creditors do currently, the Board is adopting § 226.6(b)(6)(ii) as generally proposed, with one clarification that all interest charges be grouped together. As a result, all interest charges on an account, whether they are attributable to different authorized users or sub-accounts, must be disclosed together.

Under the June 2007 Proposal, finance charges attributable to periodic rates other than interest charges, such as required credit insurance premiums, would have been required to be identified as fees and would not have been permitted to be combined with interest costs. See proposed comment 7(b)(4)-3. The Board did not receive comment on this provision, and the comment is adopted as proposed.

Current § 226.7(h) requires the disclosure of “other charges” parallel to the requirement in TILA Section 127(a)(5) and current § 226.6(b) to disclose such charges at account opening. 15 U.S.C. 1637(a)(5). Consistent with current rules to disclose “other charges,” proposed § 226.7(b)(6)(iii) required that other costs be identified consistent with the feature or type, and itemized. The Start Printed Page 5325proposal differed from current requirements in the following respect: Fees were required to be grouped together and a total of all fees for the statement period were required. Currently, creditors typically include fees among other transactions identified under § 226.7(b). In consumer testing conducted prior to the June 2007 Proposal, consumers were able to more accurately and easily determine the total cost of non-interest charges when fees were grouped together and a total of fees was given than when fees were interspersed among the transactions without a total. (Proposed § 226.7(b)(6)(iii) also would have required that certain fees included in the computation of the effective APR pursuant to § 226.14 must be labeled either as “transaction fees” or “fixed fees,” under one proposed approach. This proposed requirement is discussed in further detail in the general discussion on the effective APR in the section-by-section analysis to § 226.7(b).)

To highlight the overall cost of the credit account to consumers, under the June 2007 Proposal, creditors would have been required to disclose the total amount of interest charges and fees for the statement period and calendar year to date. Comment 7(b)(6)-3 would have provided guidance on how creditors may disclose the year-to-date totals at the end of a calendar year. This aspect of the proposal was based on consumer testing that indicated that participants noticed year-to-date cost figures and would find the numbers helpful in making future financial decisions. The proposal was intended to provide consumers with information about the cumulative cost of their credit plans over a significant period of time. This requirement is discussed further below.

Format requirements. In consumer testing conducted for the Board prior to the June 2007 Proposal, consumers consistently reviewed transactions identified on their periodic statements and noticed fees and interest charges, itemized and totaled, when they were grouped together with the transactions on the statement. Some creditors also disclose these costs in account summaries or in a progression of figures associated with disclosing finance charges attributable to periodic rates. The June 2007 Proposal did not affect creditors' flexibility to provide this information in such summaries. See Proposed Forms G-18(G) and G-18(H), which would have illustrated, but not required, such summaries. However, the Board stated in the June 2007 Proposal its belief that TILA's purpose to promote the informed use of credit would be furthered significantly if consumers are uniformly provided, in a location they routinely review, basic cost information—interest and fees—that enables consumers to compare costs among their open-end plans. The Board proposed that charges required to be disclosed under § 226.7(b)(6)(i) would be grouped together with the transactions identified under § 226.7(b)(2), substantially similar to Sample G-18(A) in Appendix G to part 226. Proposed § 226.7(b)(6)(iii) would have required non-interest fees to be itemized and grouped together, and a total of fees to be disclosed for the statement period and calendar year to date. Interest charges would have been required to be itemized by type of transaction, grouped together, and a total of interest charges disclosed for the statement period and year to date. Proposed Sample G-18(A) in Appendix G to part 226 would have illustrated the proposal.

Labeling costs imposed as part of the plan as fees or interest. Commenters generally supported the Board's approach to label costs as either “fees” or “interest charge” rather than “finance charge” as aligning more closely with consumers' understanding.

For the reasons stated above, the requirement in § 226.7(b)(6) to label costs imposed as part of the plan as either fees or interest charge is adopted as proposed. Because the Board is adopting the alternative to eliminate the requirement to disclose an effective APR, the proposed requirement to label fees as “transaction” or “fixed” fees as a part of the proposed alternative to improve consumers' understanding of the effective APR is not included in the final rule.

Grouping fees together, identified by feature or type, and itemized. Some consumer groups supported the proposal to group fees together, and to identify and itemize them by feature or type. They believe that segregating and highlighting fees is likely to make consumers more aware of fees, and in turn, to assist consumers in avoiding them.

Most industry commenters opposed this aspect of the proposal, as overly prescriptive. As discussed in the section-by-section analysis to § 226.7(b)(2) regarding the requirement to group transactions together, many commenters believe the proposal would hinder rather than help consumer understanding if transaction-related fees are disclosed in a separate location from the transaction itself. They assert that consumers prefer a chronological listing of debits and credits to the account, and even if consumers prefer groupings, chronological listings are not confusing and consumer preference does not justify the cost to the industry to redesign periodic statements.

Other industry commenters stated that currently they separately display account activity in a variety of ways, such as by user, feature, or promotion. They believe consumers find these distinctions to be helpful in managing their accounts, and urged the Board to allow creditors to continue to display information in this manner.

As discussed in the section-by-section analysis to § 226.7(b)(2) above, in the fall of 2008, the Board tested consumers' ability to identify specific transactions and fees on periodic statements where transactions were grouped by transaction type and on periodic statements that listed transactions in chronological order. Testing evidence showed that the grouped periodic statement performed better among participants with respect to identifying specific transactions and fees, though the improved performance of the grouped periodic statement was more significant with regard to the identification of fees.

Moreover, consumers' ability to match a transaction fee to the transaction giving rise to the fee was also tested. Among participants who correctly identified the transaction to which they were asked to find the corresponding fee, a larger percentage of consumers who saw a statement on which account activity was arranged chronologically were able to match the fee to the transaction than when the statement was grouped. However, out of the participants who were able to identify the transaction to which they were asked to find the corresponding fee, the percentage of participants able to find the corresponding fee was very high for both types of listings.

The Board believes that the ability to identify all fees is important for consumers to assess their cost of credit. As discussed above, since the vast majority of consumers do not appear to comprehend the effective APR, the Board believes highlighting fees and interest for consumers will more effectively inform consumers of their costs of credit. Because consumer testing results indicate that grouping fees together helped consumers find them more easily, the Board is adopting the proposal under § 226.7(b)(6)(iii) to require creditors to group fees together. All fees assessed on the account must be grouped together under one heading even if fees may be attributable to different users of the account or to different sub-accounts.Start Printed Page 5326

Cost totals for the statement period and year to date. Consumer group commenters supported the proposal to disclose cost totals for the statement period, as well as a year-to-date total. One commenter urged the Board to disclose total fees and interest charged for the cycle, regardless of the Board's decision regarding the effective APR. The commenter also stated that year-to-date totals in dollars provide consumers with the overall cost of the credit on an annualized basis.

In general, industry commenters opposed the requirement for year-to-date totals as unnecessary and costly to implement. Some trade associations urged the Board to discuss with data processors potential costs to implement the year-to-date totals, and to provide sufficient implementation time if the requirement is adopted. Suggested alternatives to the proposal included providing the information on the first or last statement of the year, at the end of the year to consumers who request it, or to provide access to year-to-date information on-line.

The Board believes that providing consumers with the total of interest and fee costs, expressed in dollars, for the statement period and year to date is a significant enhancement to consumers' ability to understand the overall cost of credit for the account, and has adopted the requirement as proposed. The Board's testing indicates consumers notice and understand credit costs expressed in dollars. Aggregated cost information enables consumers to evaluate how the use of an account may impact the amount of interest and fees charged over the year and thus promotes the informed use of credit. Discussions with processors indicated that programming costs to capture year-to-date information are not material.

Comment 7(b)(6)-3 has been added to provide additional flexibility to creditors in providing year-to-date totals, in response to a commenter's request. Under the revised comment, creditors sending monthly statements may comply with the requirement to provide a year-to date total using a January 1 through December 31 time period, or the period representing 12 monthly cycles beginning in November and ending in December of the following year or beginning in December and ending in January of the following year. This guidance also applies when creditors send quarterly statements.

Some commenters asked the Board to provide guidance on creditors' duty to reflect refunded fees or interest in year-to-date totals. Comment 7(b)(6)-5 has been added to reflect that creditors may, but are not required to, reflect the adjustment in the year-to-date totals, nor, if an adjustment is made, to provide an explanation about the reason for the adjustment, to ease compliance. Such adjustments should not affect the total fees or interest charges imposed for the current statement period.

7(b)(7) Change-in-terms and Increased Penalty Rate Summary for Open-end (not Home-secured) Plans

A major goal of the Board's review of Regulation Z's open-end credit rules is to address consumers' surprise at increased rates (and/or fees). In the June 2007 Proposal, the Board sought to address the issue in § 226.9(c)(2) and (g) to give more time before new rates and changes to significant costs become effective. The Board and other federal banking agencies further proposed in May 2008, subject to certain exceptions, a prohibition on increasing the APR applicable to balances outstanding at the end of the fourteenth day after a notice disclosing the change in the APR is provided to the consumer.

As part of the June 2007 Proposal, the Board also proposed new § 226.7(b)(14), which would have required a summary of key changes to precede transactions when a change-in-terms notice or a notice of a rate increase due to delinquency or default or as a penalty is provided on or with a periodic statement. Samples G-20 and G-21 in Appendix G to part 226 illustrated the proposed format requirement under § 226.7(b)(14) and the level of detail required for the notice under § 226.9(c)(2)(iii) and (g)(3). Proposed Sample Forms G-18(G) and G-18(H) would have illustrated the placement of these notices on a periodic statement. The summary would have been required to be displayed in a table, in no less than 10-point font. See § 226.9(c)(2)(iii)(B) and (g)(3)(ii), § 226.5(a)(3). The proposed format rule was intended to enable consumers to notice more easily changes in their account terms. Increasing the time period to act is ineffective if consumers do not see the change-in-terms notice. In consumer testing conducted prior to the June 2007 Proposal, consumers who participated in testing conducted for the Board consistently set aside change-in-terms notices in inserts that accompanied periodic statements. Research conducted for the Board indicated that consumers do look at the front side of periodic statements and do look at transactions.

Consumer groups supported the proposed format requirements, as being more readable and pertinent than current change-in-term notices provided with periodic statements. Industry commenters opposed the proposal for a number of reasons. Many commenters stated that creditors use pre-printed forms and have limited space to place non-recurring messages on the front of the statement. These commenters asserted that the proposed requirement to place a change-in-term notice or a penalty rate increase notice preceding the transactions would be costly to implement. Some commenters asked the Board to permit creditors to refer consumers to an insert where the change-in-term or penalty increase could be described, if the requirement for a summary table was adopted. Others asked for more flexibility, such as by requiring the disclosures to precede transactions, without a further requirement to provide disclosures in a form substantially similar to proposed Forms G-18(G) and G-18(H), and Samples G-20 and G-21. One commenter urged the Board to require that the summary table be printed in a font size that is consistent with TILA's general “clear and conspicuous” standard, rather than require a 10-point font. Others noted that proposed Forms G-18(G) and G-18(H) were designed in a portrait format, with the summary table directly above the transactions, and asked that the Board clarify whether creditors could provide the table in a landscape format, with the summary table to the right or left of the transactions. One commenter asked the Board to provide guidance in the event both a change-in-terms notice and a penalty rate increase notice are included in a periodic statement. One commenter suggested the effect of the proposal will be to drive creditors to use separate mailings, to reduce redesign costs.

As discussed in more detail in the section-by-section analysis to § 226.9(c) and 226.9(g), the final rule requires that a creditor include on the front of the periodic statement a tabular summary of changes to certain key terms, when a change-in-terms notice or notice of the imposition of a penalty rate is included with the periodic statement. However, consistent with the results of the consumer testing conducted on behalf of the Board, this tabular summary is not required to appear on the front of the first page of the statement prior to the list of transactions, but rather may appear anywhere on the front of the periodic statement. Conforming changes have been made to § 226.7(b)(7) in the final rule. The summary table on the model forms continues to be disclosed on the front of the first page of the periodic statement; however, this is not required under the final rule. See Forms Start Printed Page 5327G-18(F) and G-18(G) (proposed as Forms G-18(G) and G-18(H)). In a technical change, proposed § 226.7(b)(14) has been renumbered as § 226.7(b)(7) in the final rule.

7(b)(9) Address for Notice of Billing Errors

Consumers who allege billing errors must do so in writing. 15 U.S.C. 1666; § 226.13(b). Creditors must provide on or with periodic statements an address for this purpose. See current § 226.7(k). Currently, comment 7(k)-2 provides that creditors may also provide a telephone number along with the mailing address as long as the creditor makes clear a telephone call to the creditor will not preserve consumers' billing error rights. In many cases, an inquiry or question can be resolved in a phone conversation, without requiring the consumer and creditor to engage in a formal error resolution procedure.

In June 2007, the Board proposed to update comment 7(k)-2, renumbered as comment 7(b)(9)-2, to address notification by e-mail or via a Web site. The proposed comment would have provided that the address is deemed to be clear and conspicuous if a precautionary instruction is included that telephoning or notifying the creditor by e-mail or via a Web site will not preserve the consumer's billing rights, unless the creditor has agreed to treat billing error notices provided by electronic means as written notices, in which case the precautionary instruction is required only for telephoning. See also comment 13(b)-2, which addresses circumstances under which electronic notices are deemed to satisfy the written billing error requirement. Commenters generally supported the proposal. Some consumer groups urged the Board to discourage creditors' policies not to accept electronic delivery of dispute notices, and that if a creditor accepts electronic dispute notices, the creditor should be required to accept these electronic submissions as preserving billing rights. The final rule adopts comment 7(b)(9)-2, as proposed. The rule provides consumers with flexibility to attempt to resolve inquiries or questions about billing statements informally, while advising them that if the matter is not resolved in a telephone call or via e-mail, the consumer must submit a written inquiry to preserve billing error rights.

7(b)(10) Closing Date of Billing Cycle; New Balance

Creditors must disclose the closing date of the billing cycle and the account balance outstanding on that date. As a part of the June 2007 Proposal to implement TILA amendments in the Bankruptcy Act regarding late payments and the effect of making minimum payments, the Board proposed to require creditors to group together, as applicable, disclosures of related information about due dates and payment amounts, including the new balance. The comments received on these proposed formatting requirements are discussed in the section-by-section analysis to § 226.7(b)(11) and (b)(13) below.

Some consumer commenters urged the Board to require credit card issuers to disclose the amount required to pay off the account in full (the “payoff balance”) on each periodic statement and pursuant to a consumer's request by telephone or through the issuer's Web site. The Board's final rule does not contain such a requirement. At the time the payoff balance would be disclosed, the issuer may not be aware of some transactions that are still being processed and that have not yet been posted to the account. In addition, finance charges can continue to accrue after the payoff balance is disclosed. If a consumer relies on the disclosure to submit a payment for that amount, the account still may not be paid off in full.

7(b)(11) Due Date; Late Payment Costs

TILA Section 127(b)(12), added by Section 1305(a) of the Bankruptcy Act, requires creditors that charge a late-payment fee to disclose on the periodic statement (1) the payment due date or, if different, the earliest date on which the late-payment fee may be charged, and (2) the amount of the late-payment fee. 15 U.S.C. 1637(b)(12). The June 2007 Proposal would have implemented those requirements in § 226.7(b)(11) by requiring creditors to disclose the payment due date on the front side of the first page of the periodic statement and, closely proximate to the due date, any cut-off time if the time is before 5 p.m. Further, the amount of any late-payment fee and any penalty APR that could be triggered by a late payment would have been required to be in close proximity to the due date.

Home-equity plans. The Board stated in the June 2007 Proposal its intent to implement the late payment disclosure for HELOCs as a part of its review of rules affecting home-secured credit. Creditors offering HELOCs may comply with § 226.7(b)(11), at their option.

Charge card issuers. TILA Section 127(b)(12) applies to “creditors.” TILA's definition of “creditor” includes card issuers and other persons that offer consumer open-end credit. Issuers of “charge cards” (which are typically products where outstanding balances cannot be carried over from one billing period to the next and are payable when a periodic statement is received) are “creditors” for purposes of specifically enumerated TILA disclosure requirements. 15 U.S.C. 1602(f); § 226.2(a)(17). The new disclosure requirement in TILA Section 127(b)(12) is not among those specifically enumerated.

The Board proposed in June 2007 that the late payment disclosure requirements contained in the Bankruptcy Act and to be implemented in new § 226.7(b)(11) would not apply to charge card issuers because the new requirement is not specifically enumerated to apply to charge card issuers. The Board noted that for some charge card issuers, payments are not considered “late” for purposes of imposing a fee until a consumer fails to make payments in two consecutive billing cycles. It would be undesirable to encourage consumers who in January receive a statement with the balance due upon receipt, for example, to avoid paying the balance when due because a late-payment fee may not be assessed until mid-February; if consumers routinely avoided paying a charge card balance by the due date, it could cause issuers to change their practice with respect to charge cards.

One industry commenter that offers a charge card account with a revolving feature supported the proposal. The commenter further asked the Board to clarify how card issuers with such products may comply with the late payment disclosure requirement.

Creditors are required to provide the disclosures set forth in § 226.7 as applicable. Section § 226.7(b)(11)(ii) has been revised to make clear the exemption is for periodic statements provided solely for charge card accounts; periodic statements provided for accounts with charge card and revolving features must comply with the late fee disclosure provision as to the revolving feature. Comment app. G-9 has been added to provide that creditors offering card accounts with a charge card feature and a revolving feature may revise the late payment (and minimum payment) disclosure to make clear the feature to which the disclosures apply. For creditors subject to § 226.7(b)(11), the late payment disclosure is not required to be made on a statement where no payment is due (and no late payment could be triggered), because the disclosure would not apply.

Payment due date. Under the June 2007 Proposal, creditors must disclose the due date for a payment if a late-payment fee or penalty rate could be Start Printed Page 5328imposed under the credit agreement, as discussed in more detail as follows. This rule is adopted, as proposed.

Courtesy periods. In the June 2007 Proposal, the Board interpreted the due date to be a date that is required by the legal obligation. This would not encompass informal “courtesy periods” that are not part of the legal obligation and that creditors may observe for a short period after the stated due date before a late-payment fee is imposed, to account for minor delays in payments such as mail delays. Proposed comment 7(b)(11)-1 would have provided that creditors need not disclose informal “courtesy periods” not part of the legal obligation.

Commenters generally supported this aspect of the proposal, which is adopted as proposed.

Laws affecting assessment of late fees. Under the Bankruptcy Act, creditors must disclose on periodic statements the payment due date or, if different, the earliest date on which the late-payment fee may be charged. Some state laws require that a certain number of days must elapse following a due date before a late-payment fee may be imposed. Under such a state law, the later date arguably would be required to be disclosed on periodic statements. The Board was concerned, however, that such a disclosure would not provide a meaningful benefit to consumers in the form of useful information or protection and would result in consumer confusion. For example, assume a payment is due on March 10 and state law provides that a late-payment fee cannot be assessed before March 21. Highlighting March 20 as the last date to avoid a late-payment fee may mislead consumers into thinking that a payment made any time on or before March 20 would have no adverse financial consequences. However, failure to make a payment when due is considered an act of default under most credit contracts, and can trigger higher costs due to interest accrual and perhaps penalty APRs.

The Board considered additional disclosures on the periodic statement that would more fully explain the consequences of paying after the due date and before the date triggering the late-payment fee, but such an approach appeared cumbersome and overly complicated. For those reasons, under the June 2007 Proposal, creditors would have been required to disclose the due date under the terms of the legal obligation, and not a later date, such as when creditors are required by state or other law to delay imposing a late-payment fee for a specified period when a payment is received after the due date. Consumers' rights under state laws to avoid the imposition of late-payment fees during a specified period following a due date were unaffected by the proposal; that is, in the above example, the creditor would disclose March 10 as the due date for purposes of § 226.7(b)(11), but could not, under state law, assess a late-payment fee before March 21.

Commenters supported the Board's interpretation, and for the reasons stated above, the proposal is adopted. In response to a request for guidance, the substance of the above discussion regarding the due date disclosure when state or other laws affect the assessment of a late-payment fee is added in a new comment 7(b)(11)-2.

Cut-off time for making payments. As discussed in the section-by-section analysis to § 226.10(b) to the June 2007 Proposal, creditors would have been required to disclose any cut-off time for receiving payments closely proximate to each reference of the due date, if the cut-off time is before 5 p.m. on the due date. If cut-off times prior to 5 p.m. differ depending on the method of payment (such as by check or via the Internet), the proposal would have required creditors to state the earliest time without specifying the method to which it applies, to avoid information overload. Cut-off hours of 5 p.m. or later could continue to be disclosed under the existing rule (including on the reverse side of periodic statements).

Comments were divided on the proposed cut-off hour disclosure for periodic statements. Industry representatives that have a cut-off hour earlier than 5 p.m. for an infrequently used payment means expressed concern about consumer confusion if the more commonly used payment method is later than 5 p.m. Consumer groups urged the Board also to adopt a “postmark” date on which consumers could rely to demonstrate their payment was mailed sufficiently in advance for the payment to be timely received, or to eliminate cut-off hours altogether. Both consumer groups and industry representatives asked the Board to clarify by which time zone the cut-off hour should be measured.

As discussed in the section-by-section analysis to § 226.10(b) to the May 2008 Proposal, the Board proposed that to comply with the requirement in § 226.10 to provide reasonable payment instructions, a creditor's cut-off hour for receiving payments by mail can be no earlier than 5 p.m. in the location where the creditor has designated the payment to be sent. The Board requested comment on whether there would continue to be a need for creditors to disclose cut-off hours before 5 p.m. for payments made by telephone or electronically.

Consumer groups suggested the Board should require a cut-off hour no earlier than 5 p.m. for all methods of payment. They stated that different cut-off hours are confusing for consumers. Moreover, they argue that consumers have no control over the time electronic payments are posted. They suggested having a uniform cut-off hour would not require creditors to process and post payments on the same day or to change processing systems; such a rule would merely prohibit the creditor from imposing a late fee.

Industry commenters generally opposed a requirement to disclose any cut-off hour for receiving payments made other than by mail closely proximate to each reference of the due date. They stated that such a disclosure is unnecessary because creditors disclose cut-off times with other payment channels, such as the telephone or Internet. If a cut-off hour were to be required on the front side of periodic statements, one trade association suggested permitting a reference to cut-off hours on the back of the statement, to avoid cluttering the statement with information that, in their view, would not be helpful to many consumers in any event. Others suggested moving the timing and location of cut-off hour disclosures to account-opening, below the account-opening box, or disclosing the cut-off time for each payment channel on the periodic statement. One service provider suggested as an alternative to a cut-off hour disclosure, a substantive rule requiring a one-day period following the due date before the payment could be considered late.

In the two rounds of testing following the May 2008 Proposal, the Board conducted additional testing on cut-off hour disclosures for receiving payments other than by mail. Consumers were shown mock periodic statements which disclosed near the due date a 2 p.m. cut-off time for electronic payments and a reference to the back of the statement for cut-off times for other payment methods. The disclosure on the back of the statement stated that mailed payments must be received by 5 p.m. on the due date. When asked what time a mailed payment would be due, about two-thirds of the participants incorrectly named 2 p.m., the cut-off hour identified for electronic payments. Although the mock statement referred the reader to the back of the statement for more information about cut-off hours, only one participant in each round was able to locate the Start Printed Page 5329information. Most other participants understood that cut-off hours may differ for various payment channels, but they were unable to locate more specific information on the statement.

Based on the comments received and on the Board's consumer testing, the Board is not adopting an additional requirement to disclose any cut-off hour for receiving payments made other than by mail closely proximate to each reference of the due date. Testing showed that abbreviated disclosures were not effective. The Board believes that fully explaining each cut-off hour is too cumbersome for the front of the first side of the periodic statement. Creditors currently disclose relevant cut-off hours when consumers use the Internet or telephone to make a payment, and the Board expects creditors will continue to do so. See section-by-section analysis to § 226.10 regarding substantive rules regarding cut-off hours, generally.

Fee or rate triggered by multiple events. Some industry commenters asked for guidance on complying with the late payment disclosure if a late fee or penalty rate is triggered after multiple events, such as two late payments in six months. Comment 7(b)(11)-3 has been added to provide that in such cases, the creditor may, but is not required to, disclose the late payment and penalty rate disclosure each month. The disclosures must be included on any periodic statement for which a late payment could trigger the late payment fee or penalty rate, such as after the consumer made one late payment in this example.

Amount of late payment fee; penalty APR. Creditors must disclose the amount of the late-payment fee and the payment-due date on periodic statements, under TILA amendments contained in the Bankruptcy Act. The purpose of the new late payment disclosure requirement is to ensure consumers know the consequences of paying late. To fulfill that purpose, the June 2007 Proposal would have required that the amount of the late-payment fee be disclosed in close proximity to the due date. If the amount of the late-payment fee is based on outstanding balances, the proposal would have required the creditor to disclose the highest fee in the range.

In addition, the Board proposed to require creditors to disclose any increased rate that may apply if consumers' payments are received after the due date. The proposal was intended to address the Board's concern about a potential increase in APRs as a consequence of paying late. If, under the terms of the account agreement, a late payment could result in the loss of a promotional rate, the imposition of a penalty rate, or both, the proposal would have required the creditor to disclose the highest rate that could apply, to avoid information overload. The June 2007 Proposal would have required creditors to disclose the increased APR closely proximate to the fee and due date to fulfill Congress's intent to warn consumers about the effects of paying late. See proposed § 226.7(b)(13).

Some consumer groups and a member of Congress generally supported the Board's proposal to require creditors to disclose any penalty rate, as well as a late payment fee, that could be imposed if a consumer makes an untimely payment. One trade association and a number of industry commenters noted that under the proposal, consumers are warned about the consequences of paying late on or with the application or solicitation for a credit or charge card and at account-opening, and thus repeating disclosures each month was unnecessary. As an alternative, the trade association suggested requiring an annual reminder about triggers for penalty pricing or a preprinted statement on the back of the periodic statement. Some industry commenters opposed the proposal as overly burdensome.

The Board continues to believe that the late-payment warning should include a disclosure of any penalty rate that may apply if the consumer makes a late payment. For some consumers, the increase in rate associated with a late payment may be more costly than the imposition of a fee. Disclosing only the fee to these consumers would not inform them of one of the primary costs of making late payment. Accordingly, the Board believes that disclosure of both the penalty rate and fee should be required. For the reasons stated above, the proposal is adopted.

Scope of penalties disclosed. Some consumer groups urged the Board also to require disclosure of the earliest date after which a creditor could impose “any negative consequence,” as a catch-all to address new fees and terms that are not specifically addressed in the proposal. The Board is concerned that a requirement to disclose the amount of “any other negative consequence” is overly broad and unclear and would increase creditors' risk of litigation and thus is not included in the final rule.

Many consumers, consumer groups, and others also urged the Board to ban “excessive” late fees and penalty rates. Elsewhere in today's Federal Register, the Board is adopting a rule that prohibits institutions from increasing the APR on outstanding balances, with some exceptions. The Board is also adopting a rule that requires institutions to provide consumers with a reasonable amount of time to make their payments, which should help consumers avoid late fees and penalty rates resulting from late payment. No action is taken under this rulemaking that affects the amount of fees or rates creditors may impose.

Range of fees and rates. An industry commenter asked for more flexibility in disclosing late-payment fees and penalty rates that could be imposed under the account terms but could vary, for example, based on the outstanding balance. In other cases, the creditor may have the contractual right to impose a specified penalty rate but may choose to impose a lower rate based on the consumer's overall behavior. The commenter suggested permitting creditors to disclose the range of fees or rates, or “up to” the maximum late-payment fee or rate that may be imposed on the account. In the commenter's view, this approach would provide more accurate disclosures and provide consumers with a better understanding of the possible outcome of a late payment. Modified from the proposal, § 226.7(b)(11)(i)(B) provides that if a range of late-payment fees or penalty rates could be imposed on the account, creditors may disclose the highest late-payment fee and rate and at creditors' option, an indication (such as using the phrase “up to”) that lower fees or rates may be imposed. Comment 7(b)(11)-4 has been added to illustrate the requirement. The final rule also permits creditors to disclose a range of fees or rates. This approach recognizes the space constraints on periodic statements about which industry commenters express concern, but gives creditors more flexibility in disclosing possible late-payment fees and penalty rates.

Some creditors are subject to state law limitations on the amount of late-payment fees or interest rates that may be assessed. Currently, where disclosures are required but the amount is determined by state law, such creditors typically disclose a matrix disclosing which rates and fees are applicable to residents of various states. Under the June 2007 Proposal, creditors would have been required to disclose the late-payment fee applicable to the consumer's account. To ease burden, one commenter urged the Board to permit these creditors to disclose the highest late-payment fee (or penalty rate) that could apply in any state. The Board is mindful of compliance costs associated with customizing the disclosure to reflect disclosure requirements of various states; however, the Board believes the purposes of TILA Start Printed Page 5330would not be served if a consumer received a late-payment fee disclosure for an amount that exceeded, perhaps substantially, the amount the consumer could be assessed under the terms of the legal obligation of the account. For that reason, § 226.7(b)(11)(i)(B) provides that ranges or the highest fee must be those applicable to the consumer's account. Accordingly, a creditor may state a range only if all fee amounts in that range would be permitted to be imposed on the consumer's account under applicable state law, for example if the state law permits a range of late fees that vary depending on the outstanding account balance.

Penalty rate in effect. Industry commenters asked the Board to clarify the penalty rate disclosure requirements when a consumer's untimely payment has already triggered the penalty APR. Comment 7(b)(11)-5 is added to provide that if the highest penalty rate has previously been triggered on an account, the creditor may, but is not required to, delete as part of the late payment disclosure the amount of the penalty rate and the warning that the rate may be imposed for an untimely payment, as not applicable. Alternatively, the creditor may, but is not required to, modify the language to indicate that the penalty rate has been increased due to previous late payments, if applicable.

7(b)(12) Minimum Payment

The Bankruptcy Act amends TILA Section 127(b) to require creditors that extend open-end credit to provide a disclosure on the front of each periodic statement in a prominent location about the effects of making only minimum payments. 15 U.S.C. 1637(b)(11). This disclosure must include: (1) A “warning” statement indicating that making only the minimum payment will increase the interest the consumer pays and the time it takes to repay the consumer's balance; (2) a hypothetical example of how long it would take to pay off a specified balance if only minimum payments are made; and (3) a toll-free telephone number that the consumer may call to obtain an estimate of the time it would take to repay his or her actual account balance.

Under the Bankruptcy Act, depository institutions may establish and maintain their own toll-free telephone numbers or use a third party. In order to standardize the information provided to consumers through the toll-free telephone numbers, the Bankruptcy Act directs the Board to prepare a “table” illustrating the approximate number of months it would take to repay an outstanding balance if the consumer pays only the required minimum monthly payments and if no other advances are made. The Board is directed to create the table by assuming a significant number of different APRs, account balances, and minimum payment amounts; instructional guidance must be provided on how the information contained in the table should be used to respond to consumers' requests. The Board is also required to establish and maintain, for two years, a toll-free telephone number for use by customers of creditors that are depository institutions having assets of $250 million or less.[19] The Federal Trade Commission (FTC) must maintain a toll-free telephone number for creditors that are subject to the FTC's authority to enforce TILA and Regulation Z as to the card issuer. 15 U.S.C. 1637(b)(11)(A)-(C).[20]

The Bankruptcy Act provides that creditors, the Board and the FTC may use a toll-free telephone number that connects consumers to an automated device through which they can obtain repayment information by providing information using a touch-tone telephone or similar device. The Bankruptcy Act also provides that consumers who are unable to use the automated device must have the opportunity to speak with an individual from whom the repayment information may be obtained. Creditors, the Board and the FTC may not use the toll-free telephone number to provide consumers with repayment information other than the repayment information set forth in the “table” issued by the Board. 15 U.S.C. 1637(b)(11)(F)-(H).

Alternatively, a creditor may use a toll-free telephone number to provide the actual number of months that it will take consumers to repay their outstanding balance instead of providing an estimate based on the Board-created table. A creditor that does so need not include a hypothetical example on its periodic statements, but must disclose the warning statement and the toll-free telephone number on its periodic statements. 15 U.S.C. 1637(b)(11)(J)-(K).

For ease of reference, this supplementary information will refer to the above disclosures about the effects of making only the minimum payment as “the minimum payment disclosures.”

Proposal to limit the minimum payment disclosure requirements to credit card accounts. Under the Bankruptcy Act, the minimum payment disclosure requirements apply to all open-end accounts (such as credit card accounts, HELOCs, and general purpose credit lines). The Act expressly states that these disclosure requirements do not apply, however, to any “charge card” account, the primary aspect of which is to require payment of charges in full each month.

In the June 2007 Proposal, the Board proposed to exempt open-end credit plans other than credit card accounts from the minimum payment disclosure requirements. This would have exempted, for example, HELOCs (including open-end reverse mortgages), overdraft lines of credit and other general purpose personal lines of credit. In response to the June 2007 Proposal, industry commenters generally supported exempting open-end credit plans other than credit card accounts from the minimum payment disclosure requirements. Several consumer group commenters urged the Board to require the minimum payment disclosures for HELOCs, as well as credit card accounts.

The final rule limits the minimum payment disclosures to credit card accounts, as proposed pursuant to the Board's authority under TILA Section 105(a) to make adjustments that are necessary to effectuate the purposes of TILA. 15 U.S.C. 1604(a). The Congressional debate on the minimum payment disclosures indicates that the principal concern of Congress was that consumers may not be fully aware of the length of time it takes to pay off their credit card accounts if only minimum monthly payments are made. For example, Senator Grassley, a primary sponsor of the Bankruptcy Act, in discussing the minimum payment disclosures, stated:

[The Bankruptcy Act] contains significant new disclosures for consumers, mandating that credit card companies provide key information about how much [consumers] owe and how long it will take to pay off their credit card debts by only making the minimum payment. That is very important consumer education for every one of us.

Consumers will also be given a toll-free number to call where they can get information about how long it will take to pay off their own credit card balances if they only pay the minimum payment. This will educate consumers and improve consumers' Start Printed Page 5331understanding of what their financial situation is.

Remarks of Senator Grassley (2005), Congressional Record (daily edition), vol. 151, March 1, p. S 1856.

With respect to HELOCs, the Board understands that most HELOCs have a fixed repayment period. Thus, for those HELOCs, consumers could learn from the current disclosures the length of the draw period and the repayment period. See current § 226.6(e)(2). The minimum payment disclosures would not appear to provide additional information to consumers that is not already disclosed to them. The cost of providing this information a second time, including the costs to reprogram periodic statement systems and to establish and maintain a toll-free telephone number, appears not to be justified by the limited benefit to consumers. Thus, the final rule exempts HELOCs from the minimum payment disclosure requirements as not necessary to effectuate the purposes of TILA, using the Board's TILA Section 105(a) authority.

As proposed, the final rule also exempts overdraft lines of credit and other general purpose credit lines from the minimum payment disclosure requirements for several reasons. First, these lines of credit are not in wide use. The 2004 Survey of Consumer Finances data indicates that few families—1.6 percent—had a balance on lines of credit other than a home-equity line or credit card at the time of the interview. (In terms of comparison, 74.9 percent of families had a credit card, and 58 percent of these families had a credit card balance at the time of the interview.)[21] Second, these lines of credit typically are neither promoted, nor used, as long-term credit options of the kind for which the minimum payment disclosures are intended. Third, the Board is concerned that the operational costs of requiring creditors to comply with the minimum payment disclosure requirements with respect to overdraft lines of credit and other general purpose lines of credit may cause some institutions to no longer provide these products as accommodations to consumers, to the detriment of consumers who currently use these products. For these reasons, the Board is using its TILA Section 105(a) authority to exempt overdraft lines of credit and other general purpose credit lines from the minimum payment disclosure requirements, because in this context the Board believes the minimum payment disclosures are not necessary to effectuate the purposes of TILA.

7(b)(12)(i) General Disclosure Requirements

In response to the June 2007 Proposal, several commenters suggested revisions to the structure of the regulatory text in § 226.7(b)(12) to make the regulatory text in this section easier to read and understand. In the final rule, § 226.7(b)(12) is restructured to accomplish these goals. The final rule in § 226.7(b)(12)(i) clarifies that issuers can choose one of three ways to comply with the minimum payment disclosure requirements: (1) Provide on the periodic statement a warning about making only minimum payments, a hypothetical example, and a toll-free telephone number where consumers may obtain generic repayment estimates as described in Appendix M1 to part 226; (2) provide on the periodic statement a warning about making only minimum payments, and a toll-free telephone number where consumers may obtain actual repayment disclosures as described in Appendix M2 to part 226; or (3) provide on the periodic statement the actual repayment disclosure as described in Appendix M2 to part 226.

7(b)(12)(ii) Generic Repayment Example and Establishment of a Toll-Free Telephone Number

The final rule in § 226.7(b)(12)(ii) sets forth requirements that credit card issuers must follow if they choose to comply with the minimum payment disclosure provisions by providing on the periodic statement a warning about making only minimum payments, a hypothetical example, and a toll-free telephone number where consumers may obtain generic repayment estimates. Under the Bankruptcy Act, the hypothetical example that creditors must disclose on periodic statements varies depending on the creditor's minimum payment requirement. Generally, creditors that require minimum payments equal to 4 percent or less of the account balance must disclose on each statement that it takes 88 months to pay off a $1000 balance at an interest rate of 17 percent if the consumer makes a “typical” 2 percent minimum monthly payment. Creditors that require minimum payments exceeding 4 percent of the account balance must disclose that it takes 24 months to pay off a balance of $300 at an interest rate of 17 percent if the consumer makes a “typical” 5 percent minimum monthly payment (but a creditor may opt instead to disclose the statutory example for 2 percent minimum payments). The 5 percent minimum payment example must be disclosed by creditors for which the FTC has the authority under TILA to enforce the act and this regulation. Creditors also have the option to substitute an example based on an APR that is greater than 17 percent. The Bankruptcy Act authorizes the Board to periodically adjust the APR used in the hypothetical example and to recalculate the repayment period accordingly. 15 U.S.C. 1637(b)(11)(A)-(E).

Wording of the examples. The Bankruptcy Act sets forth specific language for issuers to use in disclosing the applicable hypothetical example on the periodic statement. In the June 2007 Proposal, the Board proposed to modify the statutory language to facilitate consumers' use and understanding of the disclosures, pursuant to its authority under TILA Section 105(a) to make adjustments that are necessary to effectuate the purposes of TILA. 15 U.S.C. 1604(a). First, the Board proposed to require that issuers disclose the payoff periods in the hypothetical examples in years, rounding fractional years to the nearest whole year, rather than in months as provided in the statute. Thus, issuers would have disclosed that it would take over 7 years to pay off the $1,000 hypothetical balance, and about 2 years for the $300 hypothetical balance. The Board believes that the modification of the examples will further TILA's purpose to assure a meaningful disclosure of credit terms. 15 U.S.C. 1601(a). The final rule adopts the examples as proposed. The Board believes that disclosing the payoff period in years allows consumers to better comprehend the repayment period without having to convert it themselves from months to years. Participants in the consumer testing conducted for the Board reviewed disclosures with the estimated payoff period in years, and they indicated they understood the length of time it would take to repay the balance if only minimum payments were made.

Second, the statute requires that issuers disclose in the examples the minimum payment formula used to calculate the payoff period. In the $1,000 example above, the statute would require issuers to indicate that a “typical” 2 percent minimum monthly payment was used to calculate the repayment period. In the $300 example above, the statute would require issuers to indicate that a 5 percent minimum monthly payment was used to calculate the repayment period. In June 2007, the Board proposed to eliminate the specific minimum payment formulas from the Start Printed Page 5332examples. The references to the 2 percent minimum payment in the $1,000 example, and a 5 percent minimum payment in the $300 example, are incomplete descriptions of the minimum payment requirement. In the $1,000 example, the minimum payment formula used to calculate the repayment period is the greater of 2 percent of the outstanding balance, or $20. In the $300 example, the minimum payment formula used to calculate the repayment period is the greater of 5 percent of the outstanding balance, or $15. In fact, in each example, the hypothetical consumer always pays the absolute minimum ($20 or $15, depending on the example).

In response to the June 2007 Proposal, several consumer group commenters suggested that the Board include in the example the statutory reference to the “typical” minimum payment formula (either 2 percent or 5 percent as described above), because without this reference, the example implies that minimum payment formulas do not vary from creditor to creditor.

Like the proposal, the final rule does not include in the examples a reference to the minimum payment formula used to calculate the repayment period given in the examples. The Board believes that including the entire minimum payment formula, including the floor amount, in the disclosure could make the example too complicated. Also, the Board did not revise the disclosures to indicate that the repayment period in the $1,000 balance was calculated based on a $20 payment, and the repayment period in the $300 balance was calculated based on a $15 payment. The Board believes that revising the statutory requirement in this way would change the disclosure to focus consumers on the effects of making a fixed payment each month as opposed to the effects of making minimum payments. Moreover, disclosing the minimum payment formula is not necessary for consumers to understand the essential point of the examples—that it can take a significant amount of time to pay off a balance if only minimum payments are made. In testing conducted for the Board, the $1,000 balance example was tested without including the 2 percent minimum payment disclosure required by the statute. Consumers appeared to understand the purpose of the disclosure—that it would take a significant amount of time to repay a $1,000 balance if only minimum payments were made. For these reasons, the final rule requires the hypothetical examples without specifying the minimum payment formulas used to calculate repayment periods in the examples. The Board believes that the modification of the examples will further TILA's purpose to assure a meaningful disclosure of credit terms. 15 U.S.C. 1601(a).

In response to the June 2007 Proposal, one industry commenter suggested that if an issuer already includes on the first page of the periodic statement a toll-free customer service telephone number, the Board should permit the issuer to reference that telephone number within the minimum payment disclosure, rather than having to repeat that number again in the minimum payment disclosure. The final rule requires issuers to state the toll-free telephone number in the minimum payment disclosure itself, even if the same toll-free telephone number is listed in other places on the first page of the periodic statement. The Board believes that listing the toll-free telephone number in the minimum payment disclosure itself makes the disclosure easier for consumers to use.

The final regulatory language for the examples is set forth in new § 226.7(b)(12)(ii). As proposed in June 2007, in addition to the revisions mentioned above, the final rule also adopts several stylistic revisions to the statutory language, based on plain language principles, in an attempt to make the language of the examples more understandable to consumers. Furthermore, the language has been revised to reflect comments from the Board's consultation with the other federal banking agencies, the NCUA, and the FTC, pursuant to Section 1309 of the Bankruptcy Act, as discussed immediately below.

Clear and conspicuous disclosure of examples. The Bankruptcy Act requires the Board, in consultation with the other federal banking agencies, the NCUA, and the FTC, to provide guidance on clear and conspicuous disclosure of the examples the Board is requiring under § 226.7(b)(12)(ii)(A)(1), (b)(12)(ii)(A)(2), and (b)(12)(ii)(B) to ensure that they are reasonably understandable and designed to call attention to the nature and significance of the information in the notice. 15 U.S.C. 1637 note (Regulations). In the June 2007 Proposal, the Board set forth exact wording for creditors to use for the examples based on language provided in the Bankruptcy Act, as discussed immediately above. The Board also proposed that the headings for the notice be in bold text and that the notice be placed closely proximate to the minimum payment due on the periodic statement, as discussed below in the supplementary information to § 226.7(b)(13).

The other federal banking agencies, the NCUA, and the FTC generally agreed with the Board's approach. These agencies, however, suggested that the heading be changed from “Notice about Minimum Payments” to “Minimum Payment Warning,” consistent with the heading provided in the Bankruptcy Act. The agencies the Board consulted were concerned that without the term “warning” in the heading, the Board's proposed heading would not sufficiently call attention to the nature and significance of the information contained in the notice. The Board agrees with the agencies, and the final rule adopts the “Minimum Payment Warning” heading.

One of the agencies the Board consulted also suggested that the wording in the examples be modified to refer to the example balance amount a second time in order to clarify to which balance the time period to repay refers. Thus, in the example under § 226.7(b)(12)(ii)(A)(1), the agency suggested that the phrase “of $1,000” be added to the end of the sentence in the notice that states, “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.” The agency suggested similar amendments to the examples under § 226.7(b)(12)(ii)(A)(2) and (b)(12)(ii)(B). The Board believes that including a second reference to the example balance in the notice would be redundant and would unnecessarily extend the length of the notice. Therefore, the Board declines to amend the notice to add the second reference.

Adjustments to the APR used in the examples. The Bankruptcy Act specifically authorizes the Board to periodically adjust the APR used in the hypothetical example and to recalculate the repayment period accordingly. In the June 2007 Proposal, the Board proposed not to adjust the APR used in the hypothetical examples. The final rule adopts this approach. The Board recognizes that the examples are intended to provide consumers with an indication that it can take a long time to pay off a balance if only minimum payments are made. Revising the APR used in the example to reflect the average APR paid by consumers would not significantly improve the disclosure, because for many consumers an average APR would not be the APR that applies to the consumer's account. Moreover, consumers will be able to obtain a more tailored disclosure of a repayment period based on the APR applicable to their accounts by calling the toll-free Start Printed Page 5333telephone number provided as part of the minimum payment disclosure.

Small depository institutions. Under the Bankruptcy Act, the Board is required to establish and maintain, for two years, a toll-free telephone number for use by customers of creditors that are depository institutions having assets of $250 million or less. The FTC must maintain a toll-free telephone number for creditors that are subject to the FTC's authority to enforce TILA and Regulation Z as to the card issuer. 15 U.S.C. 1637(b)(11)(F). Like the proposal, the final rule defines “small depository institution issuers” as card issuers that are depository institutions (as defined by section 3 of the Federal Deposit Insurance Act), including federal credit unions or state-chartered credit unions (as defined in section 101 of the Federal Credit Union Act), with total assets not exceeding $250 million. The final rule clarifies the determination whether an institution's assets exceed $250 million should be made as of December 31, 2009. 15 U.S.C. 1637(b)(11)(F)(ii). Generally, small depository institution issuers may disclose the Board's toll-free telephone number on their periodic statements. Nonetheless, some card issuers may fall within the definition of “small depository institution issuers” and be subject to the FTC's enforcement authority, such as small state-chartered credit unions. New comment 7(b)(12)(ii)(A)(3)-1 clarifies that those card issuers must disclose the FTC's toll-free telephone number on their periodic statements.

Web site address. In response to the June 2007 Proposal, one industry commenter suggested that the Board provide the option to include in the minimum payment disclosure a Web site address (in addition to the toll-free telephone number) where consumers may obtain the generic repayment estimates or actual repayment disclosures, as applicable. New comment 7(b)(12)-4 is added to allow issuers at their option to include a reference to a Web site address (in addition to the toll-free telephone number) where its customers may obtain generic repayment estimates or actual repayment disclosures as applicable, so long as the information provided on the Web site complies with § 226.7(b)(12), and Appendix M1 or M2 to part 226, as applicable. The Web site link disclosed must take consumers directly to the Web page where generic repayment estimates or actual repayment disclosures may be obtained. The Board believes that some consumers may find it more convenient to obtain the repayment estimate through a Web site rather than calling a toll-free telephone number.

New § 226.7(b)(12)(ii)(A)(3) sets forth the disclosure that small depository institution issuers must provide on their periodic statements if the issuers use the Board's toll-free telephone number. New § 226.7(b)(12)(ii)(B) sets forth the disclosure that card issuers subject to the FTC's enforcement authority must provide on their periodic statements. These disclosure statements include two toll-free telephone numbers: one that is accessible to hearing-impaired consumers and one that is accessible to other consumers. In addition, the disclosures include a reference to the Board's Web site, or the FTC's Web site as appropriate, where generic repayment estimates may be obtained.

Toll-free telephone numbers. Under Section 1301(a) of the Bankruptcy Act, depository institutions generally must establish and maintain their own toll-free telephone numbers or use a third party to disclose the repayment estimates based on the “table” issued by the Board. 15 U.S.C. 1637(b)(11)(F)(i). At the issuer's option, the issuer may disclose the actual repayment disclosure through the toll-free telephone number.

The Bankruptcy Act also provides that creditors, the Board and the FTC may use a toll-free telephone number that connects consumers to an automated device through which they can obtain repayment information by providing information using a touch-tone telephone or similar device, but consumers who are unable to use the automated device must have the opportunity to speak with an individual from whom the repayment information may be obtained. Unless the issuer is providing an actual repayment disclosure, the issuer may not provide through the toll-free telephone number a repayment estimate other than estimates based on the “table” issued by the Board. 15 U.S.C. 1637(b)(11)(F). These same provisions apply to the FTC's and the Board's toll-free telephone numbers as well.

In the June 2007 Proposal, the Board proposed to add new § 226.7(b)(12)(iv) and accompanying commentary to implement the above statutory provisions related to the toll-free telephone numbers. In addition, proposed comment 7(b)(12)(iv)-3 would have provided that once a consumer has indicated that he or she is requesting the generic repayment estimate or the actual repayment disclosure, as applicable, card issuers may not provide advertisements or marketing information to the consumer prior to providing the repayment information required or permitted by Appendix M1 or M2 to part 226, as applicable.

The final rule moves these provisions to § 226.7(b)(12)(ii) and comments 7(b)(12)-1, 2 and 5, with several revisions. In addition, comment 7(b)(12)-3 is added to clarify that an issuer may provide as part of the minimum payment disclosure a toll-free telephone number that is designed to handle customer service calls generally, so long as the option to select to receive the generic repayment estimate or actual repayment disclosure, as applicable, through that toll-free telephone number is prominently disclosed to the consumer. For automated systems, the option to select to receive the generic repayment estimate or actual repayment disclosure is prominently disclosed if it is listed as one of the options in the first menu of options given to the consumer, such as “Press or say `3' if you would like an estimate of how long it will take you to repay your balance if you make only the minimum payment each month.” If the automated system permits callers to select the language in which the call is conducted and in which information is provided, the Board has amended comment 7(b)(12)-3 to state that the menu to select the language may precede the menu with the option to receive the repayment disclosure.

In addition, proposed comment 7(b)(12)(iv)-3 dealing with advertisements and marketing information has been moved to comment 7(b)(12)-5. This comment is revised to specify that once a consumer has indicated that he or she is requesting the generic repayment estimate or the actual repayment disclosure, as applicable, card issuers may not provide advertisements or marketing information (except for providing the name of the issuer) to the consumer prior to providing the repayment information required or permitted by Appendix M1 or M2 to part 226, as applicable. Furthermore, new comment 7(b)(12)-5 clarifies that educational materials that do not solicit business are not considered advertisements or marketing materials for purposes of § 226.7(b)(12). Also, comment 7(b)(12)-5 contains examples of how the prohibition on providing advertisements and marketing information applies in two contexts. In particular, comment 7(b)(12)-5 provides an example where the issuer is using a toll-free telephone number that is designed to handle customer service calls generally and the option to select to receive the generic repayment estimate or actual repayment disclosure is given as one of the options in the first Start Printed Page 5334menu of options given to the consumer. Comment 7(b)(12)-5 clarifies in that context that once the consumer selects the option to receive the generic repayment estimate or the actual repayment disclosure, the issuer may not provide advertisements or marketing materials to the consumer (except for providing the name of the issuer) prior to providing the information required or permitted by Appendix M1 or M2 to part 226, as applicable. In addition, if an issuer discloses a link to a Web site as part of the minimum payment disclosure on the periodic statement, the issuer may not provide advertisements or marketing materials (except for providing the name of the issuer) on the Web page accessed by the link, including pop-up marketing materials or banner marketing materials, prior to providing the information required or permitted by Appendix M1 or M2 to part 226, as applicable.

In response to the June 2007 Proposal, several consumer groups suggested that the Board prohibit issuers from providing advertisements or marketing materials even after the repayment information has been given, if the issuer is providing generic repayment estimates through the toll-free telephone number. Nonetheless, if the issuer is providing actual repayment disclosures through the toll-free telephone number, these commenters suggested that the Board allow the issuer to provide advertisements or marketing materials after the repayment information is given, to encourage creditors to provide actual repayment disclosures instead of generic repayment estimates. The final rule does not adopt this approach. The Board believes that allowing advertisements or marketing materials after the repayment information is given is appropriate regardless of whether the repayment information provided are generic repayment estimates or actual repayment disclosures, because consumers could end the telephone call (or exit the Web page) if they were not interested in listening to or reviewing the advertisements or marketing materials given.

7(b)(12)(iii) Actual Repayment Disclosure Through Toll-free Telephone Number

Under the Bankruptcy Act, a creditor may use a toll-free telephone number to provide consumers with the actual number of months that it will take consumers to repay their outstanding balance instead of providing an estimate based on the Board-created table. Creditors that choose to give the actual number via the telephone number need not include a hypothetical example on their periodic statements. Instead, they must disclose on periodic statements a warning statement that making the minimum payment will increase the interest the consumer pays and the time it takes to repay the consumer's balance, along with a toll-free telephone number that consumers may use to obtain the actual repayment disclosure. 15 U.S.C. 1637(b)(11)(I) and (K). In the June 2007 Proposal, the Board proposed to implement this statutory provision in new § 226.7(b)(12)(ii)(A). The final rule moves this provision to § 226.7(b)(12)(iii), with one revision described below.

Wording of disclosure on periodic statement. Under the Bankruptcy Act, if a creditor chooses to provide the actual repayment disclosure through the toll-free telephone number, the statute provides specific language that issuers must disclose on the periodic statement. In particular, this statutory language reads: “Making only the minimum payment will increase the interest you pay and the time it takes to repay your balance. For more information, call this toll-free number: _____.” In the June 2007 Proposal, the Board proposed that issuers use this statutory disclosure language. See proposed § 226.7(b)(12)(ii)(A). In response to the June 2007 Proposal, several consumer groups suggested that the Board revise the disclosure language to communicate more clearly to consumers the type of information that consumers will receive through the toll-free telephone number. The final rule in § 226.7(b)(12)(iii) revises the disclosure language to read: “For an estimate of how long it will take to repay your balance making only minimum payments, call this toll-free telephone number: _____.” The Board adopts this change to the disclosure language pursuant to its authority under TILA Section 105(a) to make adjustments that are necessary to effectuate the purposes of TILA. 15 U.S.C. 1604(a). The Board believes that this change will further TILA's purpose of assuring a meaningful disclosure of credit terms. 15 U.S.C. 1601(a).

7(b)(12)(iv) Actual Repayment Disclosure on the Periodic Statement

In the June 2007 Proposal, the Board proposed to provide that if card issuers provide the actual repayment disclosure on the periodic statement, they need not disclose the warning, the hypothetical example or a toll-free telephone number on the periodic statement, nor need they maintain a toll-free telephone number to provide the actual repayment disclosure. See proposed § 226.7(b)(12)(ii)(B). In the supplementary information to the June 2007 Proposal, the Board strongly encouraged card issuers to provide the actual repayment disclosure on periodic statements, and solicited comments on whether the Board could take other steps to provide incentives to card issuers to use this approach.

In response to the June 2007 Proposal, several consumer group commenters suggested that the Board should require issuers to disclose the actual repayment disclosure on the periodic statement in all cases. Industry commenters generally supported the option to provide the actual repayment disclosure on the periodic statement.

As proposed in June 2007, the final rule in new § 226.7(b)(12)(iv) provides that an issuer may comply with the minimum payment requirements by providing the actual repayment disclosure on the periodic statement. Consistent with the statutory requirements, the Board is not requiring that issuers provide the actual repayment disclosure on the periodic statement.

The Board is adopting an exemption from the requirement to provide on periodic statements a warning about the effects of making minimum payments, a hypothetical example, and a toll-free telephone number consumers may call to obtain repayment periods, and to maintain a toll-free telephone number for responding to consumers' requests, if the card issuer instead provides the actual repayment disclosure on the periodic statement.

The Board adopts this approach pursuant to its exception and exemption authorities under TILA Section 105. Section 105(a) authorizes the Board to make exceptions to TILA to effectuate the statute's purposes, which include facilitating consumers' ability to compare credit terms and helping consumers avoid the uniformed use of credit. 15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes the Board to exempt any class of transactions (with an exception not relevant here) from coverage under any part of TILA if the Board determines that coverage under that part does not provide a meaningful benefit to consumers in the form of useful information or protection. 15 U.S.C. 1604(f)(1). Section 105(f) directs the Board to make this determination in light of specific factors. 15 U.S.C. 1604(f)(2). These factors are (1) the amount of the loan and whether the disclosure provides a benefit to consumers who are parties to the transaction involving a loan of such amount; (2) the extent to which the requirement complicates, hinders, or makes more expensive the credit process; (3) the status of the borrower, Start Printed Page 5335including any related financial arrangements of the borrower, the financial sophistication of the borrower relative to the type of transaction, and the importance to the borrower of the credit, related supporting property, and coverage under TILA; (4) whether the loan is secured by the principal residence of the borrower; and (5) whether the exemption would undermine the goal of consumer protection. The Board has considered each of these factors carefully, and based on that review, believes it is appropriate to provide this exemption for card issuers that provide the actual repayment disclosure on the periodic statement.

As discussed in the supplementary information to the June 2007 Proposal, the Board believes that certain cardholders would find the actual repayment disclosures more helpful than the generic repayment estimates, as suggested by a recent study conducted by the GAO on minimum payments. For this study, the GAO interviewed 112 consumers and collected data on whether these consumers preferred to receive on the periodic statement (1) customized minimum payment disclosures that are based on the consumers' actual account terms (such as the actual repayment disclosure), (2) generic disclosures such as the warning statement and the hypothetical example required by the Bankruptcy Act; or (3) no disclosure.[22] According to the GAO's report, in the interviews with the 112 consumers, most consumers who typically carry credit card balances (revolvers) found customized disclosures very useful and would prefer to receive them in their billing statements. Specifically, 57 percent of the revolvers preferred the customized disclosures, 30 percent preferred the generic disclosures, and 14 percent preferred no disclosure. In addition, 68 percent of the revolvers found the customized disclosure extremely useful or very useful, 9 percent found the disclosure moderately useful, and 23 percent found the disclosure slightly useful or not useful. According to the GAO, the consumers that expressed a preference for the customized disclosures preferred them because such disclosures: would be specific to their accounts; would change based on their transactions; and would provide more information than generic disclosures. GAO Report on Minimum Payments, pages 25, 27.

In addition, the Board believes that disclosing the actual repayment disclosure on the periodic statement would simplify the process for consumers and creditors. Consumers would not need to take the extra step to call the toll-free telephone number to receive the actual repayment disclosure, but instead would have that disclosure each month on their periodic statements. Card issuers (other than issuers that may use the Board or the FTC toll-free telephone number) would not have the operational burden of establishing a toll-free telephone number to receive requests for the actual repayment disclosure and the operational burden of linking the toll-free telephone number to consumer account data in order to calculate the actual repayment disclosure. Thus, the final rule has the potential to better inform consumers and further the goals of consumer protection and the informed use of credit for credit card accounts.

7(b)(12)(v) Exemptions

As explained above, the final rule requires the minimum payment disclosures only for credit card accounts. See § 226.7(b)(12)(i). Thus, creditors would not need to provide the minimum payment disclosures for HELOCs (including open-end reverse mortgages), overdraft lines of credit or other general purpose personal lines of credit. For the same reasons as discussed above, the final rule exempts these products even if they can be accessed by a credit card device as discussed in the June 2007 Proposal, pursuant to the Board's authority under TILA Section 105(a) to make adjustments that are necessary to effectuate the purposes of TILA. 15 U.S.C. 1604(a). Specifically, new § 226.7(b)(12)(v) would exempt the following types of credit card accounts: (1) HELOCs that are subject to § 226.5b, even if the HELOC is accessible by credit cards; (2) overdraft lines of credit tied to asset accounts accessed by check-guarantee cards or by debit cards; and (3) lines of credit accessed by check-guarantee cards or by debit cards that can be used only at automated teller machines. See new § 226.7(b)(12)(v)(A)-(C). The final rule also exempts charge cards from the minimum payment disclosure requirements, to implement TILA Section 127(b)(11)(I). 15 U.S.C. 1637(b)(11)(I); see new § 226.7(b)(12)(v)(D).

Exemption for credit card accounts with a fixed repayment period. In the June 2007 Proposal, the Board proposed to exempt credit card accounts where a fixed repayment period for the account is specified in the account agreement and the required minimum payments will amortize the outstanding balance within the fixed repayment period. See proposed § 226.7(b)(12)(iii)(E).

In response to the June 2007 Proposal, several consumer group commenters urged the Board not to provide an exemption for credit with a defined fixed repayment period. These commenters believed that the Board should develop a special warning for these types of loans, indicating that paying more than the required minimum payment will result in paying off the loan earlier than the date of final payment and will save the consumer interest charges. Industry commenters generally supported the exemption for credit card accounts with a specific repayment period.

The final rule in § 226.7(b)(12)(v)(E) adopts the exemption for credit card accounts with a specific repayment period as proposed, with several technical edits, pursuant to the Board's authority under TILA Section 105(a) to make adjustments that are necessary to effectuate the purposes of TILA. 15 U.S.C. 1604(a). The minimum payment disclosure does not appear to provide additional information to consumers that they do not already have in their account agreements. In addition, as discussed below, this exemption will typically be used with respect to accounts that have been closed due to delinquency and the required monthly payment has been reduced or the balance decreased to accommodate a fixed payment for a fixed period of time designed to pay off the outstanding balance. In these cases, consumers will likely be aware of the fixed period of time to repay because it has been specifically negotiated with the card issuer.

In order for this proposed exemption to apply, a fixed repayment period must be specified in the account agreement. As discussed above, this exemption would be applicable to, for example, accounts that have been closed due to delinquency and the required monthly payment has been reduced or the balance decreased to accommodate a fixed payment for a fixed period of time designed to pay off the outstanding balance. See comment 7(b)(12)(v)-1. This exemption would not apply where the credit card may have a fixed repayment period for one credit feature, but an indefinite repayment period on another feature. For example, some Start Printed Page 5336retail credit cards have several credit features associated with the account. One of the features may be a general revolving feature, where the required minimum payment for this feature does not pay off the balance in a specific period of time. The card also may have another feature that allows consumers to make specific types of purchases (such as furniture purchases, or other large purchases), and the required minimum payments for that feature will pay off the purchase within a fixed period of time, such as one year. Comment 7(b)(12)(v)-1 makes clear that the exemption relating to a fixed repayment period for the entire account does not apply to the above situation, because the retail card account as a whole does not have a fixed repayment period, although the exemption under § 226.7(b)(12)(v)(F) might apply as discussed below.

Exemption where balance has fixed repayment period. In the June 2007 Proposal, the Board proposed to exempt credit card issuers from providing the minimum payment disclosures on periodic statements in a billing cycle where the entire outstanding balance held by consumers in that billing cycle is subject to a fixed repayment period specified in the account agreement and the required minimum payments applicable to that balance will amortize the outstanding balance within the fixed repayment period. See proposed § 226.7(b)(12)(iii)(G). This exemption was meant to cover the retail cards described above in those cases where the entire outstanding balance held by a consumer in a particular billing cycle is subject to a fixed repayment period specified in the account agreement. On the other hand, this exemption would not have applied in those cases where all or part of the consumer's balance for a particular billing cycle is held in a general revolving feature, where the required minimum payment for this feature does not pay off the balance in a specific period of time set forth in the account agreement. The final rule in § 226.7(b)(12)(v)(F) adopts this exemption as proposed, with one technical edit, pursuant to the Board's authority under TILA Section 105(a) to make adjustments that are necessary to effectuate the purposes of TILA. 15 U.S.C. 1604(a). See also comment 7(b)(12)(v)-2. The minimum payment disclosures would not appear to provide additional information to consumers in this context because consumers would be able to determine from their account agreements how long it would take to repay the balance. In addition, these fixed repayment features are often promoted in advertisements by retail card issuers, so consumers will typically be aware of the fixed repayment period when using these features.

Exemption where cardholders have paid their accounts in full for two consecutive billing cycles. In the June 2007 Proposal, the Board proposed to provide that card issuers are not required to include the minimum payment disclosure in the periodic statement for a particular billing cycle if a consumer has paid the entire balance in full in that billing cycle and the previous billing cycle. See proposed § 226.7(b)(12)(iii)(F).

In response to the June 2007 Proposal, several consumer groups suggested that the Board not adopt this exemption and not provide any exemption based on consumers' payment habits. Several industry commenters suggested that the Board broaden this exemption. Some industry commenters suggested that issuers should only be required to comply with minimum payment disclosure requirements for a particular billing cycle if the consumer has made minimum payments for the past three consecutive billing cycles. Other industry commenters suggested that issuers should only by required to comply with the minimum payment disclosure requirements for a particular billing cycle if the consumer has made at least three minimum payments in the past 12 months. Another industry commenter suggested that there should be an exemption for any consumer who has paid his or her account in full during the past 12 months, or has promotional balances that equal 50 percent or more of his or her total account balance.

The final rule adopts in § 226.7(b)(12)(v)(G) the exemption as proposed, with one technical edit, pursuant to the Board's authority under TILA Section 105(a) to make adjustments that are necessary to effectuate the purposes of TILA. 15 U.S.C. 1604(a). The final rule exempts card issuers from the requirement to provide the minimum payment disclosures in the periodic statement for a particular billing cycle immediately following two consecutive billing cycles in which the consumer paid the entire balance in full, had a zero balance or had a credit balance. The Board believes this approach strikes an appropriate balance between benefits to consumers of the disclosures, and compliance burdens on issuers in providing the disclosures. Consumers who might benefit from the disclosures will receive them. Consumers who carry a balance each month will always receive the disclosure, and consumers who pay in full each month will not. Consumers who sometimes pay their bill in full and sometimes do not will receive the minimum payment disclosures if they do not pay in full two consecutive months (cycles). Also, if a consumer's typical payment behavior changes from paying in full to revolving, the consumer will begin receiving the minimum payment disclosures after not paying in full one billing cycle, when the disclosures would appear to be useful to the consumer. In addition, creditors typically provide a grace period on new purchases to consumers (that is, creditors do not charge interest to consumers on new purchases) if consumers paid both the current balance and the previous balance in full. Thus, creditors already currently capture payment history for consumers for two consecutive months (or cycles).

The Board notes that card issuers are not required to use this exemption. A card issuer may provide the minimum payment disclosures to all of its cardholders, even to those cardholders that fall within this exemption. If issuers choose to provide voluntarily the minimum payment disclosures to those cardholders that fall within this exemption, the Board encourages issuers to follow the disclosures rules set forth in § 226.7(b)(12), the accompanying commentary, and Appendices M1-M3 to part 226 (as appropriate) for those cardholders.

Exemption where minimum payment would pay off the entire balance for a particular billing cycle. In response to the June 2007 Proposal, several commenters requested that the Board add an exemption where issuers would not be required to comply with the minimum payment disclosure requirements for a particular billing cycle where paying the minimum payment due for that billing cycle will pay the outstanding balance on the account for that billing cycle. For example, if the entire outstanding balance on an account for a particular billing cycle is $20 and the minimum payment is $20, an issuer would not need to comply with the minimum payment disclosure requirements for that particular billing cycle. The final rule contains this exemption in new § 226.7(b)(12)(v)(H), pursuant to the Board's authority under TILA Section 105(a) to make adjustments that are necessary to effectuate the purposes of TILA. 15 U.S.C. 1604(a).

Other exemptions. In response to the June 2007 Proposal, several commenters suggested other exemptions to the minimum payment requirements, as discussed below. For the reasons discussed below, the final rule does not include these exemptions.Start Printed Page 5337

1. Exemption for discontinued credit card products. In response to the June 2007 Proposal, one industry commenter asked the Board to provide an exemption for discontinued products for which no new accounts are being opened, and for which existing accounts are closed to new transactions. The commenter indicated that the number of accounts that are discontinued are usually very small and the computer systems used to produce the statements for the closed accounts are being phased out. The Board does not believe that this exception is warranted. Issuers will need to make changes to their periodic statement systems as a result of changes to other periodic statement requirements in this final rule and issuers could make changes to the periodic statement system to incorporate the minimum payment disclosure on the periodic statement at the same time they make other changes required by the final rule.

2. Exemption for credit card accounts purchased within the last 18 months. In response to the June 2007 Proposal, several commenters urged the Board to provide an exemption for accounts purchased by a credit card issuer. With respect to these purchased accounts, one commenter urged the Board to exempt issuers from providing the minimum payment disclosures during a transitional period (up to 18 months) while the purchasing issuer converts the new accounts to its statement system. In this situation, the commenters indicated that the purchase of credit card accounts is often followed by a change-in-terms notice, which may include a change in the minimum payment formula. If this occurs, disclosing one estimated repayment period immediately after the account is purchased and then disclosing a different repayment period for the same balance after the change in terms becomes effective would be confusing to many consumers. The Board does not believe that such an exemption is warranted. A consumer may be alerted that his or her minimum payment has changed, either through reading the change-in-terms notice, or seeing different minimum payment amounts disclosed on his or her periodic statement. Thus, consumers may be aware that their minimum payment has changed, and as a result, may not be confused about receiving a different repayment period for the same or similar balance.

3. Promotional plans. One industry commenter suggested that the Board exempt any account where there is a balance in a promotional credit plan, such as a deferred interest plan, until expiration of the promotional plan. Another industry commenter suggested that the Board not require an issuer to provide the minimum payment disclosures to any consumer that has promotional balances that equal 50 percent or more of his or her total account balance. The final rule does not include these exemptions for promotional plans. Not all consumers will necessarily pay off the promotional balances by the end of the promotional periods. Thus, the Board believes that some consumers that have taken advantage of promotional plans may still find the minimum payment disclosures useful.

4. General purpose lines of credit. One commenter suggested that the final rule include an exemption for general purpose lines of credit. This commenter indicated that general purpose lines can be accessed by check or credit union share draft, by personal request at a branch, or via telephone or Internet. The Board notes that § 226.7(b)(12)(i) makes clear that the minimum payment disclosure requirements only apply to credit card accounts. Thus, to the extent that a general purpose line of credit is not accessed by a credit card, it is not subject to the requirements in § 226.7(b)(12).

7(b)(13) Format Requirements

Under the June 2007 Proposal, creditors would have been required to group together disclosures regarding when a payment is due (due date and cut-off time if before 5 p.m.), how much is owed (minimum payment and ending balance), the potential costs for paying late (late-payment fee, and penalty APR if triggered by a late payment), and the potential costs for making only minimum payments. Proposed Samples G-18(E) and G-18(F) in Appendix G to part 226 would have illustrated the proposed requirements. The proposed format requirements were intended to fulfill Congress's intent to have the new late payment and minimum payment disclosures enhance consumer understanding of the consequences of paying late or making only minimum payments, and were based on consumer testing conducted for the Board that indicated improved understanding when related information is grouped together.

Consumer group commenters, a member of Congress and one trade association supported the format requirements, as being helpful to consumers.

Industry commenters generally opposed the requirements as being overly prescriptive. They urged the Board to permit additional flexibility, or instead to retain the current requirement to provide “clear and conspicuous” disclosures. They asked the Board to require a “closely proximate” standard that would allow additional flexibility in how creditors design their statements, and to eliminate any requirement that creditors' disclosures be substantially similar to model forms or samples. They stated that there is no evidence that under the current “clear and conspicuous” standard consumers are unable to locate or understand the due date, balances, and minimum payment amount.

Some industry commenters opposed the requirement to place the late payment disclosures on the front of the first page. Some commenters asserted that locating that disclosure on the top of the first page places a disproportionate emphasis on the disclosure.

The Board tested the formatting of information regarding payments in two rounds of consumer testing conducted after May 2008. Participants were presented with two different versions of the periodic statement, in which the information was grouped, but the formatting was varied. These changes had no noticeable impact on how easily participants could locate the warning regarding the potential costs for paying late and the potential costs for making only minimum payments.

The Board also tested different formats for the grouped information in the quantitative testing conducted in September and October 2008. Participants were shown versions of the periodic statement in which the information was grouped, but formatted in three different ways. In order to assess whether formatting had an impact on consumers' ability to locate these disclosures, the Board's testing consultant focused on whether the format in which payment information was provided impacted consumer awareness of the late payment warning. Participants were asked whether there was any information on the statement about what would happen if they made a late payment. Participants who noticed the late payment warning were then asked a series of questions about what would happen if they made a late payment. Consistent with the prior rounds of consumer testing, the results of the quantitative testing demonstrated that the formatting of the grouped payment information does not have a statistically significant impact on consumers' ability to locate or understand the late payment warning.

Because the Board's consumer testing demonstrated that formatting of the information about payments does not have an impact on consumer awareness Start Printed Page 5338of these disclosures if the information is grouped together, § 226.7(b)(13) as adopted does not require that disclosures regarding when a payment is due, how much is owed, the potential costs for paying late, and the potential costs for making only minimum payments be “substantially similar” to Sample G-18(D) or G-18(E) (proposed as Samples G-18(E) and G-18(F)). The final rule does require, however, that these terms be grouped together, in close proximity, consistent with the proposal. For the reasons discussed in the supplementary information to § 226.7(b)(11), the final rule does not require a disclosure of the cut-off time on the front of the periodic statement, and the reference to a cut-off time disclosure that was included in proposed § 226.7(b)(13) has been deleted.

In response to a request for guidance, comment app. G-10 is added to clarify that although the payment disclosures appear in the upper right-hand corner of Forms G-18(F) and G-18(G) (proposed as Forms G-18(G) and G-18(H)), the disclosures may be located elsewhere, as long as they appear on the front side of the first page.

Combined deposit account and credit account statements. Some financial institutions provide information about deposit account and open-end credit account activity on one periodic statement. Industry commenters asked for guidance on how to comply with format requirements requiring disclosures to appear on the “front of the first page” for these combined statements. Comment 7(b)(13)-1 is added to clarify that for purposes of providing disclosures on the front of the first page of the periodic statement pursuant to § 226.7(b)(13), the first page of such a combined statement shall be deemed to be the page on which credit transactions first appear. For example, assume a combined statement where credit transactions begin on the third page and deposit account information appears on pages one and two. For purposes of providing disclosures on the front of the first page of the periodic statement under Regulation Z, this comment clarifies that page three is deemed to be the first page of the periodic statement.

Technical revisions. A number of technical revisions are made for clarity, as proposed. For the reasons set forth in the section-by-section analysis to § 226.6(b)(2)(v), the Board is updating references to “free-ride period” as “grace period” in the regulation and commentary, without any intended substantive change. Current comment 7-2, which addresses open-end plans involving more than one creditor, is deleted as obsolete and unnecessary.

Section 226.8 Identifying Transactions on Periodic Statements

TILA Section 127(b)(2) requires creditors to identify on periodic statements credit extensions that occurred during a billing cycle. 15 U.S.C. 1637(b)(2). The statute calls for the Board to implement requirements that are sufficient to identify the transaction or to relate the credit extension to sales vouchers or similar instruments previously furnished. The rules for identifying transactions are implemented in § 226.8, and vary depending on whether: (1) The sales receipt or similar credit document is included with the periodic statement, (2) the transaction is sale credit (purchases) or nonsale credit (cash advances, for example), and (3) the creditor and seller are the “same or related.” TILA's billing error protections include consumers' requests for additional clarification about transactions listed on a periodic statement. 15 U.S.C. 1666(b)(2); § 226.13(a)(6).

“Descriptive billing” statements. In June 2007, the Board proposed revisions to the rules for identifying sales transactions when the sales receipt or similar document is not provided with the periodic statement (so called “descriptive billing”), which is typical today. The proposed revisions reflect current business practices and consumer experience, and were intended to ease compliance. Currently, creditors that use descriptive billing are required to include on periodic statements an amount and date as a means to identify transactions. As an additional means to identify transactions, current rules contain description requirements that differ depending on whether the seller and creditor are “same or related.” For example, a retail department store with its own credit plan (seller and creditor are same or related) sufficiently identifies purchases on periodic statements by providing the department such as “jewelry” or “sporting goods”; item-by-item descriptions are not required. Periodic statements provided by issuers of general purpose credit cards, where the seller and creditor are not the same or related, identify transactions by the seller's name and location.

The June 2007 Proposal would have permitted all creditors to identify sales transactions (in addition to the amount and date) by the seller's name and location. Thus, creditors and sellers that are the same or related could, at their option, identify transactions by a brief identification of goods or services, which they are currently required to do in all cases, or they could provide the seller's name and location for each transaction. Guidance on the level of detail required to describe amounts, dates, the identification of goods, or the seller's name and location would have remained unchanged under the proposal.

Commenters addressing this aspect of the June 2007 Proposal generally supported the proposed revisions. For the reasons stated below, the final rule provides additional flexibility to creditors that use descriptive billing to identify transactions on periodic statements.

The Board's revisions are guided by several factors. The standard set forth by TILA for identifying transactions on periodic statements is quite broad. 15 U.S.C. 1637(b)(2). Whether a general description such as “sporting goods” or the store name and location would be more helpful to a consumer can depend on the situation. Many retailers permit consumers to purchase in a single transaction items from a number of departments; in that case, the seller's name and location may be as helpful as the description of a single department from which several dissimilar items were purchased. Also, the seller's name and location has become the more common means of identifying transactions, as the use of general purpose cards increases and the number of store-only cards decreases. Thus, retailers that commonly accept general purpose credit cards but also offer a credit card account or other open-end plan for use only at their store would not be required to maintain separate systems that enable different descriptions to be provided, depending on the type of card used. Moreover, consumers are likely to carefully review transactions on periodic statements and inquire about transactions they do not recognize, such as when a retailer is identified by its parent company on sales slips which the consumer may not have noticed at the time of the transaction. Moreover, consumers are protected under TILA with the ability to assert a billing error to seek clarification about transactions listed on periodic statements, and are not required to pay the disputed amount while the card issuer obtains the necessary clarification. Maintaining rules that require more standardization and detail would be costly, and likely without significant corresponding consumer benefit. Thus, the revisions are intended to provide flexibility for card issuers without reducing consumer protection.Start Printed Page 5339

The Board notes, however, that some retailers offering their own open-end credit plans tie their inventory control systems to their systems for generating sales receipts and periodic statements. In these cases, purchases listed on periodic statements may be described item by item, for example, to indicate brand names such as “XYZ Sweater.” This item-by-item description, while not required under current or revised rules, remains permissible.

To implement the approach described above, § 226.8 is revised, as proposed, as follows. Section 226.8(a)(1) sets forth the rule providing flexibility in identifying sales transactions, as discussed above as well as the content of footnote 19. Section 226.8(a)(2) contains the existing rules for identifying transactions when sales receipts or similar documents accompany the periodic statement. Section 226.8(b) is revised for clarity. A new § 226.8(c) is added to set forth rules now contained in footnote 16; and, without references to “same or related” parties, footnotes 17 and 20. The substance of footnote 18, based on a statutory exception where the creditor and seller are the same person, is deleted as unnecessary. The title of the section is revised for clarity.

The commentary to § 226.8 is reorganized and consolidated but is not substantively changed, as proposed. Comments 8-1, 8(a)(1)-1, and 8(a)(2)-4 are deleted as duplicative. Similarly, comments 8-6 through 8-8, which provide creditors with flexibility in describing certain specific classes of transactions regardless of whether they are “related” or “nonrelated” sellers or creditors, are deleted as unnecessary. Revised § 226.8(a)(1)(ii) and comments 8(a)-3 and 8(a)-7, which provide guidance for identifying mail or telephone transactions, are updated to refer to Internet transactions.

Examples of sale credit. Proposed comment 8(a)-1 republished an existing example of sales credit—a funds transfer service (such as a telegram) from an intermediary— and proposed a new example—expedited payment service from a creditor. One commenter addressed the proposed comment, suggesting that the entire comment be deleted. The commenter asserted creditors should have the flexibility to post a funds transfer service as a cash advance but that the comment forces creditors to post the transaction as a purchase, and, similarly, creditors should have discretion in how to post fees for creditors' services.

The requirements of § 226.8 are limited to how creditors must identify transactions on periodic statements and do not impact how creditors may otherwise characterize transactions, such as for purposes of pricing. The Board believes a consumer's purchase of a funds transfer service from a third party is properly characterized as sales credit for purposes of identifying transactions on a card issuer's periodic statement. Consumers are likely to recognize the name of the funds transfer merchant, as would be the typical case where the card issuer and funds transfer merchant are not the same or related. Thus, the example is retained although a more current illustration (wire transfer) replaces the existing illustration (telegram).

Additional guidance is added to comment 8(a)-1 regarding permissible identification of creditors' services that are purchased by the consumer and are “costs imposed as part of the plan,” in response to the commenter's concerns. The comment provides that for the purchase of such services (for example, a fee to expedite a payment), card issuers and creditors comply with the requirements for identifying transactions under § 226.8 by disclosing the fees in accordance with the requirements of § 226.7(b)(6)(iii). The example of voluntary credit insurance premiums as “sale credit” is deleted, because such premiums are costs imposed as part of the plan under § 226.6(b)(3)(ii)(F). To ease compliance, the comment further provides that for purchases of services that are not costs imposed as part of the plan, card issuers and creditors may, at their option, identify transactions under this section or in accordance with the requirements of § 226.7(b)(6)(iii). This flexibility is intended to avoid technical compliance violations.

Aggregating small dollar purchases. One commenter urged the Board to permit card issuers to aggregate, for billing purposes, small dollar purchases at the same merchant. Aggregating such purchases, in the view of the commenter, could enhance consumers' ability to track small dollar spending at particular merchants in a more meaningful way.

The Board believes further study is desirable to consider the potential ramifications of permitting card issuers to aggregate small dollar transactions on periodic statements. Furthermore, consistent rules should be considered under Regulation E (Electronic Fund Transfer). 12 CFR part 205. Thus, the final revisions do not include rules permitting aggregation of small dollar purchases.

Receipts accompany statements. Rules for identifying transactions where receipts accompany the periodic statement were not affected by the June 2007 Proposal, and are retained. Comments 8-4 and 8(a)(2)-3, which provide guidance when copies of credit or sales slips accompany the statement, are deleted, as proposed. The Board believes this practice is no longer common, and to the extent sales or similar credit documents accompany billing statements, additional guidance seems unnecessary.

Section 226.9 Subsequent Disclosure Requirements

Section 226.9 currently sets forth a number of disclosure requirements that apply after an account is opened, including a requirement to provide billing rights statements annually, a requirement to provide at least 15 days' advance notice whenever a term required to be disclosed in the account-opening disclosures is changed, and a requirement to provide finance charge disclosures whenever credit devices or features are added on terms different from those previously disclosed.

9(a) Furnishing Statement of Billing Rights

Section 226.9(a) requires creditors to mail or deliver a billing error rights statement annually, either to all consumers or to each consumer entitled to receive a periodic statement. See 15 U.S.C. 1637(a)(7). Alternatively, creditors may provide a shorter billing rights statement on each periodic statement. Regulation Z contains model forms creditors may use to satisfy the notice requirements under § 226.9(a). See Model Forms G-3 and G-4.

The June 2007 Proposal would have revised both the regulation and commentary under § 226.9(a) to conform to other changes elsewhere in the proposal, but otherwise would have left the provision unchanged substantively. In addition, the Board proposed new Model Forms G-3(A) (long form billing rights notice) and G-4(A) (short form alternative billing rights notice) in the June 2007 Proposal to improve the readability of the current notices. For HELOCs subject to the requirements of § 226.5b, the June 2007 Proposal would have given creditors the option of using the current Model Forms G-3 and G-4, or the revised forms.

One industry commenter opposed the proposed changes in Model Forms G-3(A) and G-4(A), largely due to the increased compliance burden from having separate forms for HELOCs and for other open-end plans. This commenter further noted that the Board did not conduct consumer research on the readability of the proposed notices. Another industry commenter opposed Start Printed Page 5340the revised language in Model Forms G-3(A) and G-4(A) regarding the merchant claims and defenses under § 226.12(c), stating that mere dissatisfaction with the goo