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6500 - Consumer Protection
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PART 227—UNFAIR OR DECEPTIVE ACTS OR PRACTICES
(REGULATION AA)
Subpart A—General Provision
Sec.
227.1
Definitions.
227.2
Consumer complaint procedure.
Subpart B—Credit Practices Rule
227.11
Authority, purpose, and scope.
227.12
Definitions.
227.13
Unfair credit contract provisions.
227.14
Unfair or deceptive practices involving cosigners.
227.15
Unfair late charges.
227.16
State exemptions.
Subpart C—Consumer Credit Card Account Practices Rule
227.21
Definitions.
227.22
Unfair acts or practices regarding time to make payment.
227.23
Unfair acts or practices regarding allocation of payments.
227.24
Unfair acts or practices regarding increases in annual percentage
rates.
227.25
Unfair balance computation method.
227.26
Unfair charging of security deposits and fees for the issuance or
availability of credit to consumer credit card accounts.
AUTHORITY: 15 U.S.C. 57a.
SOURCE: The provisions of this Part 227 appear at 41 Fed. Reg.
44362, October 8, 1976, and 58 Fed. Reg. 50512, September 28, 1993,
except as otherwise noted.
Subpart A—General Provision
§ 227.1 Authority, purpose, and scope.
(a) Authority. This part is issued by the Board under
section 18(f) of the Federal Trade Commission Act, 15 U.S.C. 57a(f)
(section 202(a) of the Magnuson-Moss Warranty--Federal Trade Commission
Improvement Act, Pub. L. 93--637).
(b) Purpose. The purpose of this part is to prohibit
unfair or deceptive acts or practices in violation of section 5(a)(1)
of the Federal Trade Commission Act, 15 U.S.C. 45(a) (1). Subparts B
and C define and contain requirements prescribed for the purpose of
preventing specific unfair or deceptive acts or practices of banks. The
prohibitions in subparts B and C do not limit the Board's or any other
agency's authority to enforce the FTC Act with respect to any other
unfair or deceptive acts or practices.
(c) Scope. Subparts B and C apply to banks, including
subsidiaries of banks and other entities listed in paragraph (c)(2) of
this section. Subparts B and C do not apply to savings associations as
defined in 12 U.S.C. 1813(b). Compliance is to be enforced by:
(1) The Comptroller of the Currency, in the case of national
banks and federal branches and federal agencies of foreign banks;
(2) The Board of Governors of the Federal Reserve Systems, in the
case of banks that are members of the Federal Reserve System (other
than banks referred to in paragraph (c)(1) of this section), branches
and agencies of foreign banks (other than federal branches, federal
agencies, and insured state branches of foreign banks), commercial
lending companies owned or controlled by foreign banks, and
organizations operating under section 25 or 25A of the Federal Reserve
Act; and
(3) The Federal Deposit Insurance Corporation, in the case of
banks insured by the Federal Deposit Insurance Corporation (other than
banks referred to in paragraphs (c)(1) and (c)(2) of this section), and
insured state branches of foreign banks.
(d) Definitions. Unless otherwise noted, the terms used
in paragraph (c) of this section that are not defined in the Federal
Trade Commission Act or in section 3(s) of the Federal
{{2-27-09 p.7410}}Deposit Insurance Act (12
U.S.C. 1813(s)) shall have the meaning given to them in section 1(b) of
the International Banking Act of 1978 (12 U.S.C. 3101).
[Codified to 12 C.F.R.
§ 227.1]
§ 227.2 Consumer-complaint procedure.
(a) Definitions. For purposes of this section, unless
the context indicates otherwise, the following definitions apply:
(1) "Board" means the Board of Governors of the Federal
Reserve System.
(2) "Consumer complaint" means an allegation by or on
behalf of an individual, group of individuals, or other entity that a
particular act or practice of a State member bank is unfair or
deceptive, or in violation of a regulation issued by the Board pursuant
to a Federal statute, or in violation of any other act or regulation
under which the bank must operate. Unless the context indicates
otherwise, "complaint" shall be construed to mean a "consumer
complaint" for purposes of this section.
(3) "State member bank" means a bank that is chartered by a
State and is a member of the Federal Reserve System.
(b) Submission of complaints. (1) Any consumer having a
complaint regarding a State member bank is invited to submit it to the
Federal Reserve System. The complaint should be submitted in writing,
if possible, and should include the following information:
(i) A description of the act or practice that is thought to be
unfair or deceptive, or in violation of existing law or regulation,
including all relevant facts;
(ii) The name and address of the State member bank that is the
subject of the complaint; and
(iii) The name and address of the complainant.
(2) Consumer complaints should be made to--Federal Reserve
Consumer Help Center, P.O. Box 1200, Minneapolis, MN 55480, Toll-free
number: (888) 851--1920, Fax number: (877) 888--2520, TDD number: (877)
766--8533, E-mail address: ConsumerHelp
FederalReserve.gov, Web site address:
www.federalreserveconsumerhelp.gov.
(c) Response to complaints. Within 15 business days of
receipt of a written complaint by the Board or a Federal Reserve Bank,
a substantive response or an acknowledgment setting a reasonable time
for a substantive response will be sent to the individual making the
complaint.
(d) Referrals to other agencies. Complaints received by
the Board or a Federal Reserve Bank regarding an act or practice of an
institution other than a State member bank will be forwarded to the
Federal agency having jurisdiction over that institution.
[Codified to 12 C.F.R. § 227.2]
Subpart B—Credit Practices Rule
§ 227.11 [Added and Reserved]
[Section 227.11 added at 50 Fed. Reg. 16697, April 29, 1985,
effective January 1, 1986; amended at 57 Fed. Reg. 20401, May 13,
1992]
§ 227.12 Definitions.
For the purposes of this subpart, the following definitions apply:
(a) "Consumer" means a natural person who seeks or acquires
goods, services, or money for personal, family, or household use other
than for the purchase of real property.
(b)(1) "Cosigner" means a natural person who assumes
liability for the obligation of a consumer without receiving goods,
services, or money in return for the obligation, or, in the case of an
open-end credit obligation, without receiving the contractual right to
obtain extensions of credit under the account.
(2) "Cosigner" includes any person whose signature is
requested as a condition to granting credit to a consumer, or as a
condition for forbearance on collection of a consumer's obligation that
is in default. The term does not include a spouse whose signature is
required on a credit obligation to perfect a security interest pursuant
to state law.
(3) A person who meets the defintion in this paragraph is a
"cosigner," whether or not the person is designated as such on
the credit obligation.
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(c) "Earnings" means compensation paid or payable to an
individual or for the individual's account for personal services
rendered or to be rendered by the individual, whether denominated as
wages, salary, commission, bonus, or otherwise, including periodic
payments pursuant to a pension, retirement, or disability program.
(d) "Household goods" means clothing, furniture, appliances,
linens, china, crockery, kitchenware, and personal affects of the
consumer and the consumer's dependents. The term "household
goods" does not include:
(1) Works of art;
(2) Electronic entertainment equipment (other than one television
and one radio);
(3) Items acquired as antiques; that is, items over one hundred
years of age, including such items that have been repaired or renovated
without changing their original form or character; and
(4) Jewelry (other than wedding rings).
(e) "Obligation" means an agreement between a consumer and a
creditor.
(f) "Person" means an individual, corporation, or other
business organization.
[Codified to 12 C.F.R. § 227.12]
[Section 227.12 added at 50 Fed. Reg. 16697, April 29,
1985, effective January 1, 1986]
§ 227.13 Unfair credit contract provisions.
It is an unfair act or practice for a bank to enter into a consumer
credit obligation that contains, or to enforce in a consumer credit
obligation purchased by the bank, any of the following provisions:
(a) Confession of judgment. A cognovit or confession of
judgment (for purposes other than executory process in the State of
Louisiana), warrant of attorney, or other waiver of the right of notice
and the opportunity to be heard in the event of suit or process
thereon.
(b) Waiver of exemption. An executory waiver or a
limitation of exemption from attachment, execution, or other process on
real or personal property held, owned by, or due to the consumer,
unless the waiver applies solely to property subject to a security
interest executed in connection with the obligation.
(c) Assignment of wages. An assignment of wages or
other earnings unless:
(1) The assignment by its terms is revocable at the will of the
debtor;
(2) The assignment is a payroll deduction plan or preauthorized
payment plan, commencing at the time of the transaction, in which the
consumer authorizes a series of wage deductions as a method of making
each payment; or
(3) The assignment applies only to wages or other earnings
already earned at the time of the assignment.
(d) Security interest in household goods. A
nonpossessory security interest in household goods other than a
purchase money security interest.
[Codified to 12 C.F.R. § 227.13]
[Section 227.13 added at 50 Fed. Reg. 16697, April 29,
1985, effective January 1, 1986]
§ 227.14 Unfair or deceptive practices involving cosigners.
(a) Prohibited practices. In connection with the
extension of credit to consumers, it is:
(1) A deceptive act or practice for a bank to misrepresent the
nature or extent of cosigner liability to any person; and
(2) An unfair act or practice for a bank to obligate a cosigner
unless the cosigner is informed prior to becoming obligated of the
nature of the cosigner's liability.
(b) Disclosure requirement. (1) A clear and conspicuous
disclosure statement shall be given in writing to the cosigner prior to
becoming obligated. The disclosure statement shall be substantially
similar to the following statement and shall either be a separate
document or included in the documents evidencing the consumer credit
obligation.
Notice to Cosigner
You are being asked to guarantee this debt. Think carefully
before you do. If the borrower doesn't pay the debt, you will have to.
Be sure you can afford to pay if you have to, and that you want to
accept this responsibility.
You may have to pay up to the full amount of the debt if the
borrower does not pay. You may also have to pay late fees or collection
costs, which increase this amount.
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The bank can collect this debt from you without first trying to
collect from the borrower. The bank can use the same collection methods
against you that can be used against the borrower, such as suing you,
garnishing your wages, etc. If this debt is ever in default, that fact
may become a part of your credit record.
This notice is not the contract that makes you liable for the debt.
(2) In the case of open-end credit, the disclosure statement
shall be given to the cosigner prior to the time that the cosigner
becomes obligated for fees or transactions on the account.
(3) A bank that is in compliance with this paragraph may not be
held in violation of paragraph (a)(2) of this section.
[Codified to 12 C.F.R. § 227.14]
[Section 227.14 added at 50 Fed. Reg. 16697, April 29, 1985,
effective January 1, 1986]
§ 227.15 Unfair late charges.
(a) In connection with collecting a debt arising out of an
extension of credit to a consumer, it is an unfair act or practice for
a bank to levy or collect any delinquency charge on a payment, when the
only delinquency is attributable to late fees or delinquency charges
assessed on earlier installments, and the payment is otherwise a full
payment for the applicable period and is paid on its due date or within
an applicable grace period.
(b) For the purposes of this section, "collecting a debt"
means any activity, other than the use of judicial process, that is
intended to bring about or does bring about repayment of all or part of
money due (or alleged to be due) from a consumer.
[Codified to 12 C.F.R. § 227.15]
[Section 227.15 added at 50 Fed. Reg. 16698, April 29, 1985,
effective January 1, 1986]
§ 227.16 State exemptions.
(a) General rule. (1) An appropriate state agency may
apply to the Board for a determination that:
(i) There is a state requirement or prohibition in effect that
applies to any transaction to which a provision of this subpart
applies; and Protection
(ii) The state requirement or prohibition affords a level of
protection to consumers that is substantially equivalent to, or greater
than, the protection afforded by this subpart.
(2) If the Board makes such a determination, the provision of
this subpart will not be in effect in that state to the extent
specified by the Board in its determination, for as long as the state
administers and enforces the state requirement or prohibition
effectively.
(b) Applications. The procedures under which a state
agency may apply for an exemption under this section are the same as
those set forth in Appendix B to Regulation Z
(12 CFR Part 226).
[Codified to 12 C.F.R. § 227.16]
[Section 227.16 added at 50 Fed. Reg. 16698, April 29, 1985,
effective January 1, 1986]
Subpart C—Consumer Credit Card Account Practices Rule
§ 227.21 Definitions.
For purposes of this subpart, the following definitions apply:
(a) "Annual percentage rate"means the product of multiplying
each periodic rate for a balance or transaction on a consumer credit
card account by the number of periods in a year. The term "periodic
rate" has the same meaning as in 12 CFR 226.2.
(b) "Consumer" means a natural person to whom credit is
extended under a consumer credit card account or a natural person who
is a co-obligor or guarantor of a consumer credit card account.
(c) "Consumer credit care account" means an account provided
to a consumer primarily for personal, family, or household purposes
under an open-end credit plan that is accessed by a credit card or
charge card. The terms "open-end credit," "credit card,"
and "charge card" have the same meanings as in 12 CFR 226.2. The
following are not consumer credit card accounts for purposes of this
subpart:
(1) Home equity plans subject to the requirements of 12 CFR
226.5b that are accessible by a credit or charge card;
{{2-27-09 p.7412.01}}
(2) Overdraft lines of credit tied to asset accounts accessed by
check-guarantee cards or by debit cards;
(3) Lines of credit accessed by check-guarantee cards or by debit
cards that can be used only at automated teller machines; and
(4) Lines of credit accessed solely by account numbers.
[Codified to 12 C.F.R. § 227.21]
§ 227.22 Unfair acts or practices regarding time to make
payment.
(a) General rule. Except as provided in paragraph (c) of
this section, a bank must not treat a payment on a consumer credit card
account as late for any purpose unless the consumer has been provided a
reasonable amount of time to make the payment.
(b) Compliance with general rule--(1) Establishing
compliance. A bank must be able to establish that it has complied
with paragraph (a) of this section.
(2) Safe harbor. A bank complies with paragraph (a) of
this section if it has adopted reasonable procedures designed to ensure
that periodic statement specifying the payment due date are mailed or
delivered to consumers at least 21 days before the payment due date.
(c) Exceptions for grace periods. Paragraph (a) of this
section does not apply to any time period provided by the bank within
which the consumer may repay any portion of the credit extended without
incurring an additional finance charge.
[Codified to 12 C.F.R. § 227.22]
§ 227.23 Unfair acts or practices regarding allocation of
payments.
When different annual percentage rates apply to different balances
on a consumer credit card account, the bank must allocate any amount
paid by the consumer in excess of the required minimum periodic payment
among the balances using one of the following methods:
(a) High-to-low method. The amount paid by the consumer
in excess of the required minimum periodic payment is allocated first
to the balance with the highest annual percentage rate and any
remaining portion to the other balances in descending order based on
the applicable annual percentage rate.
(b) Pro rata method. The amount paid by the consumer in
excess of the required minimum periodic payment is allocated among the
balances in the same proportion as each balance bears to the total
balance.
[Codified to 12 C.F.R. § 227.23]
§ 227.24 Unfair acts or practices regarding increases in annual
percentage rates.
(a) General rule. At account opening, a bank must
disclose the annual percentage rates that will apply to each category
of transactions on the consumer credit card account. A bank must not
increase the annual percentage rate for a category of transactions on
any consumer credit card account except as provided in paragraph (b) of
this section.
(b) Exceptions. The prohibition in paragraph (a) of this
section on increasing annual percentage rates does not apply where an
annual percentage rate may be increased pursuant to one of the
exceptions in this paragraph.
(1) Account opening disclosure exception. An annual
percentage rate for a category of transactions may be increased to a
rate disclosed at account opening upon expiration of a period of time
disclosed at account opening.
(2) Variable rate exception. An annual percentage rate
for a category of transactions that varies according to an index that
is not under the bank's control and is available to the general public
may be increased due to an increase in the index.
(3) Advance notice exception. An annual percentage
rate for a category of transactions may be increased pursuant to a
notice under 12 CFR 226.9(c) or (g) for transactions that occur more
than seven days after provision of the notice. This exception does not
permit an increase in any annual percentage rate during the first year
after the account is opened.
(4) Delinquency exception. An annual percentage rate
may be increased due to the bank not receiving the consumer's required
minimum periodic payment within 30 days after the due date for that
payment.
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(5) Workout arrangement exception. An annual
percentage rate may be increased due to the consumer's failure to
comply with the terms of a workout arrangement between the bank and the
consumer, provided that the annual percentage rate applicable to a
category of transactions following any such increase does not exceed
the rate that applied to that category of transactions prior to
commencement of the workout arrangement.
(c) Treatment of protected balances. For purposes of
this paragraph, "protected balance" means the amount owed for a
category of transactions to which an increased annual percentage rate
cannot be applied after the rate for that category of transactions has
been increased pursuant to paragraph (b)(3) of this section.
(1) Repayment. The bank must provide the consumer with
one of the following methods of repaying a protected balance or a
method that is no less beneficial to the consumer than one of the
following methods:
(i) An amortization period of no less than five years, starting
from the date on which the increased rate becomes effective for the
category of transactions; or
(ii) A required minimum periodic payment that includes a
percentage of the protected balance that is no more than twice the
percentage required before the date on which the increased rate became
effective for the category of transactions.
(2) Fees and charges. The bank must not assess any fee
or charge based solely on a protected balance.
[Codified to 12 C.F.R. § 227.24]
§ 227.25 Unfair balance computation method.
(a) General rule. Except as provided in paragraph (b) of
this section, a bank must not impose finance charges on balances on a
consumer credit card account based on balances for days in billing
cycles that precede the most recent billing cycle as a result of the
loss of any time period provided by the bank within which the consumer
may repay any portion of the credit extended without incurring a
finance charge.
(b) Exceptions. Paragraph (a) of this section does not
apply to:
(1) Adjustments to finance charges as a result of the resolution
of a dispute under 12 CFR 226.12 or 12 CFR 226.13; or
(2) Adjustments to finance charges as a result of the return of a
payment for insufficient funds.
[Codified to 12 C.F.R. § 227.25]
§ 227.26 Unfair charging of security deposits and fees for the
issuance or availability of credit to consumer credit card accounts.
(a) Limitation for first year. During the first year, a
bank must not charge to a consumer credit card account security
deposits and fees for the issuance or availability of credit that in
total constitute a majority of the initial credit limit for the
account.
(b) Limitations for first billing cycle and subsequent
billing cycles. (1) First billing cycle. During the first billing
cycle, the bank must not charge to a consumer credit card account
security deposits and fees for the issuance or availability of credit
card that in total constitutes more than 25 percent of the initial
credit limit for the account.
(2) Subsequent billing cycles. Any additional security
deposits and fees for the issuance or availability of credit permitted
by paragraph (a) of this section must be charged to the account in
equal portions in no fewer than the five billing cycles immediately
following the first billing cycle.
(c) Evasion prohibited. A bank must not evade the
requirements of this section by providing the consumer with additional
credit to fund the payment of security deposits and fees for the
issuance or availability of credit that exceed the total amounts
permitted by paragraphs (a) and (b) of this section.
(d) Definitions. For purposes of this section, the
following definitions apply:
(1) "Fees for the issuance or availability of credit"
means:
(i) Any annual or other periodic fee that may be imposed for the
issuance or availability of a consumer credit card account, including
any fee based on account activity or inactivity; and
(ii) Any non-periodic fee that relates to opening an
account.
{{2-27-09 p.7412.02-A}}
(2) "First billing cycle" means the first billing cycle
after a consumer credit card account is opened.
(3) "First year" means the period beginning with the date
on which a consumer credit card account is opened and ending twelve
months from that date.
(4) "Initial credit limit" means the credit limit in effect
when a consumer credit card account is opened.
Supplement I to Part 227—Official Staff Commentary
Subpart A—General Provisions for Consumer Protection Rules
Section 227.1—Authority, Purpose, and Scope
(c) Scope
1. Penalties for noncompliance. Administrative
enforcement of the rule for banks may involve actions under section 8
of the Federal Deposit Insurance Act (12 U.S.C. 1818), including
cease-and-desist orders requiring that actions be taken to remedy
violations and civil money penalties.
2. Industrial loan companies. Industrial loan companies
that are insured by the Federal Deposit Insurance Corporation are
covered by the Board's rule.
Subpart C—Consumer Credit Card Account Practices Rule
Section 227.22—Unfair Acts or Practices Regarding Time To
Make Payment
22(a) General Rule
1. Treating a payment as late for any purpose. Treating
a payment as late for any purpose includes increasing the annual
percentage rate as a penalty, reporting the consumer as delinquent to a
credit reporting agency, or assessing a late fee or any other fee based
on the consumer's failure to make a payment within the amount of time
provided to make that payment under this section.
2. Reasonable amount of time to make payment. Whether an
amount of time is reasonable for purposes of making a payment is
determined from the perspective of the consumer, not the bank. Under
§ 227.22(b)(2), a bank provides a reasonable amount of time to make a
payment if it has adopted reasonable procedures designed to ensure that
periodic statements specifying the payment due date are mailed or
delivered to consumers at least 21 days before the payment due date.
22(b) Compliance with General Rule
1. Reasonable procedures. A bank is not required to
determine the specific date on which periodic statements are mailed or
delivered to each individual consumer. A bank provides a reasonable
amount of time to make a payment if it has adopted reasonable
procedures designed to ensure that periodic statements are mailed or
delivered to consumers no later than a certain number of days after the
closing date of the billing cycle and adds that number of days to the
21-day period in § 227.24(b)(2) when determining the payment due
date. For example, if a bank has adopted reasonable procedures designed
to ensure that periodic statements are mailed or delivered to consumers
no later than three days after the closing date of the billing cycle,
the payment due date on the periodic statement must be no less than 24
days after the closing date of the billing cycle.
2. Payment due date. For purposes of § 227.22(b)(2),
"payment due date" means the date by which the bank requires the
consumer to make the required minimum periodic payment in order to
avoid being treated as late for any purpose, except as provided in
§ 227.22(c).
3. Example of alternative method of compliance. Assume
that, for a particular type of consumer credit card account, a bank
only provides periodic statements electronically and only accepts
payments electronically (consistent with applicable law and regulatory
guidance). Under these circumstances, the bank could comply with
§ 227.22(a) even if it does not provide periodic statements 21 days
before the payment due date consistent with § 227.22(b)(2).
Section 227.23--Unfair Acts or Practices Regarding
Allocation of Payments
1. Minimum periodic payment. Section 227.23 addresses
the allocation of amounts paid by the consumer in excess of the minimum
periodic payment required by the bank. Section 227.23 does not limit or
otherwise address the bank's ability to determine, consistent
with
{{2-27-09 p.7412.02-B}}applicable law and regulatory
guidance, the amount of the required minimum periodic payment or how
that payment is allocated. A bank may, but is not required to, allocate
the required minimum periodic payment consistent with the requirements
in § 227.23 to the extent consistent with other applicable law or
regulatory guidance.
2. Adjustments of one dollar or less permitted. When
allocating payments, the bank may adjust amounts by one dollar or less.
For example, if a bank is allocating $100 pursuant to § 227.23(b)
among balances of $1,000, $2,000, and $4,000, the bank may apply $14 to
the $1,000 balance, $29 to the $2,000 balance, and $57 to the $4,000
balance.
3. Applicable balances and annual percentage rates.
Section 227.23 permits a bank to allocate an amount paid by the
consumer in excess of the required minimum periodic payment based on
the balances and annual percentage rates on the date the preceding
billing cycle ends, on the date the payment is credited to the account,
or on any day in between those two dates. For example, assume that the
billing cycles for a consumer credit card account start on the first
day of the month and end on the last day of the month. On the date the
March billing cycle ends (March 31), the account has a purchase balance
of $500 at a variable annual percentage rate of 14% and a cash advance
balance of $200 at a variable annual percentage rate of 18%. On April
1, the rate for purchase increases to 16% and the rate for cash
advance increases to 20% consistent with § 227.24(b)(2). On April
15, the purchase balance increases to $700. On April 25, the bank
credits to the account $400 paid by the consumer in excess of the
required minimum periodic payment. Under § 227.23, the bank may
allocate the $400 based on the balances in existence and rates in
effect on any day from March 31 through April 25.
4. Use of permissible allocation methods. A bank is not
prohibited from changing the allocation method for a consumer credit
card account or from using different allocation methods for different
consumer credit card accounts, so long as the methods used are
consistent with § 227.23. For example, a bank may change from
allocating to the highest rate balance first pursuant to § 227.23(a)
to allocating pro rata pursuant to § 227.23(b) or vice versa.
Similarly, a bank may allocate to the highest rate balance first
pursuant to § 227.23(a) on some of its accounts and allocate pro rata
pursuant to § 227.23(b) on other accounts.
5. Claims or defenses under Regulation Z, 12 CFR
226.12(c). When a consumer has asserted a claim or defense against
the card issuer pursuant to 12 CFR 226.12(c), the bank must allocate
consistent with 12 CFR 226.12 comment 226.12(c)--4.
6. Balances with the same annual percentage rate. When
the same annual percentage rate applies to more than one balance on an
account and a different annual percentage rate applies to at least one
other balance on that account, § 227.23 does not require that any
particular method be used when allocating among the balances with the
same annual percentage rate. Under these circumstances, a bank may
treat the balances with the same rate as a single balance or separate
balances. See comments 23(a)--1.iv and 23(b)--2.iv.
23(a) High-to-Low Method
1. Examples. For purposes of the following examples,
assume that none of the required minimum periodic payment is allocated
to the balances discussed (unless otherwise stated).
i. Assume that a consumer's account has a cash advance balance of
$500 at an annual percentage rate of 20% and a purchase balance of
$1,500 at an annual percentage rate of 15% and that the consumer pays
$800 in excess of the required minimum periodic payment. A bank using
the method would allocate $500 to pay off the case advance balance and
then allocate the remaining $300 to the purchase balance.
ii. Assume that a consumer's account has a cash advance balance of
$500 at an annual percentage rate of 20% and a purchase balance of
$1,500 at an annual percentage rate of 15% and that the consumer pays
$400 in excess of the required minimum periodic payment. A bank using
this method would allocate the entire $400 to the cash advance balance.
iii. Assume that a consumer's account has a cash advance balance
of $100 at an annual percentage rate of 20%, a purchase balance of
$300 at an annual percentage rate of 18%, and a $600 protected balance
on which the 12% annual percentage rate cannot be increased pursuant
to § 227.24. If the consumer pays $500 in excess of the required
minimum periodic payment, a bank using this method would allocate $100
to pay off the cash advance balance, $300 to pay off the purchase
balance and $100 to the protected balance.
{{2-27-09 p.7412.02-C}}
iv. Assume that a consumer's account has a cash advance balance of
$500 at an annual percentage rate of 20%, a purchase balance of $1,000
at an annual percentage rate of 15%, and a transferred balance of
$2,000 that was previously at a discounted annual percentage rate of
5% but is now at an annual percentage rate of 15%. Assume also that
the consumer pays $800 in excess of the required minimum periodic
payment. A bank using this method would allocate $500 to pay off the
cash advance balance and allocate the remaining $300 among the purchase
balance and the transferred balance in the manner the bank deems
appropriate.
23(b) Pro Rata Method
1. Total balance. A bank may, but is not required to,
deduct amounts paid by the consumer's required minimum periodic
payment when calculating the total balance for purposes of
§ 227.23(b)(3). See comment 23(b)--2.iii.
2. Examples. For purposes of the following examples,
assume that none of the required minimum periodic payment is allocated
to the balances discussed (unless otherwise stated) and that the
amounts allocated to each balance are rounded to the nearest dollar.
i. Assume that a consumer's account has a cash advance balance of
$500 at an annual percentage rate of 20% and a purchase balance of
$1,500 at an annual percentage rate of 15% and that the consumer pays
$555 in excess of the required minimum periodic payment. A bank using
this method would allocate 25% of the amount ($139) to the cash
advance balance and 75% of the amount ($416) to the purchase balance.
ii. Assume that a consumer's account has a cash advance balance of
$100 at an annual percentage rate of 20%, a purchase balance of $300
at an annual percentage rate of 18%, and a $600 protected balance on
which the 12% annual percentage rate cannot be increased pursuant to
§ 227.24. If the consumer pays $130 in excess of the required minimum
periodic payment, a bank using this method would allocate 10% of the
amount ($13) to the cash advance balance, 30% of the amount ($39) to
the purchase balance, and 60% of the amount ($78) to the protected
balance.
iii. Assume that a consumer's account has a cash advance balance
of $300 at an annual percentage rate of 20% and a purchase balance of
$600 at an annual percentage rate of 15%. Assume also that the
required minimum periodic payment is $50 and that the bank allocates
this payment first to the balance with the lowest annual percentage
rate (the $600 purchase balance). If the consumer pays $300 in excess
of the $50 minimum payment, a bank using this method could allocate
based on a total balance of $850 (consisting of the $300 cash advance
balance plus the $550 purchase balance after application of the $50
minimum payment). In this case, the bank would apply 35% of the $300
($105) to the cash advance balance and 65% of that amount ($195) to
the purchase balance. In the alternative, the bank could allocate based
on a total balance of $900 (which does not reflect the $50 minimum
payment). In that case, the bank would apply one third of the $300
excess payment ($100) to the cash advance balance and two thirds ($200)
to the purchase balance.
iv. Assume that a consumer's account has a cash advance balance of
$500 at an annual percentage rate of 20%, a purchase balance of $1,000
at an annual percentage rate of 15%, and a transferred balance of
$2,000 that was previously at a discounted annual percentage rate of
5% but is now at an annual percentage rate of 15%. Assume also that
the consumer pays $800 in excess of the required minimum periodic
payment. A bank using this method would allocate 14% of the excess
payment ($112) to the cash advance balance and allocate the remaining
86% ($688) among the purchase balance and the transferred balance in
the manner the bank deems appropriate.
Section 227.24—Unfair Acts or Practices Regarding Increases
in Annual Percentage Rates
1. Relationship to Regulation Z, 12 CFR part 226. A bank
that complies with the applicable disclosure requirements in Regulation
Z, 12 CFR part 226, has complied with the disclosure requirements in
§ 227.24. See 12 CFR 226.5a, 226.6, 226.9. For example, a
bank may comply with the requirements in § 227.24(a) to disclose at
account opening the annual percentage rates that will apply to each
category of transactions by complying with the disclosure requirements
in 12 CFR 226.5a regarding applications and solicitations and the
requirements in 12 CFR 226.6 regarding account-opening disclosure.
Similarly, in order to increase an annual percentage rate on new
transactions pursuant to § 227.24(b)(3), a bank must comply with the
disclosure requirements in 12 CFR 226.9(c) or (g). However, nothing in
§ 227.24 alters the requirements in 12 CFR 226.9(c) and (g) that
creditors provide
{{2-27-09 p.7412.02-D}}consumers with written notice
at least 45 days prior to the effective date of certain increases in
the annual percentage rates on open-end (not home-secured) credit
plans.
24(a) General Rule
1. Rates that will apply to each category of transactions.
Section 227.24(a) requires banks to disclose, at account opening,
the annual percentage rates that will apply to each category of
transactions on the account. A bank cannot satisfy this requirement by
disclosing at account opening only a range of rates or that a rate will
be "up to" a particular amount.
2. Application of prohibition on increasing rates.
Section 227.24(a) prohibits banks from increasing the annual percentage
rate for a category of transactions on any consumer credit card account
unless specifically permitted by one of the exceptions in §227.24(b).
The following examples illustrate the application of the rule:
i. Assume that, at account opening on January 1 of year one, a bank
discloses that the annual percentage rate for purchase is a
non-variable rate of 15% and will apply for six months. The bank also
discloses that, after six months, the annual percentage rate for
purchases will be a variable rate that is currently 18% and will be
adjusted quarterly by adding a margin of 8 percentage points to a
publicly available index not under the bank's control. Finally, the
bank discloses that the annual percentage rate for cash advances is the
same variable rate that will apply to purchases after six months. The
payment due date for the account is the twenty-fifth day of the month
and the required minimum periodic payments are applied to accrued
interest and fees but do not reduce the purchase and cash advance
balances.
A. On January 15, the consumer uses the account to make a $2,000
purchase and a $500 cash advance. No other transactions are made on the
account. At the start of each quarter, the bank adjusts the variable
rate that applies to the $500 cash advance consistent with changes in
the index (pursuant to § 227.24(b)(2)). All required minimum periodic
payments are received on or before the payment due date until May of
year one, when the payment due on May 25 is received by the bank on May
28. The bank is prohibited by § 227.24 from increasing the rates that
apply to the $2,000 purchase, the $500 cash advance, or future
purchases and cash advances. Six months after account opening (July 1),
the bank begins accruing interest on the $2,000 purchase at the
previously disclosed variable rate determined using an 8-point margin
(pursuant to § 227.24(b)(1)). Because no other increases in rate were
disclosed at account opening, the bank may not subsequently increase
the variable rate that applies to the $2,000 purchase and the $500 cash
advance (except due to increases in the index pursuant to
§ 227.24(b)(2)). On November 16, the bank provides a notice pursuant
to 12 CFR 226.9(c) informing the consumer of a new variable rate that
will apply on January 1 of year two (calculated using the same index
and an increased margin of 12 percentage points). On January 1 of year
two, the bank increases the margin used to determine the variable rate
that applies to new purchases to 12 percentage points (pursuant to
§ 227.24(b)(3)). On January 15 of year two, the consumer makes a $300
purchase. The bank applies the variable rate determined using the
12-point margin to the $300 purchase but not the $2,000 purchase.
B. Same facts as above except that the required minimum periodic
payment due on May 25 of year one is not received by the bank until
June 30 of year one. Because the bank received the required minimum
periodic payment more than 30 days after the payment due date,
§ 227.24(b)(4) permits the bank to increase the annual percentage
rate applicable to the $2,000 purchase, the $500 cash advance, and
future purchases and cash advances. However, the bank must first comply
with the notice requirements in 12 CFR 226.9(g). Thus, if the bank
provided a 12 CFR 226.9(g) notice on June 25 stating that all rates on
the account would be increased to a non-variable penalty rate of 30%,
the bank could apply that 30% rate beginning on August 9 to all
balances and future transactions.
ii. Assume that, at account opening on January 1 of year one, a
bank discloses that the annual percentage rate for purchases will
increase as follows: A non-variable rate of 5% for six months; a
non-variable rate of 10% for an additional six months; and thereafter
a variable rate that is currently 15% and will be adjusted monthly by
adding a margin of 5 percentage points to a publicly available index
not under the bank's control. The payment due date for the account is
the fifteenth day of the month and the required minimum periodic
payments are applied to accrued interest and fees but do not reduce the
purchase balance. On January 15, the consumer uses the account to make
a $1,500 purchase. Six
{{2-27-09 p.7412.02-E}}months after account opening
(July 1), the bank begins accruing interest on the $1,500 purchase at
the previously disclosed 10% non-variable rate (pursuant to
§ 227.24(b)(1)). On September 15, the consumer uses the account for a
$700 purchase. On November 16, the bank provides a notice pursuant to
12 CFR 226.9(c) informing the consumer of a new variable rate that will
apply on January 1 of year two (calculated using the same index and an
increased margin of 8 percentage points). One year after account
opening (January 1 of year two), the bank begins accruing interest on
the $2,200 purchase balance at the previously disclosed variable rate
determined using a 5-point margin (pursuant to § 227.24(b)(1)).
Because the variable rate determined using the 8-point margin was not
disclosed at account opening, the bank may not apply that rate to the
$2,200 purchase balance. Furthermore, because no other increases in
rate were disclosed at account opening, the bank may not subsequently
increase the variable rate that applies to the $2,200 purchase balance
(except due to increases in the index pursuant to § 227.24(b)(2)).
The bank may, however, apply the variable rate determined using the
8-point margin to purchases made on or after January 1 of year two
(pursuant to § 227.24(b)(3)).
iii. Assume that, at account opening on January 1 of year one, a
bank discloses that the annual percentage rate for purchases is a
variable rate determined by adding a margin of 6 percentage points to a
publicly available index outside of the bank's control. The bank also
discloses that, to the extent consistent with § 227.24 and other
applicable law, a non-variable penalty rate of 28% may apply if the
consumer makes a late payment. The due date for the account is the
fifteenth of the month. On May 30 of year two, the account has a
purchase balance of $1,000. On May 31, the creditor provides a notice
pursuant to 12 CFR 226.9(c) informing the consumer of a new variable
rate that will apply on July 16 for all purchases made on or after June
8 (calculated by using the same index and an increased margin of 8
percentage points). On June 7, the consumer makes a $500 purchase. On
June 8, the consumer makes a $200 purchase. On June 25, the bank has
not received the payment due on June 15 and provides the consumer with
a notice pursuant to 12 CFR 226.9(g) stating that the penalty rate of
28% will apply as of August 9 to all transactions made on or after
July 3. On July 4, the consumer makes a $300 purchase.
A. The payment due on June 15 of year two is received on June 26.
On July 16, § 227.24(b)(3) permits the bank to apply the variable
rate determined using the 8-point margin to the $200 purchase made on
June 8 but does not permit the bank to apply this rate to the $1,500
purchase balance. On August 9, § 227.24(b)(3) permits the bank to
apply the 28% penalty rate to the $300 purchase made on July 4 but
does not permit the bank to apply this rate to the $1,500 purchase
balance (which remains at the variable rate determined using the
6-point margin) or the $200 purchase (which remains at the variable
rate determined using the 8-point margin).
B. Same facts as above except the payment due on September 15 of
year two is received on October 20. Section 227.24(b)(4) permits the
bank to apply the 28% penalty rate to all balances on the account and
to future transactions because it has not received payment within 30
days after the due date. However, in order to apply the 28% penalty
rate to the entire $2,000 purchase balance, the bank must provide an
additional notice pursuant to 12 CFR 226.9(g). This notice must be sent
no earlier than October 16, which is the first day the account became
more than 30 days' delinquent.
C. Same facts as paragraph A. above except the payment due on June
15 of year two is received on July 20. Section 227.24(b)(4) permits the
bank to apply the 28% penalty rate to all balances on the account and
to future transactions because it has not received payment within 30
days after the due date. Because the bank provided a 12 CFR 226.9(g)
notice on June 24 stating the 28% penalty rate, the bank may apply the
28% penalty rate to all balances on the account as well as any future
transactions on August 9 without providing an additional notice
pursuant to 12 CFR 226.9(g).
24(b) Exceptions
24(b)(1) Account Opening Disclosure Exception
1. Prohibited increases in rate. Section 227.24(b)(1)
permits an increase in the annual percentage rate for a category of
transactions to a rate disclosed at account opening upon expiration of
a period of time that was also disclosed at account opening. Section
227.24(b)(1) does not permit application of increased rates that are
disclosed at account opening but are contingent on a particular event
or occurrence or may be applied at the
{{2-27-09 p.7412.02-F}}bank's discretion. The
following examples illustrate rate increases that are not permitted by
§ 227.24(a):
i. Assume that a bank discloses at account opening on January 1 of
year one that a non-variable rate of 15% applies to purchases but that
all rates on an account may be increased to a non-variable penalty rate
of 30% if a consumer's required minimum periodic payment is received
after the payment due date, which is the fifteenth of the month. On
March 1, the account has a $2,000 purchase balance. The payment due on
March 15 is not received until March 20. Section 227.24 does not permit
the bank to apply the 30% penalty rate to the $2,000 purchase balance.
However, pursuant to § 227.24(b)(3), the bank could provide a 12 CFR
226.9(c) or (g) notice on November 16 informing the consumer that, on
January 1 of year two, the 30% rate (or a different rate) will apply
to new transactions.
ii. Assume that a bank discloses at account opening on January 1 of
year one that a non-variable rate of 5% applies to transferred
balances but that this rate will increase to a non-variable rate of
18% if the consumer does not use the account for at least $200 in
purchases each billing cycle. On July 1, the consumer transferred a
balance of $4,000 to the account. During the October billing cycle, the
consumer uses the account for $150 in purchases. Section 227.24 does
not permit the bank to apply the 18% rate to the $4,000 transferred
balance. However, pursuant to § 227.24(b)(3), the bank could provide
a 12 CFR 226.9(c) or (g) notice on November 16 informing the consumer
that, on January 1 of year two, the 18% rate (or a different rate)
will apply to new transactions.
iii. Assume that a bank discloses at account opening on January 1
of year one that interest on purchases will be deferred for one year,
although interest will accrue on purchases during that year at a
non-variable rate of 20%. The bank further discloses that, if all
purchases made during year one are not paid in full by the end of that
year, the bank will begin charging interest on the purchase balance and
new purchases at 20% and will retroactively charge interest on the
purchase balance at a rate of 20% starting on the date of each
purchase made during year one. On January 1 of year one, the consumer
makes a purchase of $1,500. No other transactions are made on the
account. On January 1 of year two, $500 of the $1,500 purchase remains
unpaid. Section 227.24 does not permit the bank to reach back to charge
interest on the $1,500 purchase from January 1 through December 31 of
year one. However, the bank may apply the previously disclosed 20%
rate to the $500 purchase balance beginning on January 1 of year two
(pursuant to § 227.24(b)(1)).
2. Loss of grace period. Nothing in § 227.24 prohibits
a bank from assessing interest due to the loss of a grace period to the
extent consistent with § 227.25.
3. Application of rate that is lower than disclosed rate.
Section 227.24(b)(1) permits an increase in the annual percentage
rate for a category of transactions to a rate disclosed at account
opening upon expiration of a period of time that was also disclosed at
account opening. Nothing in § 227.24 prohibits a bank from applying a
rate that is lower than the disclosed rate upon expiration of the
period. However, if a lower rate is applied to an existing balance, the
bank cannot subsequently increase the rate on that balance unless it
has provided the consumer with advance notice of the increase pursuant
to 12 CFR 226.9(c). Furthermore, the bank cannot increase the rate on
that existing balance to a rate that is higher than the increased rate
disclosed at account opening. The following example illustrates the
application of this rule:
i. Assume that, at account opening on January 1 of year one, a bank
discloses that a non-variable annual percentage rate of 15% will apply
to purchases for one year and discloses that, after the first year, the
bank will apply a variable rate that is currently 20% and is
determined by adding a margin of 10 percentage points to a publicly
available index not under the bank's control. On December 31 of year
one, the account has a purchase balance of $3,000.
A. On November 16 of year one, the bank provides a notice pursuant
to 12 CFR 226.9(c) informing the consumer of a new variable rate that
will apply on January 1 of year two (calculated using the same index
and a reduced margin of 8 percentage points). The notice further states
that, on July 1 of year two, the margin will increase to the margin
disclosed at account opening (10 percentage points). On July 1 of year
two, the bank increases the margin used to determine the variable rate
that applies to new purchases to 10 percentage points and applies that
rate to any remaining portion of the $3,000 purchase balance (pursuant
to § 227.24(b)(1)).
{{2-27-09 p.7412.02-G}}
B. Same facts as above except that the bank does not send a notice
on November 16 of year one. Instead, on January 1 of year two, the bank
lowers the margin used to determine the variable rate to 8 percentage
points and applies that rate to the $3,000 purchase balance and to new
purchases. 12 CFR 226.9 does not require advance notice in these
circumstances. However, unless the account becomes more than 30 days'
delinquent, the bank may not subsequently increase the rate that
applies to the $3,000 purchase balance except due to increases in the
index (pursuant to § 227.24(b)(2)).
24(b)(2) Variable Rate Exception
1. Increases due to increase in index. Section
227.24(b)(2) provides that an annual percentage rate for a category of
transactions that varies according to an index that is not under the
bank's control and is available to the general public may be increased
due to an increase in the index. This section does not permit a bank to
increase the annual percentage rate by changing the method used to
determine a rate that varies with an index (such as by increasing the
margin), even if that change will not result in an immediate increase.
2. External index. A bank may increase the annual
percentage rate if the increase is based on an index or indices outside
the bank's control. A bank may not increase the rate based on its own
prime rate or cost of funds. A bank is permitted, however, to use a
published prime rate, such as that in the Wall Street
Journal, even if the bank's own prime rate is one of several
rates used to establish the published rate.
3. Publicly available. The index or indices must be
available to the public. A publicly available index need not be
published in a newspaper, but it must be one the consumer can
independently obtain (by telephone, for example) and use to verify the
rate applied to the outstanding balance.
4. Changing a non-variable rate to a variable rate.
Section 227.24 generally prohibits a bank from changing a
non-variable annual percentage rate to a variable rate because such a
change can result in an increase in rate. However, § 227.24(b)(1)
permits a bank to change a non-variable rate to a variable rate if the
change was disclosed at account opening. Furthermore, following the
first year after the account is opened, § 227.24(b)(3) permits a bank
to change a non-variable rate to a variable rate with respect to new
transactions (after complying with the notice requirements in 12 CFR
226.9(c) or (g)). Finally, § 227.24(b)(4) permits a bank to change a
non-variable rate to a variable rate if the required minimum periodic
payment is not received within 30 days of the payment due date (after
complying with the notice requirements in 12 CFR 226.9(g)).
5. Changing a variable annual percentage rate to a
non-variable annual percentage rate. Nothing in § 227.24
prohibits a bank from changing a variable annual percentage rate to an
equal or lower non-variable rate. Whether the non-variable rate is
equal to or lower than the variable rate is determined at the time the
bank provides the notice required by 12 CFR 226.9(c). For example,
assume that on March 1 a variable rate that is currently 15% applies
to a balance of $2,000 and the bank sends a notice pursuant to 12 CFR
226.9(c) informing the consumer that the variable rate will be
converted to a non-variable rate of 14% effective April 17. On April
17, the bank may apply the 14% non-variable rate to the $2,000 balance
and to new transactions even if the variable rate on March 2 or a later
date was less than 14%.
6. Substitution of index. A bank may change the index
and margin used to determine the annual percentage rate under
§ 227.24(b)(2) if the original index becomes unavailable, as long as
historical fluctuations in the original and replacement indices were
substantially similar, and as long as the replacement index and margin
will produce a rate similar to the rate that was in effect at the time
the original index became unavailable. If the replacement index is
newly established and therefore does not have any rate history, it may
be used if it produces a rate substantially similar to the rate in
effect when the original index became unavailable.
24(b)(3) Advance Notice Exception
1. First year after the account is opened. A bank may
not increase an annual percentage rate pursuant to § 227.24(b)(3)
during the first year after the account is opened. This limitation does
not apply to accounts opened prior to July 1, 2010.
2. Transactions that occur more than seven days after notice
provided. Section 227.24(b)(3) generally prohibits a bank from
applying an increased rate to transactions that occur within seven days
after provision of the 12 CFR 226.9(c) or (g) notice. This prohibition
does not, however, apply to transactions that are authorized within
seven days
{{2-27-09 p.7412.02-H}}after provision of the 12 CFR
226.9(c) or (g) notice but are settled more than seven days after the
notice was provided.
3. Examples.
i. Assume that a consumer credit card account is opened on January
1 of year one. On March 14 of year two, the account has a purchase
balance of $2,000 at a non-variable annual percentage rate of 15%. On
March 15, the bank provides a notice pursuant to 12 CFR 226.9(c)
informing the consumer that the rate for new purchases will increase to
a non-variable rate of 18% on May 1. The notice further states that
the 18% rate will apply for six months (until November 1) and states
that thereafter the bank will apply a variable rate that is currently
22% and is determined by adding a margin of 12 percentage points to a
publicly-available index that is not under the bank's control. The
seventh day after provision of the notice is March 22 and, on that
date, the consumer makes a $200 purchase. On March 24, the consumer
makes a $1,000 purchase. On May 1, § 227.24(b)(3) permits the bank to
begin accruing interest at 18% on the $1,000 purchase made on March
24. The bank is not permitted to apply the 18% rate to the $2,200
purchase balance as of March 22. After six months (November 2), the
bank may begin accruing interest on any remaining portion of the $1,000
purchase at the previously-disclosed variable rate determined using the
12-point margin.
ii. Same facts as above except that the $200 purchase is authorized
by the bank on March 22 but is not settled until March 23. On May 1,
§ 227.24(b)(3) permits the bank to start charging interest at 18% on
both the $200 purchase and the $1,000 purchase. The bank is not
permitted to apply the 18% rate to the $2,000 purchase balance as of
March 22.
iii. Same facts as in paragraph i. above except that on September
17 of year two (which is 45 days before expiration of the 18%
non-variable rate), the bank provides a notice pursuant to 12 CFR
226.9(c) informing the consumer that, on November 2, a new variable
rate will apply to new purchases and any remaining portion of the
$1,000 balance (calculated by using the same index and a reduced margin
of 10 percentage points). The notice further states that, on May 1 of
year three, the margin will increase to the margin disclosed at account
opening (12 percentage points). On May 1 of year three,
§ 227.24(b)(3) permits the bank to increase the margin used to
determine the variable rate that applies to new purchases to 12
percentage points and to apply that rate to any remaining portion of
the $1,000 purchase as well as to new purchases. See comment
24(b)(1)--(3). The bank is not permitted to apply this rate to any
remaining portion of the $2,200 purchase balance as of March 22.
24(b)(5) Workout Arrangement Exception
1. Scope of exception. Nothing in § 227.24(b)(5)
permits a bank to alter the requirements of § 227.24 pursuant to a
workout arrangement between a consumer and the bank. For example, a
bank cannot increase an annual percentage rate pursuant to a workout
arrangement unless otherwise permitted by § 227.24. In addition, a
bank cannot require the consumer to make payments with respect to a
protected balance that exceed the payments permitted under
§ 227.24(c).
2. Variable annual percentage rates. If the annual
percentage rate that applied to a category of transactions prior to
commencement of the workout arrangement varied with an index consistent
with § 227.24(b)(2), the rate applied to that category of
transactions following an increase pursuant to § 227.24(b)(5) must be
determined using the same formula (index and margin).
3. Example. Assume that, consistent with
§ 227.24(b)(4), the margin used to determine a variable annual
percentage rate that applies to a $5,000 balance is increased from 5
percentage points to 15 percentage points. Assume also that the bank
and the consumer subsequently agree to a workout arrangement that
reduces the margin back to 5 points on the condition that the consumer
pay a specified amount by the payment due date each month. If the
consumer does not pay the agreed-upon amount by the payment due date,
the bank may increase the margin for the variable rate that applies to
the $5,000 balance up to 15 percentage points. 12 CFR 226.9 does not
require advance notice of this type of increase.
24(c) Treatment of Protected Balances
1. Protected balances. Because rates cannot be increased
pursuant to § 227.24(b)(3) during the first year after account
opening, § 227.24(c) does not apply to balances during the first
year. Instead, the requirements in § 227.24(c) apply only to
"protected balances,"
{{2-27-09 p.7412.02-I}}which are amounts owed for a
category of transactions to which an increased annual percentage rate
cannot be applied after the rate for that category of transactions has
been increased pursuant to § 227.24(b)(3). For example, assume that,
on March 15 of year two, an account has a purchase balance of $1,000 at
a non-variable rate of 12% and that, on March 16, the bank sends a
notice pursuant to 12 CFR 226.9(c) informing the consumer that the rate
for new purchases will increase to a non-variable rate of 15% on May
2. On March 20, the consumer makes a $100 purchase. On March 24, the
consumer makes a $150 purchase. On May 2, § 227.24(b)(3) permits the
bank to start charging interest at 15% on the $150 purchase made on
March 24 but does not permit the bank to apply that 15% rate to the
$1,100 purchase balance as of March 23. Accordingly, § 227.24(c)
applies to the $1,100 purchase balance as of March 23 but not the $150
purchase made on March 24.
24(c)(1) Repayment
1. No less beneficial to the consumer. A bank may
provide a method of repaying the protected balance that is different
from the methods listed in § 227.24(c)(1) so long as the method used
is no less beneficial to the consumer than one of the listed methods. A
method is no less beneficial to the consumer if the method amortizes
the protected balance in five years or longer or if the method results
in a required minimum periodic payment that is equal to or less than a
minimum payment calculated consistent with § 227.24(c)(1)(ii). For
example, a bank could incrase the percentage of the protected balance
included in the required minimum periodic payment from 2% to 5% so
long as doing so would not result in amortization of the protected
balance in less than five years. Alternatively, a bank could require a
consumer to make a minimum payment that amortizes the protected balance
in less than five years so long as the payment does not include a
percentage of the balance that is more than twice the percentage
included in the minimum payment before the effective date of the
increased rate. For example, a bank could require the consumer to make
a minimum payment that amortizes the protected balance in four years so
long as doing so would not more than double the percentage of the
balance included in the minimum payment prior to the effective date of
the increased rate.
2. Lower limit for required minimum periodic payment. If
the required minimum periodic payment under § 227.24(c)(1)(i) or
(c)(1)(ii) is less than the lower dollar limit for minimum payments
established in the cardholder agreement before the effective date of
the rate increase, the bank may set the minimum payment consistent with
that limit. For example, if at account opening the cardholder agreement
stated that the required minimum periodic payment would be either the
total of fees and interest charges plus 1% of the total amount owed ot
$20 (whichever is greater), the bank may require the consumer to make a
minimum payment of $20 even if doing so would pay off the protected
balance in less than five years or constitute more than 2% of the
protected balance plus fees and interest charges.
Paragraph 24(c)(1)(i)
1. Amortization period starting from date on which increased
rate becomes effective. Section 227.24(c)(1)(i) provides for an
amortization period for the protected balance of no less than five
years, starting from the date on which the increased annual percentage
rate becomes effective. A bank is not required to recalculate the
required minimum periodic payment for the protected balance if, during
the amortization period, that balance is reduced as a result of the
allocation of amounts paid by the consumer in excess of the minimum
payment consistent with § 227.23 or any other practice permitted by
these rules and other applicable law.
2. Amortization when applicable annual percentage rate is
variable. If the annual percentage rate that applies to the
protected balance varies with an index consistent with
§ 227.24(b)(2), the bank may adjust the interest charges included in
the required minimum periodic payment for that balance accordingly in
order to ensure that the outstanding balance is amortized in five
years. For example, assume that a variable rate that is currently 15%
applies to a protected balance and that, in order to amortize that
balance in five years, the required minimum periodic payment must
include a specific amount of principal plus all accrued interest
charges. If the 15% variable rate increases due to an increase in the
index, the bank may increase the required minimum periodic payment to
include the additional interest charges.
{{2-27-09 p.7412.02-J}}
Paragraph 24(c)(1)(ii)
2. Required minimum periodic payment on other balances.
Section 227.24(c)(1)(ii) addresses the required minimum periodic
payment on the protected balance. Section 227.24(c)(1)(ii) does not
limit or otherwise address the bank's ability to determine the amount
of the required minimum periodic payment for other balances.
2. Example. Assume that the method used by a bank to
calculate the required minimum periodic payment for a consumer credit
card account requires the consumer to pay either the total of fees and
interest charges plus 1% of the total amount owed or $20, whichever is
greater. Assume also that the account has a purchase balance of $2,000
at an annual percentage rate of 15% and a cash advance balance of $500
at an annual percentage rate of 20% and that the bank increases the
rate for purchases to 18% but does not increase the rate for cash
advances. Under § 227.24(c)(1)(ii), the bank may require the consumer
to pay fees and interest plus 2% of the $2,000 purchase balance.
Section 227.24(c)(1)(ii) does not prohibit the bank from increasing the
required minimum periodic payment for the cash advance balance.
24(c)(2) Fees and Charges
1. Fee or charge based solely on the protected
balance. A bank is prohibited from assessing a fee or charge based
solely on balances to which § 227.24(c) applies. For example, a bank
is prohibited from assessing a monthly maintenance fee that would not
be charged if the account did not have a protected balance. A bank is
not, however, prohibited from assessing fees such as late payment fees
or fees for exceeding the credit limit even if such fees are based in
part on the protected balance.
Section 227.25—Unfair Balance Computation Method
25(a) General Rule
1. Two-cycle method prohibited. When a consumer ceases
to be eligible for a time period provided by the bank within which the
consumer may repay any portion of the credit extended without incurring
a finance change (a grace period), the bank is prohibited from
computing the finance charge using the so-called two-cycle average
daily balance computation method. This method calculates the finance
charge using a balance that is the sum of the average daily balances
for two billing cycles. The first balance is for the current billing
cycle, and is calculated by adding the total balance (including or
excluding new purchases and deducting payments and credits) for each
day in the billing cycle, and then dividing by the number of days in
the billing cycle. The second balance is for the preceding billing
cycle.
2. Examples.
i. Assume that the billing cycle on a consumer credit card account
starts on the first day of the month and ends on the last day of the
month. The payment due date for the account is the twenty-fifth day of
the month. Under the terms of the account, the consumer will not be
charged interest on purchases if the balances at the end of a billing
cycle is paid in full by the following payment due date. The consumer
uses the credit card to make a $500 purchase on March 15. The consumer
pays the balance for the February billing cycle in full on March 25. At
the end of the March billing cycle (March 31), the consumer's balance
consists only of the $500 purchase and the consumer will not be charged
interest on that balance if it is paid in full by the following due
date (April 25). The consumer pays $400 on April 25, leaving a $100
balance. The bank may charge interest on the $500 purchase from the
start of the April billing cycle (April 1) through April 24 and
interest on the remaining $100 from April 25 through the end of the
April billing cycle (April 30). The bank is prohibited, however, from
reaching back and charging interest on the $500 purchase from the date
of purchase (March 15) to the end of the March billing cycle (March
31).
ii. Assume the same circumstances as in the previous example except
that the consumer does not pay the balance for the February billing
cycle in full on March 25 and therefore, under the terms of the
account, is not eligible for a time period within which to repay the
$500 purchase without incurring a finance charge. With respect to the
$500 purchase, the bank may charge interest from the date of purchase
(March 15) through April 24 and interest on the remaining $100 from
April 25 through the end of the April billing cycle (April
30).
{{2-27-09 p.7412.02-K}}
Section 227.26—Unfair Charging of Security Deposits and
Fees for the Issuance or Availability of Credit to Consumer Credit Card
Accounts
26(a) Limitation for First Year
1. Majority of the credit limit. The total amount of
security deposits and fees for the issuance or availability of credit
constitutes a majority of the initial credit limit if that total is
greater than half of the limit. For example, assume that a consumer
credit card account has an initial credit limit of $500. Under
§ 227.26(a), a bank may charge to the account security deposits and
fees for the issuance or availability of credit totaling no more than
$250 during the first year (consistent with § 227.26(b)).
26(b) Limitations for First Billing Cycle and Subsequent Billing
Cycles
1. Adjustments of one dollar or less permitted. When
dividing amounts pursuant to § 227.26(b)(2), a bank may adjust
amounts by one dollar or less. For example, if a bank is dividing $87
over five billing cycles, the bank may charge $18 for two months and
$17 for the remaining three months.
2. Examples.
i. Assume that a consumer credit card account opened on January 1
has an initial credit limit of $500. Assume also that the billing
cycles for this account begin on the first day of the month and end on
the last day of the month. Under § 227.26(a), the bank may charge to
the account no more than $250 in security deposits and fees for the
issuance or availability of credit during the first year after the
account is opened. If it charges $250, the bank may charge up to $125
during the first billing cycle. If it charges $125 during the first
billing cycle, it may then charge no more than $25 in each of the next
five billing cycles. If it chooses, the bank may spread the additional
security deposits and fees over a longer period, such as by charging
$12.50 in each of the ten billing cycles following the first billing
cycle.
ii. Same facts as above except that on July 1 the bank increases
the credit limit on the account from $500 to $750. Because the
prohibition in § 227.26(a) is based on the initial credit limit of
$500, the increase in credit limit does not permit the bank to charge
to the account additional security deposits and fees for the issuance
or availability of credit (such as a fee for increasing the credit
limit).
26(c) Evasion Prohibited
1. Evasion. Section 227.26(c) prohibits a bank from
evading the requirements of this section by providing the consumer with
additional credit to fund the consumer's payment of security deposits
and fees that exceed the total amounts permitted by § 227.26(a) and
(b). For example, assume that on January 1 a consumer opens a consumer
credit card account with an initial credit limit of $400 and the bank
charges to that account $100 in fees for the issuance or availability
of credit. Assume also that the billing cycles for the account coincide
with the days of the month and that the bank will charge $20 in fees
for the issuance or availability of credit in the February, March,
April, May and June billing cycles. The bank violates § 227.26(c) if
it provides the consumer with a separate credit product to fund
additional security deposits or fees for the issuance or availability
of credit.
2. Payment with funds not obtained from the bank. A bank
does not violate § 227.26(c) if it requires the consumer to pay
security deposits or fees for the issuance or availability of credit
using funds that are not obtained, directly or indirectly, from the
bank. For example, a bank does not violate § 227.26(c) if a $400
security deposit paid by a consumer to obtain a consumer credit card
account with a credit line of $400 is not charged to a credit account
provided by the bank or its affiliate.
26(d) Definitions
1. Membership fees. Membership fees for opening an
account are fees for the issuance or availability of credit. A
membership fee to join an organization that provides a credit or charge
card as a privilege of membership is a fee for the issuance or
availability of credit only if the card is issued automatically upon
membership. If membership results merely in eligibility to apply for an
account, then such a fee is not a fee for the issuance or availability
of credit.
2. Enhancements. 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) are not fees
for the issuance or availability of credit if the basic account may
be
{{2-27-09 p.7412.02-L}}opened without paying such
fees. 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, are fees for the issuance
or availability of credit. Thus, a fee to obtain an additional card on
the account beyond the first card (so that each cardholder would have
his or her own card) is a fee for the issuance or availability of
credit even if the fee is optional; that is, if the fee is charged only
if the cardholder requests one or more additional cards.
3. One-time fees. Non-periodic fees related to opening
an account (such as application fees or one-time membership or
participation fees) are fees for the issuance or availability of
credit. Fees for reissuing a lost or stolen card, statement
reproduction fees, and fees for late payment or other violations of the
account terms are examples of fees that are not fees for the issuance
or availability of credit.
{{2-27-09 p.7412.03}}
STAFF GUIDELINES ON THE CREDIT PRACTICES RULE—SUBPART B
OF REGULATION AA
Introduction
1. Background. On March 1, 1984, the Federal Trade
Commission (FTC) adopted its Credit Practices Rule, effective March 1,
1985, pursuant to the authority granted the FTC under 18(a)(1)(B) and
5(a)(1) of the Federal Trade Commission Act (FTC Act),
15 U.S.C. 57a(a)(1)(B) and
15 U.S.C. 45(a)(1). Under this
statute the FTC is authorized to promulgate rules that define and
prevent "unfair or deceptive acts or practices" in or affecting
commerce with respect to extensions of credit to consumers. Section
18(f) of the FTC Act, 15 U.S.C. 57a(f), provides that, whenever the FTC
promulgates a rule prohibiting practices which it has deemed to be
unfair or deceptive, the Board of Governors of the Federal Reserve
System (Board) must adopt a substantially similar rule prohibiting such
practices by banks. The Board must adopt a rule within 60 days of the
effective date of the FTC's rule unless the Board finds that such acts
or practices by banks are not unfair or deceptive, or that the adoption
of similar regulations for banks would seriously conflict with
essential monetary and payment systems policies of the Board.
In April, 1985, the Board adopted a rule substantially similar to
the FTC's Credit Practices Rule, thereby amending the Board's
Regulation AA, Unfair or Deceptive Acts or Practices (12 CFR Part 227).
The Board modified certain provisions of the FTC's rule in order to
take into account the needs and characteristics of the banking
industry. The effective date of the Board's rule is January 1, 1986.
2. Summary of Rule. The Board's rule applies to all
consumer credit contracts other than those for the purchase of real
estate. It prohibits banks from using certain remedies to enforce
consumer credit obligations. Under the rule, banks may not include
these remedies in their consumer credit contracts, and, if banks
purchase contracts that contain a prohibited provision(s), banks are
prohibited from enforcing the provision(s).
The prohibited provisions are: (1) A confession of judgment clause,
(also known as a cognovit or warrant of attorney)
whichpermits a creditor to obtain a judgment based on the
borrower's agreement in advance that, in the event of a suit on the
obligation, the borrower waives the right to notice and the opportunity
to be heard; (2) a waiver of exemption in which the consumer
relinquishes a statutory right protecting his or her home and other
necessities from seizure to satisfy a judgment, unless the waiver
applies solely to property that serves as security for the obligation;
(3) an irrevocable assignment of future wages which gives the bank the
right to receive the consumer's wages or earnings directly from the
consumer's employer, unless the assignment constitutes a payroll
deduction plan or other preauthorized payment plan; and (4) the taking
of nonpossessory security interests in household goods, unless such
goods are purchased with the credit extended by the bank.
The rule also prohibits a practice known as "pyramiding late
charges." Under the pyramiding provision, a bank is prevented from
assessing multiple late charges based on a single late payment that is
subsequently paid.
The rule also prohibits a bank from misrepresenting a cosigner's
liability and requires the bank to give a cosigner, prior to becoming
obligated in a consumer credit transaction, a disclosure notice which
explains the nature of the cosigner's obligations and liabilities under
the contract.
3. Scope; enforcement. As stated in subpart A of
Regulation AA, this rule applies to all banks and the4ir subsidiaries,
except savings associations as defined in 12 U.S.C.1813(b). The Board
had enforcement responsibility for state-chartered banks that are
members of the Federal Reserve System. The Office of the Comptroller of
the Currency has enforcement responsibility for national banks. The
Federal Deposit Insurance Corporation has enforcement responsibility
for insured state-chartered banks that are not members of the Federal
Reserve System.
4. State Exemptions. The rule provides that states
may seek exemptions from the requirements of the rule when the state
law provides a level of protection substan
{{2-27-09 p.7412.04}}tially
equivalent to, or greater than, the protection afforded by the rule.
5. Format of Staff Guidelines. The staff guidelines
on the Credit Practices Rule--Subpart B of Regulation AA--are in
question and answer format. The questions are identified by hyphenated
numbers. The first part of the number indicates the regulatory section;
the second part, the sequential order of a particular question within
that section. For example, 13(d)-1 indicates the first question in
§ 227.13(d). Headings are included to make it easier for users to
locate questions.
Section
227.12--Definitions.
12(a) "Consumer"
Q12(a)-1: Type of transaction covered. What type of
transaction is covered by the rule?
A: The rule covers credit obligations of consumers to acquire
goods, services, or money primarily for personal, family or household
use. The rule does not apply, however, to loans made for the purchase
of real property.
Q12(a)-2: Business vs. consumer purpose. How
can a bank determine whether credit extensions are for business
purposes and, therefore, not covered by the rule?
A: While there is no precise test for what constitutes
business-purpose credit--as opposed to credit primarily for personal,
family or household purposes--banks may consider the factors described
in the Official Staff Commentary to Regulation Z (Truth in Lending,
12 CFR 226) on this
issue. The factors include:
• The relationship of the borrower's primary occupation to the
acquisition. The more closely related, the more likely it is to be
business purpose.
• The degree to which the borrower will personally manage the
acquisition. The more personal involvement there is, the more likely it
is to be business purpose.
• The ratio of income from the acquisition to the total income
of the borrower. The higher the ratio, the more likely it is to be
business purpose.
• The size of the transaction. The larger the transaction, the
more likely it is to be business purpose.
• The borrower's statement of purpose for the loan.
Examples of business-purpose credit include:
• A loan to expand a business, even if it is secured by the
borrower's residence or personal property.
• A loan to improve a principal residence by putting in a
business office.
• A business account used occasionally for consumer purposes.
Examples of consumer-purpose credit include:
• Credit extensions by a company to its employees or agents if
the loans are used for personal purposes.
• A loan secured by a mechanic's tools to pay a child's
tuition.
• A personal account used occasionally for business purposes.
Q12(a)-3: Agricultural purpose loans. What about
loans made for agricultural purposes? Are they covered by the rule?
A: A loan made for an "agricultural purpose"--as that term is
defined in the Official Staff Commentary to Regulation Z--would not be
a loan made primarily for personal, family, or household use and,
therefore, would not be subject to the rule. An "agricultural
purpose" loan would include loans for the planting, propagating,
nurturing, harvesting, catching, storing, ex-
{{4-28-00 p.7412.05}}hibiting,
marketing, transporting, processing, or manufacturing of food,
beverages (including alcoholic beverages), flowers, trees, livestock,
poultry, bees, wildlife, fish, or shellfish by a natural person engaged
in farming, fishing, or growing crops, flowers, trees, livestock,
poultry, bees, or wildlife.
Q12(a)-4: Real property loan--not secured by property
purchased. Does the rule apply where a consumer obtains a loan to
purchase real property but secures the loan with some other collateral,
such as a savings account or other real property?
A: No, the rule would not apply since the purpose of the loan is to
purchase real property.
Q12(a)-5: Home improvement loans. What happens when a
bank makes a home improvement loan to a consumer and secures it with
the consumer's home? Is the transaction subject to the rule?
A: Yes, the transaction is subject to the rule since the
purchase of real property is not the purpose of the loan.
Q12(a)-6 Mobile home and houseboat purchases. Is a
purchase of a mobile home or houseboat exempt from the rule as a
purchase of real property?
A: The issue of whether purchases of mobile homes or houseboats are
covered by the rule depends on how these dwellings are treated under
state law. If the applicable state law considers them real property, as
opposed to personal property, then transactions for their purchase
would be exempt from the rule.
Q12(a)-7: Construction loans. Are construction loans
and loans made to provide permanent financing exempt from the rule as
purchases of real property?
A: Yes, construction loans and loans made to provide permanent
financing are considered loans for the purchase of real property and,
therefore, not subject to the rule.
Q12(a)-8: Assumptions. A bank makes a loan for the
purchase of real property. The loan is assumed by a new purchaser.
Would the assumption be considered a transaction "for the purchase
of real property," and therefore, not covered by the rule?
A: Yes, as assumption of a loan made for the purchase of real
property is considered a transaction "for the purchase of real
property," and not covered by the rule.
Q12(a)-9: Refinancings of real property loans. What
happens if a bank refinances a loan that had been made to purchase real
property and, therefore, was exempt from the rule? Is the new loan
still exempt from the rule?
A: The new loan will be exempt from the rule as long as the primary
purpose of the new loan is in fact the refinancing of the original debt
(for example, in order to take advantage of lower interest rates). The
amount outstanding on the original loan--which is now being
refinanced--must represent substantially the entire amount of the new
loan; any additional credit extended as part of the new loan must be
incidential to the primary purpose of refinancing.
Q12(a)-10: Lease transactions. Are consumer lease
transactions covered by the rule?
A: The rule covers only consumer credit obligations. A lease
transaction would be covered by the rule only if the transaction is a
credit sale as defined in Regulation Z.
Q12(a)-11: Trusts. Are extensions of credit made to a
consumer through a trust covered by the rule?
A: Yes, such extensions of credit are covered by the rule,
unless the credit is being extended through a nonprofit trust (as the
rule does not apply to nonprofit organizations).
12(b) "Cosigner"
Q12(b)-1: Cosigner--basic definition. Who is a
cosigner under the rule?
A: Any natural person who assumes liability for the obligation of a
consumer (including, for example, a surety, guarantor or other
accommodation party), and who does so without receiving goods, services
or money in return for the obligation, or, in the case of open-end
credit, without receiving the contractual right to obtain extensions of
credit on the account, would be considered a cosigner for purposes of
the rule.
Q12(b)-1a: Business entities as cosigners. If a
partnership or a corporation cosigns a consumer credit obligation, is
such an entity a cosigner for purposes of the rule? Must the bank
provide a cosigner notice?
A: No, the rule applies only to natural persons who are
cosigners. Consequently, the rule does not require a bank to provide a
cosigner notice when a partnership, corpora-
{{4-28-00 p.7412.06}}tion, or other
business entity serves as a cosigner on a consumer credit obligation.
Q12(b)-1b: Dealer guarantee. Where a bank and an
automobile dealer, for example, enter into an agreement whereby the
bank purchases a consumer credit obligation from the dealer and the
dealer guarantees the obligation, must the bank provide a cosigner
notice to the dealer?
A: No, the rule is not intended to apply in such recourse agreement
situations where the bank is purchasing dealer paper.
Q12(b)-2: Person's signature requested as a condition to
credit or as a condition of forbearance. If a bank requests a
person's signature as a condition to granting credit to another
individual, or as a condition for forbearance on collection of a
consumer's obligation that is in default, is that person a cosigner?
A: Yes, if such a person is asked to sign as a condition to
granting credit to another individual, or as a condition for
forbearance on collection of an obligation that is in default, such a
person would be a cosigner, provided that the person assumes liability
for a consumer's obligation without receiving goods, services or money
in return. If the person who is asked to sign the credit obligation
(for example, for the purchase of an automobile, or for an open-end
credit card account) decides that he or she wishes to be reflected on
the title to the automobile being purchased, or to have access to the
credit card line, that person is not a cosigner for purposes of the
rule.
Q12(b)-3: Joint applicants. What happens when two
people visit a bank to apply for a loan and appear to be applying
jointly? Can the bank assume that they are applying as joint
applicants, or does the rule require the bank to determine if both of
the applicants will actually be "receiving goods, services, or money
in return for the obligation"?
A: Where two people visit a bank to apply for a loan and appear to
be applying jointly, the rule does not require a bank to conduct a
detailed inquiry into the extent to which both persons are
"receiving goods, services, or money in return for the
obligation." In the great majority of situations, individuals
applying together will be co-borrowers and will not be covered by
therule. The cosigner provision would not
apply, for example:
• If two people apply together for a loan to purchase items
for their shared use or to be owned jointly.
• If two people apply jointly for a credit card account and
both have the contractual right to draw on the account, even if one of
the applicants eventually chooses not to use the account. The cosigner
provision would apply, for example:
• If a consumer applies for a loan with a friend or relative
and during the application process it becomes apparent to the loan
officer that the purpose of the loan is such that the friend or
relative will not receive any benefit from the loan and that the friend
or relative is applying with the consumer solely to aid the consumer in
obtaining credit (for example, where the proceeds of the loan are to be
used to pay the consumer's dental expenses, or to buy furniture for the
consumer's home or apartment.)
Q12(b)-4: Signature to perfect security
interest--relationship to Regulation B. The rule does not
consider a spouse, whose signature is required on a credit obligation
to perfect a security interest pursuant to state law, to be a cosigner.
Does this affect a creditor's obligation under the signature rules of
Regulation B (Equal Credit Opportunity, 12 CFR Part 202) which limit
the circumstances in which a creditor may require a cosigner?
A: No, the rule in no way permits a creditor to obtain the
signature of a nonapplicant spouse, or any person, in violation of
Regulation B. The rule merely addresses whether a bank must give a
cosigner notice when a person's signature is required on the credit
obligation in order to perfect a security interest; whether a bank is
in fact permitted to obtain such a signature, however, is controlled by
Regulation B.
Q12(b)-5: Hypothecating security. Is a person who
hypothecates security for another's obligation a cosigner?
A: No. A person who merely offers security for a loan, and in so
doing signs a security agreement--but not the note, contract or other
document that would render the cosigner liable on the underlying
obligation--is not a cosigner under the rule.
{{4-28-00 p.7412.07}}
12(d) "Household Goods"
Q12(d)--1: Basic definition of household goods. What is
included in the term "household goods"?
A: "Household goods" includes clothing, furniture,
appliances, linens, china, crockery, kitchenware, and personal effects
of the consumer and the consumer's dependents. The term does not
include works of art, electronic entertainment equipment (other than
one television and one radio), items acquired as antiques, and jewelry
(except wedding rings).
Q12(d)--2: Duplicates of household goods. Can duplicate
items of household goods be used to secure a consumer credit
obligation?
A: The definition of household goods includes one television and
one radio; but it does not similarly limit furniture or any of the
other items included in the definition. Consequently, duplicates of any
items included in the definition--other than duplicates of a television
or a radio--are covered by the prohibition.
Q12(d)--3: Personal effects. What are "personal
effects" for purposes of the household goods definition?
A: The term "personal effects" is to be narrowly construed
and is limited to those items that an individual would ordinarily carry
about on his or her person and possessions of a uniquely personal
nature. This includes items such as personal papers, family
photographs, or a family Bible. It does not include musical
instruments, typewriters, firearms, bicycles, snowmobiles, cameras and
camera equipment, sporting goods, and stamp and coin collections.
Q12(d)--4: Appliances as fixtures. What happens
when appliances are considered "fixtures" under state law? Do
they still come within the household goods definition?
A: No. Under some state laws, appliances are considered fixtures,
and, as such, they become part of the realty. A bank that takes a
security interest in realty in such cases would not violate the rule's
prohibition against taking a security interest in household goods.
12(e) "Obligation"
Q12(e)--1: Transactions over $25,000. Is a credit
transaction exceeding $25,000 excluded from the rule's requirements?
A: Unlike Regulation Z, the Credit Practices Rule does not have any
dollar amount cut-off for determining if a transaction is covered by
the rule. However, the dollar amount of a transaction is one of the
factors that can be considered in determining whether a transaction is
for a business or a consumer purpose. (See Q12(a)-2.)
Section
227.13--Unfair Credit Contract Provisions.
Q13--1: Retroactive effect--bank's own contract. If a
bank entered into a contract with a consumer prior to the effective
date of the rule, and that contract contained a provision ultimately
prohibited by the rule, may the bank enforce the provision?
A: Yes, the rule is not intended to have retroactive effect. (See,
however, Q15-8.)
Q13--2: Retroactive effect--purchased paper written before
effective date of rule. What happens if, after January 1, 1986, a
bank buys paper from a third party that was written prior to the rule's
effective date and that contains a provision ultimately prohibited by
the rule? May the bank enforce the provision?
A: Yes, the bank could enforce the provision since, at the time the
paper was written, the provision was not prohibited.
Q13--3: Refinancings and renewals--original credit obligation
entered into prior to effective date of rule. Assume that a bank
entered into a credit obligation prior to the effective date of the
rule and that the credit obligation contained a provision ultimately
prohibited by the rule. Assume further that the credit obligation is
refinanced after the effective date of the rule. May the refinanced
obligation contain the prohibited provision, or is the refinancing
subject to the rule? Does the same hold true of renewals of the
original credit obligation?
A: There is no distinction in the treatment of renewals and
refinancings for purposes of the rule. A refinancing or renewal entered
into after the effective date of the rule is subject to the rule and,
therefore, may not contain a contract provision prohibited by the rule.
Q13--4: Open-end account--future advances made under
the plan. If a bank entered into an open-end credit obligation
with a consumer prior to the effective date of the rule and that
agreement contained con-
{{4-28-00 p.7412.08}}tract
provisions ultimately prohibited by the rule, may the bank enforce
those contract provisions as to future advances made under the plan
after January 1, 1986?
A: Yes, contract provisions ultimately prohibited by the rule can
be enforced in such a situation since the advances are being made as
part of an open-end agreement that was entered into before the
effective date of the rule, and the rule is not intended to have
retroactive effect. (See, however, Q15--8.)
Q13--5: Prohibited provisions in cosigner
agreement. May a bank include any of the provisions prohibited by
the rule in the documents obligating a cosigner on a consumer credit
obligation (for example, in a guaranty agreement)?
A: A bank may not include any of the prohibited provisions in the
documents obligating a cosigner. The agreement between the bank and the
cosigner, even if executed separately, is part of the consumer credit
obligation and is therefore subject to the rule's prohibitions.
13(a) Confession of Judgment
Q13(a)--1: Basic definition; coverage. What is a
confession of judgment provision?
A: A confession of judgment is a contract clause in which the
debtor consents in advance to allow the creditor to obtain a judgment
against the debtor without giving the debtor prior notice or an
opportunity to be heard in court. Such provisions are sometimes
referred to as "cognovit" provisions. The Board's rule prohibits
confessions of judgment that involve anticipatory waivers of procedural
due process in the context of consumer credit obligations. It does not
prohibit a debtor from acknowledging liability, or from otherwise
entering into a negotiated settlement, after a legal action has been
instituted.
The confession of judgment provision also does not affect a
power of attorney in a mortgage loan obligation or deed of trust for
purposes of foreclosure; nor does the provision affect a power of
attorney given to expedite the transfer of pledged securities or the
disposal of repossessed collateral, or to allow the prompt cancellation
of insurance in an insurance premium finance contract.
Q13(a)--2: Language limiting confession of judgment
provision. If a bank uses multi-purpose credit contracts, may the
bankinclude a confession of judgment clause
with qualifying language indicating that the clause is not applicable
in a consumer purpose loan--such as, "You confess judgment to the
extent the law allows," or "This clause applies only in business
purpose loans"?
A: No. Given the public policy purpose of the rule, a bank may not
have a confession of judgment clause in a consumer credit contract,
even with limiting language. Therefore, when a multi-purpose form is
used for a consumer purpose loan, the bank must cross out, blacken in,
or otherwise indicate clearly the removal of the prohibited clause from
the loan document.
13(b) Waiver of Exemption
Q13(b)--1: Basic definition. What is a waiver of
exemption clause?
A: A waiver of exemption clause is a contract provision under which
the debtor agrees to waive a property exemption provided by state law.
Generally, state property exemptions protect the debtor's home and
other necessary items, such as furniture and clothing, from attachment
or execution in order to satisfy the judgment debt. Under the rule, a
waiver is permitted if it applies solely to property which was given as
security in connection with the consumer credit obligation.
Q13(b)--2: Nonpurchase money transactions. Does a
waiver of a state homestead exemption for a nonpurchase money security
interest (such as a second trust or a home equity line of credit)
violate the rule if the waiver applies only to the property that is
subject to the security interest?
A: No, the waiver of homestead exemption provision in the rule is
not violated in the nonpurchase money security interest situation, as
long as the waiver only applies to the property that is in fact
securing the transaction.
Q13(b)--3: Language of contract provision limiting
applicability of waiver. If a bank's consumer credit contracts
contain a clause that states "I waive my state property exemption to
the extent the law allows," would such a clause be permitted under
the rule?
A: No, in spite of the limiting language "to the extent the law
allows," the clause is an overly broad waiver and,
therefore,
{{4-28-00 p.7412.09}}would be
prohibited by the rule. A clause in a consumer credit contract
providing that the consumer waives an exemption "as to property that
secures this loan," for example, would be a permissible waiver of
exemption provision under the rule.
13(c) Assignment of Wages
Q13(c)--1: Basic definition. What is an assignment of
wages clause?
A: Under an assignment of wages clause the debtor assigns future
wages to the creditor in the event of default. Unlike a garnishment, a
court judgment is not required. Typically, once a debtor defaults, the
creditor presents the assignment of wages to the debtor's employer who
then pays the agreed portion of the employee's wages directly to the
creditor.
Q13(c)--2: Exceptions. Are there any exceptions to the
assignment of wages prohibition? exceptions to the assignment of wages
prohibition?
A: Yes, the following types of wage assignments are permitted under
the rule:
• Assignments that are revocable at the will of the debtor;
• Payroll deduction plans regardless of revocability;
• Revocable preauthorized payment plans (governed by the
Electronic Fund Transfer Act, 15 U.S.C. 1693 et seq. ) for
electronic fund transfers to accounts from wages; and
• Assignments of wages already earned at the time of the
assignment.
Q13(c)--3: Retroactivity. Does the rule's basic
prohibition against wage assignments apply to a loan agreement entered
into by the bank prior to the effective date of the rule?
A: No. The rule does not invalidate or prevent enforcement of any
wage assignments that were executed prior to January 1, 1986, the
effective date of the rule, even though such wage assignments may cover
wages payable or earned after the effective date.
Q13(c)--4: Payment plans entered into after transaction
begins. What happens if, sometime after entering into a credit
transaction, a consumer decides that he or she would like to make
payments by payroll deduction or by having the payments deducted from
wages and electronically transferred to the bank as payment on an
account. Would this be considered a prohibited wage assignment under
the rule?
A: While most consumers authorize payroll deduction plans and
preauthorized payment plans at the commencement of the credit
obligation (as is contemplated by the rule), a consumer's enrolling in
a payroll deduction plan or preauthorized payment plan after the
obligation has begun is permissible under the rule as long as it is
done voluntarily by the consumer and at the consumer's request.
Q13(c)--5: Offer of a commission as security. Is the
rule's prohibition against a bank's taking an assignment of a
consumer's future wages violated if a bank takes as security for a loan
a consumer's commission (for example, a real estate agent's commission)
that has been earned but not yet received by the consumer?
A: No, this would not be a prohibited wage assignment since the
consumer's commission has already been earned at the time of the
assignment; the fact that it has not yet been received by the consumer
does not affect its treatment under the rule.
13(d) Security Interest in Household Goods
Q13(d)--1: Definition of type of security interest
prohibited. What type of security interest is prohibited by the
Board's rule?
A: The Board's rule specifically prohibits banks from taking
nonpossessory security interests--other than purchase money security
interests--in items defined as household goods. The purpose of the rule
is to prevent consumers from losing basic necessities, which usually
have little resale value to the creditor. The Board's rule does not
prohibit a security interest in real property, a security interest in
items not defined as household goods, or a possessory security interest
(for example, a pawn or pledge) in a consumer's household goods.
Q13(d)--2: Voluntary offerings of household goods. What
happens if a consumer voluntarily offers household goods as collateral
on a nonpurchase money loan? Is the bank allowed to accept them?
A: No. The bank is prohibited from accepting household goods as
collateral even if offered voluntarily.
Q13(d)--3: Refinancings--original loan purchase
money. Assume that a bank entered into a loan transaction with
the con-
{{4-28-00 p.7412.10}}sumer--either
before or after the effective date of the rule--that involved the
taking of a purchase money security interest in household goods. Assume
further that the loan is refinanced. May the bank retain its security
interest in the household goods? Does it make a difference if the new
loan is for a larger amount? What if the loan is refinanced more than
once?
A: The bank may retain its security interest in household goods
even if the new transaction is for a larger amount, and without regard
to how many times the loan is refinanced.
Q13(d)--3a: Refinancing (new creditor)--original loan
purchase money. On the same facts as those detailed in Q13(d)--3,
assume that the consumer refinances the loan with a different bank. May
that bank acquire the security interest of the purchase-money lender in
household goods without violating the rule?
A: Yes, the bank may acquire the security interest of the
purchase-money lender without violating the rule.
Q13(d)--4: Cross-collateral and future advances
clauses. Does the rule prohibit a cross-collateral or future
advances clause in a security agreement for household goods which
provides that the household goods would serve as security for other
loans--both current and future--that the bank makes to the debtor?
A: A cross-collateral or future advances clause would violate the
rule's prohibition on taking a security interest in household goods
where the clause is so broad in its applicability that it goes beyond
loans that are refinancings or consolidations of the original loan
(which contained the purchase money security interest in household
goods) and extends to other loans--whether current or future--that the
bank makes to the debtor.
Q13(d)--5: Refinancings--releasing a portion of security
interest. When a bank has entered into a purchase money loan
transaction secured by household goods and then advances additional
funds to the consumer in subsequent refinancings of that transaction,
is the bank required to release a proportionate amount of the security
interest in the household goods, as the original loan amount decreases?
A: The rule does not require a proportionate reduction of the
security interest as the original loan amount decreases; such may be
required, however, under state law.
Q13(d)--6: Bill consolidation loans. May Bank A, in
making a bill consolidation loan, secure its loan with the security
interest in household goods taken in the original credit transaction
with Bank B (which was a purchase money credit transaction) and which
will be paid in full by the bill consolidation loan?
A: Yes, no distinction is made under the rule between a
consolidation loan made by a creditor who already holds the purchase
money security interest and a consolidation loan made by a different
creditor.
Q13(d)--7: Refinancing by sales contract vs. direct
loan. May a purchase money security interest in household goods
that is acquired by a sales contract be retained if that sales contract
is consolidated or refinanced by a direct loan instead of another sales
contract?
A: Yes, a bank may retain the security interest in the household
goods even though the sales contract is consolidated or refinanced by a
direct loan.
Q13(d)--8: Documentation of purchase money loan. How is
the purchase money nature of a loan to be documented?
A: The rule contains no specific documentation requirements. For
purposes of evidencing compliance, however, the creditor may, for
example: place a note or statement in the loan file attesting to the
purchase money nature of a loan; include a check-box in the contract
which would indicate whether the transaction was a purchase money loan;
or reserve a place in the contract for indicating the purpose for which
the proceeds will be used.
Q13(d)--9: Appliances as fixtures. When a bank takes a
security interest in realty and, under state law, fixtures are part of
the realty, does the bank violate the prohibition against taking a
security interest in household goods?
A: No. See Q12(d)--4.
Q13(d)--10: Security interest in substituted household
goods. Does a bank violate the rule by retaining a security
interest in household goods that have been substituted by the consumer
for household goods in
{{4-28-00 p.7412.11}}which the bank
originally had a permissible purchase money security interest?
A: A security interest in substituted household goods would violate
the rule's prohibition on taking a nonpurchase money security interest
in household goods unless the goods were substituted pursuant to a
warranty; as such, the goods would be considered part of the original
money transaction for purposes of the rule.
Section
227.14--Unfair or Deceptive Practices Involving Cosigners
Q14--1: State-required cosigner notice. If a state law
also requires that a notice be given to a cosigner, how should a bank
handle the dual requirement? Can the state-required notice substitute
for the federal notice?
A: No, a state notice cannot be substituted for the federal notice,
unless a state has obtained an exemption from the federal cosigner
provision as provided for in § 227.16 of the rule. In those instances
in which state law requires that a notice be given to cosigners, the
bank may give both notices.
The bank could, for example, include both notices in the documents
evidencing the credit obligation or on a separate document, unless such
would be prohibited by state law. (See Q14(b)--7 on how to handle
language in the federal notice that is inconsistent with state law
provisions.)
Q14--2: Record retention. Must a bank retain a copy of
the cosigner notice it gives its customers?
A: As a general matter, the rule does not contain any record
retention requirements. A bank should be able, however, to demonstrate
that it has procedures in place that ensure that the cosigner notice is
provided as required by the rule. (See Q14(b)--9 which discusses the
inclusion of acknowledgment statements and signature lines on the
cosigner notice.)
14(a) Prohibited Practices
Q14(a)--1: Retroactivity of cosigner provision. If a
bank has entered into a loan transaction prior to January 1, 1986, in
which a cosigner was involved, but at which time the cosigner notice
was not required, can the bank attempt to collect against the cosigner
after January 1, 1986, should the debtor default?
A: Yes, the bank can attempt to collect from the cosigner, since
the rule does not apply retroactively to obligations entered into
before the rule's effective date.
Q14(a)--2: Purchase of third-party paper. What happens
if a bank, after January 1, 1986, purchases an obligation in which a
cosigner notice should have been given under the rule, but was not?
Would a bank's purchase of the obligation violate the rule? Would the
bank's attempt to collect from the cosigner in such a situation violate
the rule?
A: A bank that purchases an obligation in which the cosigner notice
was not given would not be considered to have obligated the cosigner in
violation of the rule. The purchasing bank would violate the rule in
such a case, however, if it attempts to collect the debt
from the cosigner.
14(b) Disclosure Requirement
Q14(b)--1: Timing of cosigner notice. At what point in
the transaction must the cosigner notice be given?
A: The cosigner notice must be given to the cosigner before the
cosigner becomes obligated on the transaction. This means that the
cosigner should receive the notice prior to the event that makes the
cosigner liable. In the case of open-end credit the cosigner should
receive the notice before becoming obligated for any fees or
transactions on the account.
Q14(b)--2: Oral vs. written notice. May the cosigner
notice be given orally to a cosigner?
A: No, the cosigner notice must be in writing.
Q14(b)--3: Form of cosigner notice. Does the cosigner
notice have to be given in a form that the cosigner can keep?
A: No, the rule does not require that the cosigner notice be in a
form that the cosigner can keep.
Q14(b)--4: Acknowledgment of receipt. Must the
cosigner notice be signed by the cosigner?
A: The rule does not require that the cosigner sign the cosigner
notice, or otherwise acknowledge its receipt. (See, however, Q14(b)--9
on permissible additions to the cosigner notice.)
{{4-28-00 p.7412.12}}
Q14(b)--5: Type size, format requirements. Does the
cosigner notice have to be in a particular type size or format?
A: No, the rule does not specify a particular type size, style or
format. The rule does require, however, that the notice be clear and
conspicuous.
Q14(b)--6: Clear and conspicuous. What is meant by the
rule's requirement that the cosigner notice be "clear and
conspicuous"?
A: A cosigner notice is clear and conspicuous if it is noticeable,
readable and understandable. In those instances in which the notice is
included in the body of the documents evidencing the obligation,
special attention should be given to ensure that the cosigner notice is
prominent or distinctive--that is, to insure that it is noticeable and
readable. Any modifications or additions to the notice should not
jeopardize its clarity.
Q14(b)--7: Modifying the cosigner notice; inconsistency with
state law provisions. Must a bank give a cosigner notice that is
identical to that set forth in the rule, or can the bank modify the
notice? What if language in the federal notice is inconsistent with
state law provisions?
A: Under the rule, a bank must give a cosigner notice that is
substantially similar to the one set forth in the rule; the notice does
not have to be identical. Language in the notice may be deleted or
modified to take into account the rights and responsibilities of
cosigners under applicable state law. Language may be deleted or
modified if it is inapplicable or if it inaccurately reflects the
agreement with the cosigner. For example, the federal cosigner notice
states that a bank can collect from a cosigner without first collecting
from the borrower. It also states that a bank can garnish a cosigner's
wages. If either of these statements is inaccurate under state law,
then the inaccurate language may be deleted or modified. In addition,
minor editorial changes can be made to the notice, such as changing the
word "borrower" to "accountholder," or changing the word
"debt" to "account," as appropriate.
Q14(b)--8: Guarantee language in cosigner notice. The
cosigner notice in the rule states "You are being asked to guarantee
this debt." If a bank does not consider the cosigner a guarantor,
may the bank modify the notice?
A: The word "guarantee" is used in the cosigner notice in its
generic or colloquial sense merely as a way to describe the fact that
the cosigner has an obligation to repay the debt. The underlying
contract--not the notice--is what defines or determines a cosigner's
liability. However, if use of the term conflicts with or causes
confusion under state law, language such as, "You are being asked to
become liable on this debt" can be substituted.
Q14(b)--9: Additional information included on
notice. If the cosigner notice is given on a separate document,
may a bank place additional information on the document? May the bank
print the notice on its letterhead?
A: Yes, a bank may print the notice on its letterhead. The bank may
also include additional information on the document such as:
• The date of the transaction
• The loan amount
• Name(s) and addresses
• The account number and other information describing or
identifying the debt in question
• Acknowledgment of receipt language
• A signature line
As a general rule, any additional information should be concisely
written so as not to detract from the notice's message. Moreover, care
should be taken not to add unnecessary information to the notice.
Q14(b)--10: Cosigner notice on credit application. May
the cosigner notice be placed on a credit application form?
A: Yes, the cosigner notice may be placed on a credit application
form.
Q14(b)--11: Documents of principal debtor vs. those of
cosigner. What happens if the document obligating the cosigner is
separate from that obligating the principal debtor? May the cosigner
notice be included in the document obligating the cosigner.
A: Yes. Where the cosigner is required to sign a separate document
that obligates the cosigner, the cosigner notice may be included in
that document.
Q14(b)--12: Multiple cosigners. What happens if there
are two or more cosigners involved in a transaction? Must each one
receive the cosigner notice?
A: Yes, each cosigner must be given the cosigner notice. However,
since there is no
{{4-28-00 p.7412.13}}requirement in
the regulation that the cosigner notice be given in a form that the
cosigner can retain (See Q14(b)--3), each cosigner does not have to
receive his or her own notice. One notice that serves to notify all
cosigners is sufficient.
Q14(b)--13: Continuing guaranties. When must a bank
give the cosigner notice to a guarantor who has executed a guaranty for
not only the original loan, but also for future loans of the primary
debtor? Must a cosigner notice be given to the guarantor with each
subsequent loan to the primary debtor?
A: The cosigner notice should be provided before the guarantor
becomes obligated on the guaranty--that is, at the time the guaranty is
executed. The cosigner notice need not be given to the guarantor with
each subsequent loan made to the primary debtor, since the cosigner is
already obligated under the original contract to guarantee future
indebtedness. However, since the guarantor is being asked to guarantee
not only the original debt, but also the future debts of the primary
obligor, the cosigner notice should be modified to accurately reflect
the extent of the guaranty obligation. For example, the first sentence
of the cosigner notice could read "You are being asked to guarantee
this debt, as well as all future debts of the borrower entered into
with this bank through December 31, 1987."
Q14(b)--13a: Continuing guaranties--open-end plan. If a
cosigner executes a guaranty on an open-end credit plan (that is, one
guaranteeing all advances made under the plan), does the bank have to
modify the cosigner notice to indicate that all advances made under the
plan are being guaranteed?
A: No, the bank is not required to modify the cosigner notice since
the future advances are all being made as part of the same open-end
credit plan.
Q14(b)--14: Renewal or refinancing of credit
obligation. What happens when a credit obligation involving a
cosigner is renewed or refinanced? Must a bank give the cosigner
another notice at the time of renewal or refinancing?
A: If under the terms of the original credit agreement the cosigner
is obligated for renewals or refinancings of the credit obligation, a
bank would not be required to give another cosigner notice
at the time of each renewal or refinancing.
Q14(b)--15: Placement of cosigner notice above signature
line. When the cosigner notice is included in the documents
evidencing the consumer credit obligation, does the notice have to be
located above the place reserved for the consigner's signature?
A: The regulation does not specify the location of the cosigner
notice when it is contained in the documents evidencing the consumer
credit obligation. Since a bank must, however, provide the notice to
the cosigner prior to the cosigner's becoming obligated on the consumer
credit transaction, placement of the notice above the cosigner's
signature line would seem wise.
Q14(b)--16: Foreign language translation. May a foreign
language translation of the cosigner notice be provided?
A: Yes, a foreign language translation of the cosigner notice may
be provided.
Q14(b)--17: Contract in foreign language. What if the
underlying contract is in a foreign language? Must the cosigner notice
be in the same language?
A: Yes, the cosigner notice should be provided in the same language
as that used in the underlying contract.
Section
227.15--Unfair Late Charges.
Q15--1: Basic definition of unfair late charges
prohibition. What does the rule prohibit with regard to the
imposition of late charges?
A: Under the rule banks are prohibited from levying or collecting
any delinquency charge on a payment, when the only delinquency is
attributable to late fees or delinquency charges assessed on earlier
installments, and the payment is otherwise a full payment for the
applicable period and is paid on its due date or within an applicable
grace period.
Q15--2: Skipped and partial payments. What happens if a
consumer misses or partially pays a monthly payment and fails to make
up that payment month after month? May the bank assess a delinquency
charge for each month that passes in which the consumer fails to make
the missed or "skipped" payment or to pay the outstanding balance
of the partial payment?
A: Yes, the rule does not prohibit the bank from assessing a
delinquency charge
{{4-28-00 p.7412.14}}for each month
that the skipped or partial payment remains outstanding.
Q15--3: Multiple late charges assessed on payment
subsequently paid. Assume the following: A consumer's payments
are $40 a month. The consumer makes his or her February payment in
full, but makes it late. The bank assesses a $5 late charge. The
consumer makes the March payment of $40 on time, but fails to pay the
$5 late charge. The bank uses part of the March payment to pay off the
outstanding late charge, and then considers the March payment
deficient. May the bank then assess another late charge?
A: No, the bank cannot assess another late charge since the March
payment was made in full and on time.
Q15--4: Subsequent payment made late. Assume the same
facts as those detailed in Q15--3, but that the consumer makes the
March payment of $40 late. May the bank assess another late charge?
A: Yes, the bank may assess another late charge since the consumer
failed to make the March payment on time.
Q15--5: Partial payment short more than amount of outstanding
late fee. Assume the same facts as those detailed in Q15--3, but
that the consumer only pays $20 of the $40 March payment. May the bank
assess another late charge?
A: Yes, the bank may assess another late charge since the consumer
failed to make the March payment in full.
Q15--5a: Allocation of excessive payment. Assume that
beginning in January a consumer's payment on an installment loan is $40
a month. The consumer pays only $35 of a $40 January payment and a late
charge of $5 is imposed on the account. If the following month's
payment is for $45, may the creditor use the extra $5 to pay off the
late charge and impose another late charge since the previous month's
payment is still deficient $5?
A: If a consumer's payment could bring the account current except
for an outstanding late charge, no additional late charge may be
imposed.
Q15--6: Open-end credit plans. Does the rule's late
charge provision come into play in an open-end credit plan that
involves a periodic statement that reflects a late charge upon its
imposition, as well as a minimum payment amount that serves to inform
the consumer of the full amount due to remain current on the account?
A: No, in an open-end credit plan where the bank discloses late
charges to the consumer as they are imposed and informs the consumer of
the full amount that the consumer must pay for the applicable period in
order to remain current on the account, the rule's provision on late
charges does not come into play.
Q15--7: Interest limitations. Does the rule prohibit a
bank from imposing interest on an unpaid late fee?
A: The rule does not address the issue of whether interest may be
imposed on unpaid late fees.
Q15--8: Retroactivity of unfair late charges
prohibition. Does the unfair late charges prohibition reach
obligations entered into prior to the rule's effective date?
A: Yes. Unlike the other provisions in the rule which do not
affect obligations entered into prior to the rule's effective date, the
unfair late charges prohibition applies to all outstanding consumer
credit obligations regardless of when they were entered into.
Section 227.16--State
Exemptions.
Q16--1: Applicability of exemption granted by another
agency. If the FTC grants an exemption from a provision(s) of its
rule, are banks, which are subject to the Board's rule, able to take
advantage of that exemption or must the state apply to the Board for an
exemption?
A: Exemptions that are granted by the FTC apply only to those
creditors that are covered by that agency's rule. The state agency
would have to apply to the Board for an exemption for banks under the
Board's rule.
16(a) General Rule
Q16(a)--1: Who may request an exemption. May a private
individual or a bank apply for an exemption?
A: No, neither private individuals nor banks may apply for an
exemption from the rule's provisions. The rule provides that "an
appropriate state agency" may apply for an exemption.
Q16(a)--2: Criteria for exemption. When may a state
agency apply for an exemption?
A: A state agency may apply for an exemption from the rule's
provisions:
{{2-27-09 p.7412.15}}
• When there is a state requirement or prohibition in effect
that applies to any transaction(s) to which a provision of the rule
applies; and
• When the state requirement or prohibition affords a level of
protection to consumers that is substantially equivalent to, or greater
than, the protection afforded by the rule's provision.
16(b) Applications
Q16(b)--1: Board guidelines on exemption
applications. Does the Board have guidelines for applying for an
exemption from the rule?
A: Yes, a state agency applying for an exemption should use the
procedures set forth in Appendix B to Regulation Z. These procedures
indicate: where an application should be filed; what should be
contained in the application; what types of supporting documents should
accompany the application; factors on which the Board bases its
determination; the consequences of favorable and adverse Board
determinations; and the procedures involved in revoking an exemption.
Q16(b)--2: Deadline for exemption application. Is there
a time by which a stateagency must submit its
exemption application in order to receive consideration? Must it be
submitted by the effective date of the rule?
A: There is no deadline for submitting an exemption application.
Applications can be submitted anytime before or after the effective
date of the rule.
Q16(b)--3. Exemption granted. What states have been
granted an exemption from the Board's rule?
A: The state of Wisconsin was granted an exemption from all
provisions of the Board's rule effective November 20, 1986, for
transactions of $25,000 or less. The state of New York was granted an
exemption from the cosigner provisions of the Board's rule effective
January 21, 1987, for transactions of $25,000 or less. In both
Wisconsin and New York, transactions over $25,000 are subject to the
Board's rule but compliance with state law is deemed compliance with
the federal law. The state of California was granted an exemption from
the cosigner provisions of the Board's rule effective August 1, 1988.
These exemptions do not apply to federally chartered institutions.
[Source: 50 Fed. Reg. 47037, November 14, 1985, effective January
1, 1986; amended at 51 Fed. Reg. 39647, October 30, 1986, effective
November 1, 1986; 53 Fed. Reg. 29226, August 3, 1988, effective August
1, 1988; 74 Fed. Reg. 5567, January 29, 2009, effective July 1, 2010]
[The page following this is 7413.]
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