Document Sample
					                                                                                                                               OCTOBER 19, 2009

The Financial Institutions                                   Federal Reserve Issues Regulations to
Regulatory Practice Group of
Sidley Austin LLP                                            Implement Credit CARD Act of 2009
The Financial Institutions Regulator y                       On September 29, 2009, the Board of Governors of the Federal Reserve System
Practice group offers counseling, transaction                (“FRB”) issued a proposed amendment to Regulation Z (“Proposal”) to implement
and litigation services to depository and
                                                             the Credit CARD Act of 2009 (the “CARD Act”). The CARD Act enacted
nondepository financial institutions and their
holding companies. Our lawyer s assist                       substantial new limitations and requirements for credit card issuers. The Proposal
domestic and foreign financial institutions and              provides much needed detail on how those new limitations requirements will apply to
their holding companies, and electronic                      the industry.
payment systems, as well as secur ities,
insurance, finance, mor tgage and other                      The requirements of the CARD Act become effective on February 22, 2010. As a
diversified financial services companies.We                  result, the FRB has allowed only a short 30-day comment period from when the
represent financial services clients before the
                                                             Proposal is published in the Federal Register (which is expected shortly). Because of
U.S. Department of the Treasury, the Board of
Governors of the Federal Reserve System, the
                                                             the significance of the changes, however, it is likely that issuers and other creditors
Federal Deposit Insurance Corporation, the                   offering open-end (not home-secured) credit will need to begin planning for
Office of the Comptroller of the Currency,                   compliance now, well before final rules are released.
the Office of Thrift Supervision and state
bank regulatory agencies. In addition, we                    This update summarizes some of the key issues raised by the Proposal. The Proposal
represent clients before the United States                   also contains a re-issuance of the FRB’s comprehensive amendment to Regulation Z
Supreme Court, the federal courts of appeal,                 published in January 2009, including the substantial revisions to the advertising,
federal district courts and state courts.
                                                             application and solicitation, account opening, periodic statement, and change-in-terms
  To receive future copies of Financial                      disclosure requirements. This update does not attempt to summarize all of the
  Institutions Regulatory Update via                         requirements in the Proposal.
  email, please send your name, company
  or firm name and email address to Lacy                     Limitations on Rate Changes
  Quarles at
                                                             The Proposal implements the CARD Act’s restrictions on rate increases by adopting
This Sidley Update has been prepared by Sidley               a broad rule that an issuer may not increase any APR, annual fee, minimum interest
Austin LLP for informational purposes only and
                                                             charge, or required debt cancellation fee unless the increase fits within one of six
does not constitute legal advice. This information is
not intended to create, and receipt of it does not           exceptions:
constitute, a lawyer-client relationship. Readers
                                                             •   Upon the expiration of a period of six months or longer, but only if the issuer
should not act upon this without seeking advice
from professional advisers.                                      disclosed the length of the period and the higher rate that would apply afterward
Attorney Advertising - For purposes of compliance with New
                                                                 in writing, prior to the commencement of the period. This exception also applies
York State Bar rules, our headquarters are Sidley Austin
                                                                 to deferred interest plans, which the FRB considers to involve a rate increase;
LLP, 787 Seventh Avenue, New York, NY 10019, 212.839.5300
and One South Dearborn, Chicago, IL 60603, 312.853.7000.
Prior results do not guarantee a similar outcome.            •   For a variable-rate plan;
                                                                               FINANCIAL INSTITUTIONS REGULATORY UPDATE
                                                                                                                  PAGE 2

•   For new transactions only, but only following advance             The regulation does not specify the sources from which issuers
    notice and only after the account has been open for a year.       may collect information about the consumer’s assets and
    The issuer may not raise any APR, annual fee, minimum             income, and it does not require issuers to verify the information
    interest charge, or required debt cancellation fee on any         they receive.
    existing balance, and must follow specific rules to allow the
                                                                      This new requirement raises serious concerns, as many issuers
    cardholder to pay off the balance over time;
                                                                      have historically relied on credit scores for underwriting credit
•   For a 60-day delinquency, but only if the reason for the          card accounts. Incorporating the gathering and consideration
    increase is disclosed, and if the issuer returns the cardholder   of income, assets, and current obligations raises a host of
    to the lower rate if the cardholder makes 6 consecutive           practical concerns, and may affect underwriting models.
    minimum payments following the rate increase;
                                                                      The FRB acknowledges that these requirements are taken from
•   Upon the expiration or ter mination of a workout
                                                                      the rules applicable under Regulation Z for underwriting
                                                                      closed-end mortgages. However, the process of underwriting a
•   Upon termination of protection under the Servicemembers           consumer for a mortgage payment that may well be several
    Civil Relief Act.                                                 thousand dollar s a month seems ver y different from
                                                                      underwriting a consumer for a much smaller credit card
One of the key issues raised by these new requirements is the
limitation that temporary rates must be in effect for at least 6      minimum payment. The Proposal does not explain how issuers
months, and the related requirement that the period of a              are expected to translate those concepts.
temporary rate and the “go to” rate be disclosed in writing and       Two-Cycle Billing and Partial Grace Periods
in close proximity to the disclosure of the lower temporary rate.
                                                                      The Proposal broadly prohibits the two-cycle average daily
These rules will limit the types of promotions that many issuers
                                                                      balance computation method. In addition, following the
have offered, and will require disclosures that may be
                                                                      CARD Act, the Proposal requires issuers to give cardholders
operationally difficult to deliver and update.
                                                                      the benefit of a “partial” grace period. In the past, under most
Underwriting Requirements
                                                                      card agreements, a cardholder could only take advantage of the
The CARD Act provides that an “issuer may not open any                grace period if he or she was otherwise eligible, and then paid
credit card account … or increase any credit limit … unless the       off the card balance in full. However, the Proposal will require
card issuer considers the ability of the consumer to make the         issuers to provide a partial grace period to cardholders who are
required payments under the terms of such account.” The               otherwise eligible but who make only a partial payment. The
Proposal implements this requirement by requiring issuers to          Proposal further provides, however, that an issuer can chose to
consider the consumer’s ability to make the required minimum          offer no grace period.
payments based on the consumer’s assets and cur rent
                                                                      Overlimit Transactions
obligations. Issuers are required to have reasonable polices and
procedures to consider this information. There is a safe harbor       Following the CARD Act, the Proposal would significantly
for issuers to measure the minimum payment by assuming full           limit issuers’ ability to charge fees to a consumer for exceeding
utilization of the credit line, and using the applicable minimum      a credit limit. In particular, as a condition to charging an
payment formula on the account.                                       overlimit fee, the issuer will need to:
                                                                            FINANCIAL INSTITUTIONS REGULATORY UPDATE
                                                                                                               PAGE 3

•   Obtain the affirmative consent of the cardholder to the            future payments then fall on the same numerical date
    payment of overlimit transactions, after disclosing the            going forward. The FRB has requested comment on
    consumer’s right to consent, the amount of the overlimit           whether an exception is needed to allow due dates to fall
    fee, and the amount of any penalty rate that may apply as a        on the 29th, 30th, and 31st days of a month.
    result of exceeding the credit limit; and
                                                                   •   Any payment in excess of the required minimum payment
•   Provide the consumer notice of the right to revoke that            must be allocated first to the account balance with the
    consent following any assessment of an overlimit fee.              highest APR, and then to balances with progressively lower
                                                                       APRs. There is a limited exception for deferred interest
The cardholder is permitted to revoke consent at any time.
                                                                       and similar plans, which generally must be treated as
While the issuer is permitted to honor overlimit transactions
                                                                       balances with a 0% APR, except that amounts in excess of
even if the cardholder has not consented, the issuer cannot
                                                                       the required minimum payment must be allocated first to
charge a fee for such a transaction.
                                                                       such balances during the last two cycles prior to expiration
In the Proposal, the FRB also proposes to prohibit a number of         of the plan.
additional practices associated with overlimit transactions,
                                                                   •   Issuers may set reasonable cut-off times for payments
several of which were not mentioned in the CARD Act:
                                                                       received by mail, electronically, by telephone, or in person,
•   Charging more than one overlimit fee per cycle;                    but the cut-off time may not be earlier that 5 p.m. at the
                                                                       location specified for payment. A depository institution
•   Charging a fee for the same overlimit transaction in more
                                                                       issuer that accepts payments in person at a branch or other
    than 3 cycles (unless the consumer makes additional
                                                                       office (but not a retail location) may not specify a cut-off
    overlimit transactions);
                                                                       time that is earlier than the closing time for the branch.
•   Imposing an overlimit fee solely because of the issuer’s
                                                                   •   If the payment due date is a date on which the issuer does
    failure to replenish credit availability after receiving a
                                                                       not receive or accept payments by mail, then the issuer
                                                                       must treat as timely any payments received by any method
•   Conditioning a credit limit on the cardholder’s agreement          on the next business day. However, if the issuer accepts or
    to overlimit transactions; and                                     receives payments on the due date by a means other than
•   Charging an overlimit fee because of fees or charges               mail (e.g., electronic payments), then the issuer is not
    assessed by the issuer in that billing cycle (but the issuer       required to treat payments received on the next business
    may charge an overlimit fee based on posting fees or               day by that method as timely.
    charges from prior billing cycles).                            •   An issuer may only charge a fee to a cardholder for making
Payment Crediting and Allocation                                       a payment by a specific method if the method involves “an
                                                                       expedited service by a customer service representative of
The Proposal sets forth a number of new requirements for the
                                                                       the creditor.” “Expedited service” means that the issuer
crediting and allocation of payments:
                                                                       credits the payment on the same day (or the next day, if
•   Payment due dates must be on the same numerical date               received after the cut-off time). “[B]y a customer service
    each month. Issuers can make changes in response to                representative” means that the cardholder receives the
    consumer requests and for operational reasons, as long as          assistance of a live representative or agent, whether in
                                                                              FINANCIAL INSTITUTIONS REGULATORY UPDATE
                                                                                                                 PAGE 4

    person, by telephone, or online; it does not include a voice-    warnings on periodic statements, and the Proposal incorporates
    response telephone system.                                       these changes into Regulation Z.

•   If an issuer makes a material change in the address for          Of particular note, the Proposal eliminates the option of
    receiving payments or its procedures for handling                providing generic minimum payment information on the
    payments, and the change causes a mater ial delay in             statement, and requires all issuers to provide on a periodic
    crediting payments during the next 60 days, then the issuer      statement specific, individualized information about the
    may not impose a late fee or finance charge for late             cardholder’s expected repayment time and total cost if he or she
                                                                     pays only the minimum payment.
    payment on the account. Examples in the commentary
    include changing a post office box in a way that results in      The Proposal also requires issuers to provide a disclosure of the
    payments sent to the old box not being credited, or closing      amount the cardholder would need to pay in order to pay off
    a branch where a consumer had been permitted to make             the account balance in 3 years, along with an estimate of the
    payments.                                                        savings by doing so. These disclosures must be made in a
                                                                     specified table form. The Proposal provides a number of
Limits on First Year Fees
                                                                     assumptions that issuers can follow in providing the disclosures,
If an issuer charges any fees to a credit card account during the    but requires issuers to consider the actual minimum payment
first year after opening, the issuer may not charge fees in that     formula and APRs (including promotional APRs) applicable to
year that aggregate to more than 25% of the initial credit limit     the account. If an account is in a negative amortization or no
on the account, and the issuer may not require the cardholder        amortization mode, then a modified form of the disclosure is
to pay fees in excess of that amount even if collected outside of    required.
the account.                                                         The Proposal eliminates the requirement to make minimum
This limitation picks up not only annual and monthly fees, and       payment infor mation available by telephone in some
account-opening fees, but also transactional fees such as fees for   circumstances.
cash advances and foreign currency transaction fees. It excludes     Renewal Disclosures
late payment fees, overlimit fees, returned check fees, and non-     The Proposal implements two changes to the requirement in
required fees such as optional debt cancellation.                    existing Regulation Z to provide to the cardholder key credit
The inclusion of transaction fees within this section (such fees     cost disclosures whenever an annual fee is billed.
were not included in the former Regulation AA rules regarding        First, the requirement has been expanded to require the
subprime card fees) means that issuers will need to monitor          disclosures both whenever an annual fee is billed, and also
accounts on an ongoing basis to avoid running afoul of the           whenever any credit card is “renewed,” if there have been any
rule. Although unlikely, it is possible that a cardholder who uses   changes in the key credit terms not previously disclosed to the
a card internationally could incur sufficient foreign transaction    consumer. While ordinarily the issuer would have notified
fees to reach the limit.                                             cardholders of the changes earlier, this disclosure might be
                                                                     required if, for example, the creditor had lowered a fee or
Minimum Payment and Late Payment Warnings
                                                                     finance charge rate and not provided contemporaneous notice.
The CARD Act substantially rewrote the Truth in Lending Act          One issue raised is determining when a card is considered to be
provisions requiring minimum payment and late payment                “renewed,” which is not defined by the Proposal.
                                                                                FINANCIAL INSTITUTIONS REGULATORY UPDATE
                                                                                                                   PAGE 5

Second, the CARD Act and the Proposal eliminate the option             combined with subsequent change-in-terms notices. As a
of providing the required disclosures at the same time an annual       result, issuers would seem to be required to maintain multiple
fee is billed, as long as the cardholder has the option of             generations of documents into which change-in-terms notices
cancelling the account and receiving a refund. Instead, the            have been integrated, and then to match the correct agreement
disclosure must be provided in all cases at least 30 days before       with the cardholder.
the annual fee is billed or the card is otherwise renewed. Many
                                                                       Credit Cards for Young People and College Students
issuers currently rely on the option of providing notice on the
statement where the annual fee is billed, and this will no longer      The Proposal would require specific underwriting for any
be permitted.                                                          account opened for a cardholder under the age of 21. In
                                                                       particular, the issuer would be required to receive a written
Internet Posting
                                                                       application containing either:
The Proposal requires issuers to make their cardholder
                                                                       •   The signed agreement of a cosigner, guarantor, or joint
agreements available to the general public as well as to
                                                                           applicant who is at least 21, together with financial
individual cardholders.
                                                                           information indicating that the cosigner, guarantor, or joint
For the general public, the Proposal will require issuers to               applicant has the ability to make the minimum payments
provide to the FRB a copy of each cardholder agreement used                on the account; or
by the issuer to open new accounts. Each agreement must
include key financial terms (such as the account opening               •   Financial information indicating that the person under 21
disclosures and the credit limit). If this information is not in the       has an independent ability to make the minimum
text of the agreement, it can be provided in an addendum, and              payments on the account. The Proposal does not require
must include ranges or multiple amounts if the issuer, for                 the creditor to obtain verification of this information.
example, offers multiple APRs or credit limits.                        This new requirement would seem to limit the ability to accept
The Proposal establishes a quarterly process for updating the          new cardholders of age 21 or less through certain account
agreements on file with the FRB. In the event of changes,              acquisition channels, such as by telephone. However, the
issuer s are required to provide a new ag reement (and                 proposed commentary provides that the “writing” requirement
addendum). Issuers cannot update the agreements provided to            can be satisfied by an electronic application, without the need
the FRB simply by providing change-in-terms notices.                   to comply with consumer disclosure provisions of the eSign
Issuers must also make available on their own websites all of the
agreements provided to the FRB, although they may update               The proposal also clarifies that issuers must comply with
these more frequently.                                                 Regulation B and the Equal Credit Opportunity Act when
                                                                       evaluating consumers under 21. However, if issuers do not
For individual cardholders, issuers must either post and
                                                                       generally accept cosigners, guarantors, or joint applicants, they
maintain the cardholder’s specific cardholder agreement on the
                                                                       are not required to do so for applicants under 21.
website, or make the cardholder’s agreement available on
request in either electronic or paper form. As with the version        The Proposal also imposes new requirements for credit cards
provided to the FRB, the agreement provided to the cardholder          issued to college students. First, colleges will be required to
must be a single document with an addendum of pricing terms            publicly disclose any agreements they have with issuers for
(if applicable). The issuer may not provide a base agreement           marketing credit cards. Second, issuers will be prohibited from
                                                                                                                  FINANCIAL INSTITUTIONS REGULATORY UPDATE
                                                                                                                                                     PAGE 6

offering tangible items to induce college students to apply for                                          As released, the Proposal’s proposed effective date is February
a credit card, if the offer is made on or near a college campus                                          22, 2010, but the FRB has requested comment on both (1)
(including by mail), or at a college-sponsored event. Notably,                                           whether some provisions should be pushed back until July 1,
this requirement applies to all open-end credit offered to                                               and (2) rules for the transitional period. Issuers should consider
college students, not only credit cards and not only from issuers                                        providing comments, given the operational burden that many
that have a marketing or other agreement with the college.                                               of these rules will impose as well as the potential effect on
Finally, issuers are required to make annual reports to the FRB                                          existing accounts.
concerning marketing or similar agreements that they have
with colleges or affiliated organizations.                                                               Some members of Congress have advocated advancing the
                                                                                                         effective date of the CARD Act’s requirements to as soon as
Settlement of Estates
                                                                                                         December 1, 2009, and legislation to this effect has been
The Proposal requires issuers to adopt policies and procedures                                           introduced in the House of Representatives. It is not clear at
to enable the representatives of estates to determine the amount                                         this point whether that legislation is likely to advance in the
owing on, and pay, the accounts of deceased cardholders. In                                              House, or if it would be taken up by the Senate.
particular, issuers will be prohibited from assessing additional
interest and fees on accounts after the representative requests a
statement of the amount owed.                                                                            The FRB’s Proposal is but the latest significant alteration of the
Timing and Transition Rules                                                                              federal requirements that government credit cards. Moreover,
                                                                                                         the time for comment (30 days) and for compliance (by
One of the key questions not answered by the Proposal is the                                             February 22, 2010, at least for some requirements) is very short.
specific effective dates for various aspects of the Proposal, and
                                                                                                         As a result, issuers need to swiftly examine and understand these
rules for the transition period (for example, whether existing
                                                                                                         important changes. Sidley’s Financial Institutions Regulatory
offers or terms will be grandfathered). The complexity is the
                                                                                                         attorneys are available to assist clients with understanding these
result of the history of the rulemaking. The FRB’s prior
                                                                                                         important issues.
comprehensive amendments to the credit card rules under
Regulation Z, as well as the unfair and deceptive acts and                                               James A. Huizinga                    Karl F. Kaufmann
practices regulations issued by the FRB, the Office of Thrift                                            +1.202.736.8681                      +1.202.736.8133
Supervision, and the National Credit Union Administration, all                                        
published in January 2009, were scheduled to be effective on
                                                                                                         Michael F. McEneney                  John K.Van De Weert
July 1, 2010. But most of the CARD Act’s provisions are
                                                                                                         +1.202.736.8368                      +1.202.736.8094
effective on February 22, 2010 (some already became effective
on August 20, 2009, and a few provisions are not effective until
August 22, 2010).

Sidley Austin LLP, a Delaware limited liability partnership which operates at the firm’s offices
other than Chicago, London, Hong Kong, Singapore and Sydney, is affiliated with other
partnerships, including Sidley Austin LLP, an Illinois limited liability partnership (Chicago); Sidley
Austin LLP, a separate Delaware limited liability partnership (London); Sidley Austin LLP, a
separate Delaware limited liability partnership (Singapore); Sidley Austin, a New York general
partnership (Hong Kong); Sidley Austin, a Delaware general partnership of registered foreign
lawyers restricted to practicing foreign law (Sydney); and Sidley Austin Nishikawa Foreign Law
Joint Enterprise (Tokyo). The affiliated partnerships are referred to herein collectively as Sidley
Austin, Sidley, or the firm.