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					                                                                                                                                   Thursday,
                                                                                                                                   June 14, 2007




                                                                                                                                   Part II

                                                                                                                                   Federal Reserve
                                                                                                                                   System
                                                                                                                                   12 CFR Part 226
                                                                                                                                   Truth in Lending; Proposed Rule
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                                             32948                   Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules

                                             FEDERAL RESERVE SYSTEM                                  employer-sponsored retirement plans                    against inaccurate and unfair credit
                                                                                                     would be exempt from TILA coverage.                    billing and credit card practices.
                                             12 CFR Part 226                                         DATES: Comments must be received on                       TILA’s disclosures differ depending
                                                                                                     or before October 12, 2007.                            on whether consumer credit is an open-
                                             [Regulation Z; Docket No. R–1286]                                                                              end (revolving) plan or a closed-end
                                                                                                     ADDRESSES: You may submit comments,
                                                                                                     identified by Docket No. R–1286, by any                (installment) loan. TILA also contains
                                             Truth in Lending                                                                                               procedural and substantive protections
                                                                                                     of the following methods:
                                             AGENCY:  Board of Governors of the                        • Agency Web Site: http://                           for consumers. TILA is implemented by
                                             Federal Reserve System.                                 www.federalreserve.gov. Follow the                     the Board’s Regulation Z. An Official
                                             ACTION: Proposed rule; request for                      instructions for submitting comments at                Staff Commentary interprets the
                                             public comment.                                         http://www.federalreserve.gov/                         requirements of Regulation Z. By
                                                                                                     generalinfo/foia/ProposedRegs.cfm.                     statute, creditors that follow in good
                                             SUMMARY: The Board proposes to amend                                                                           faith Board or official staff
                                                                                                       • Federal eRulemaking Portal: http://
                                             Regulation Z, which implements the                                                                             interpretations are insulated from civil
                                                                                                     www.regulations.gov. Follow the
                                             Truth in Lending Act (TILA), and the                                                                           liability, criminal penalties, or
                                                                                                     instructions for submitting comments.
                                             staff commentary to the regulation,                                                                            administrative sanction.
                                                                                                       • E-mail: regs.comments@federal
                                             following a comprehensive review of                     reserve.gov. Include the docket number                 II. Summary of Major Proposed
                                             TILA’s rules for open-end (revolving)                   in the subject line of the message.                    Changes
                                             credit that is not home-secured. The                      • Fax: (202) 452–3819 or (202) 452–
                                             proposed revisions take into                                                                                      The goal of the proposed amendments
                                                                                                     3102.                                                  to Regulation Z is to improve the
                                             consideration comments from the public                    • Mail: Jennifer J. Johnson, Secretary,
                                             on an initial advance notice of proposed                                                                       effectiveness of the disclosures that
                                                                                                     Board of Governors of the Federal                      creditors provide to consumers at
                                             rulemaking (ANPR) published in                          Reserve System, 20th Street and
                                             December 2004 on a variety of issues                                                                           application and throughout the life of an
                                                                                                     Constitution Avenue, NW., Washington,                  open-end (not home-secured) account.
                                             relating to the format and content of                   DC 20551.
                                             open-end credit disclosures and the                                                                            The proposed changes are the result of
                                                                                                        All public comments are available                   the Board’s review of the provisions that
                                             substantive protections provided under                  from the Board’s Web site at http://
                                             the regulation. The proposal also                                                                              apply to open-end (not home-secured)
                                                                                                     www.federalreserve.gov/generalinfo/                    credit. The Board’s last comprehensive
                                             considers comments received on a                        foia/ProposedRegs.cfm as submitted,
                                             second ANPR published in October                                                                               review of Regulation Z was in 1981. The
                                                                                                     unless modified for technical reasons.                 Board is proposing changes to format,
                                             2005 that addressed several                             Accordingly, your comments will not be
                                             amendments to TILA’s open-end credit                                                                           timing, and content requirements for the
                                                                                                     edited to remove any identifying or                    five main types of open-end credit
                                             rules contained in the Bankruptcy                       contact information. Public comments
                                             Abuse Prevention and Consumer                                                                                  disclosures governed by Regulation Z:
                                                                                                     may also be viewed electronically or in                (1) Credit and charge card application
                                             Protection Act of 2005. Consumer                        paper in Room MP–500 of the Board’s
                                             testing was conducted as a part of the                                                                         and solicitation disclosures; (2) account-
                                                                                                     Martin Building (20th and C Streets,                   opening disclosures; (3) periodic
                                             review.                                                 NW.) between 9 a.m. and 5 p.m. on
                                                Except as otherwise noted, the                                                                              statement disclosures; (4) change-in-
                                                                                                     weekdays.                                              terms notices; and (5) advertising
                                             proposed changes apply solely to open-
                                             end credit. Disclosures accompanying                    FOR FURTHER INFORMATION CONTACT:                       provisions.
                                             credit card applications and                            Amy Burke or Vivian Wong, Attorneys,                      Applications and solicitations. The
                                             solicitations would highlight fees and                  Krista Ayoub, Dan Sokolov, Ky Tran-                    proposal contains changes to the format
                                             reasons penalty rates might be applied,                 Trong, or John Wood, Counsels, or Jane                 and content to make the credit and
                                             such as for paying late. Creditors would                Ahrens, Senior Counsel, Division of                    charge card application and solicitation
                                             be required to summarize key terms at                   Consumer and Community Affairs,                        disclosures more meaningful and easier
                                             account opening and when terms are                      Board of Governors of the Federal                      for consumers to use. The proposed
                                             changed. The proposal would identify                    Reserve System, at (202) 452–3667 or                   changes include:
                                             specific fees that must be disclosed to                 452–2412; for users of                                    • Adopting new format requirements
                                             consumers in writing before an account                  Telecommunications Device for the Deaf                 for the summary table, including rules
                                             is opened, and give creditors flexibility               (TDD) only, contact (202) 263–4869.                    regarding: Type size and use of boldface
                                             regarding how and when to disclose                      SUPPLEMENTARY INFORMATION:                             type for certain key terms, placement of
                                             other fees imposed as part of the open-                                                                        information, and the use of cross-
                                             end plan. Periodic statements would                     I. Background on TILA and                              references.
                                             break out costs for interest and fees.                  Regulation Z                                              • Revising content, including: A
                                             Two alternatives are proposed dealing                      Congress enacted the Truth in                       requirement that creditors disclose the
                                             with the ‘‘effective’’ or ‘‘historical’’                Lending Act (TILA) based on findings                   duration that penalty rates may be in
                                             annual percentage rate disclosed on                     that economic stability would be                       effect, a shorter disclosure about
                                             periodic statements.                                    enhanced and competition among                         variable rates, new disclosures
                                                Rules of general applicability such as               consumer credit providers would be                     highlighting the effect of creditors’
                                             the definition of open-end credit and                   strengthened by the informed use of                    payment allocation practices, and a
                                             dispute resolution procedures would                     credit resulting from consumers’                       reference to consumer education
                                             apply to all open-end plans, including                  awareness of the cost of credit. The                   materials on the Board’s Web site.
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                                             home-equity lines of credit. Rules                      purposes of TILA are (1) to provide a                     Account-opening disclosures. The
                                             regarding the disclosure of debt                        meaningful disclosure of credit terms to               proposal also contains revisions to the
                                             cancellation and debt suspension                        enable consumers to compare credit                     cost disclosures provided at account
                                             agreements would be revised for both                    terms available in the marketplace more                opening to make the information more
                                             closed-end and open-end credit                          readily and avoid the uninformed use of                conspicuous and easier to read. The
                                             transactions. Loans taken against                       credit; and (2) to protect consumers                   proposed changes include:


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                                                                     Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules                                            32949

                                                • Disclosing certain key terms in a                  ensure consumers better understand the                 member of Congress also submitted
                                             summary table at account opening,                       credit terms offered. These proposed                   comments.
                                             which would be substantially similar to                 revisions include:                                        Scope. Commenters’ views on a
                                             the table required for credit and charge                  • Requiring advertisements that state                staged review of Regulation Z were
                                             card applications and solicitations, in                 a minimum monthly payment on a plan                    divided. Some believe reviewing the
                                             order to summarize for consumers key                    offered to finance the purchase of goods               regulation in stages makes the process
                                             information that is most important to                   or services to state, in equal prominence              manageable and focuses discussion and
                                             informed decision-making.                               to the minimum payment, the time                       analysis. Others supported an
                                                • Adopting a different approach to                   period required to pay the balance and                 independent focus on open-end credit
                                             disclosing fees, to provide greater clarity             the total of payments if only minimum                  rules because they believe open-end
                                             for identifying fees that must be                       payments are made.                                     credit by its nature is distinct from other
                                             disclosed. In addition, creditors would                   • Permitting advertisements to refer                 credit products covered by TILA and
                                             have flexibility to disclose charges                    to a rate as ‘‘fixed’’ only if the                     Regulation Z.
                                             (other than those in the summary table)                 advertisement specifies a time period                     Some commenters supported the
                                             in writing or orally.                                   for which the rate is fixed and the rate               Board’s approach generally, but voiced
                                                Periodic statement disclosures. The                  will not increase for any reason during                concern that looking at the regulation in
                                             proposal also contains revisions to make                that time, or if a time period is not                  a piecemeal fashion may lead to
                                             disclosures on periodic statements more                 specified, if the rate will not increase for           decisions in the early stages of the
                                             understandable, primarily by making                     any reason while the plan is open.                     review that may need to be revisited
                                             changes to the format requirements,                                                                            later. If the review is staged, these
                                                                                                     III. The Board’s Review of Open-End
                                             such as by grouping fees, interest                                                                             commenters want all changes
                                                                                                     Credit Rules
                                             charges, and transactions together. The                                                                        implemented at the same time, to ensure
                                             proposed changes include:                               A. December 2004 Advance Notice of                     consistency between the open-end and
                                                • Itemizing interest charges for                     Proposed Rulemaking                                    closed-end rules.
                                             different types of transactions, such as                  The Board began a review of                             Some commenters urged the Board to
                                             purchases and cash advances, and                        Regulation Z in December 2004.1 The                    include open-end rules affecting home-
                                             providing separate totals of fees and                   Board initiated its review of Regulation               equity lines of credit (HELOCs) in the
                                             interest for the month and year-to-date.                Z by issuing an advance notice of                      initial stage of the review. If the Board
                                                • Modifying the provisions for                       proposed rulemaking (December 2004                     chooses not to expand its review of
                                             disclosing the ‘‘effective APR,’’                       ANPR). 69 FR 70925; December 8, 2004.                  open-end credit rules to cover home-
                                             including format and terminology                        At that time, the Board announced its                  secured credit, these commenters urged
                                             requirements to make it more                            intent to conduct its review of                        the Board to avoid making any revisions
                                             understandable. Because of concerns                     Regulation Z in stages, focusing first on              that would be inconsistent with existing
                                             about the disclosure’s effectiveness,                   the rules for open-end (revolving) credit              HELOC requirements.
                                             however, the Board is also soliciting                                                                             A few commenters concurred with the
                                                                                                     accounts that are not home-secured,
                                             comment on whether this rate should be                                                                         Board’s approach of reviewing
                                                                                                     chiefly general-purpose credit cards and
                                             required to be disclosed.                                                                                      Regulation Z in stages, but they
                                                                                                     retailer credit card plans. The December
                                                • Requiring disclosure of the effect of                                                                     preferred that the Board start with rules
                                                                                                     2004 ANPR sought public comment on
                                             making only the minimum required                        a variety of specific issues relating to               of general applicability, such as
                                             payment on repayment of balances                        three broad categories: the format of                  definitions. These commenters generally
                                             (changes required by the Bankruptcy                     open-end credit disclosures, the content               urged the Board to provide additional
                                             Act).                                                   of those disclosures, and the substantive              clarity on the definition of ‘‘finance
                                                Changes in consumer’s interest rate                  protections provided for open-end                      charge,’’ TILA’s dollar cost of credit.
                                             and other account terms. The proposal                                                                             Finally, a few commenters stated the
                                                                                                     credit under the regulation. The
                                             would expand the circumstances under                                                                           Board needs to review the entire
                                                                                                     December 2004 ANPR solicited
                                             which consumers receive written notice                                                                         regulation at the same time. They
                                                                                                     comment on the scope of the Board’s
                                             of changes in the terms (e.g., an increase              review, and also requested commenters                  suggested a staged approach is not
                                             in the interest rate) applicable to their               to identify other issues that the Board                workable, and cited concerns about
                                             accounts, and increase the amount of                    should address in the review. The                      duplicating efforts, creating
                                             time these notices must be sent before                  comment period closed on March 28,                     inconsistencies, and revisiting changes
                                             the change becomes effective. The                       2005.                                                  made in earlier stages of a lengthy
                                             proposed changes include:                                 The Board received over 200                          review.
                                                • Generally increasing advance notice                comment letters in response to the                        Format. In general, commenters
                                             before a changed term can be imposed                    December 2004 ANPR. More than half of                  representing both consumers and
                                             from 15 to 45 days, to better allow                     the comments were from individual                      industry stated that the tabular format
                                             consumers to obtain alternative                         consumers. About 60 comments were                      requirements for TILA’s direct-mail
                                             financing or change their account usage.                received from the industry or industry                 credit card application and solicitation
                                                • Requiring creditors to provide 45                  representatives, and about 20 comments                 disclosures have proven useful to
                                             days’ prior notice before the creditor                  were received from consumer advocates                  consumers, although a variety of
                                             increases a rate due to the consumer’s                  and community development groups.                      suggestions were made to add or delete
                                             delinquency or default.                                 The Office of the Comptroller of the                   specific disclosures. Many, however,
                                                • When a change-in-terms notice                      Currency, one state agency, and one                    noted that typical account-opening
                                             accompanies a periodic statement,                                                                              disclosures are lengthy and complex,
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                                             requiring a tabular disclosure on the                     1 The review was initiated pursuant to               and suggested that the effectiveness of
                                             front of the periodic statement of the                  requirements of section 303 of the Riegle              account-opening disclosures could be
                                             key terms being changed.                                Community Development and Regulatory                   improved if key terms were summarized
                                                                                                     Improvement Act of 1994, section 610(c) of the
                                                Advertising provisions. The proposal                 Regulatory Flexibility Act of 1980, and section 2222
                                                                                                                                                            in a standardized format, perhaps in the
                                             would revise the rules governing                        of the Economic Growth and Regulatory Paperwork        same format as TILA’s direct-mail credit
                                             advertising of open-end credit to help                  Reduction Act of 1996.                                 card application and solicitation


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                                             32950                   Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules

                                             disclosures. These suggestions were                     confuses consumers, and is difficult to                   In October 2005, the Board published
                                             consistent with the views of some                       explain. Some commenters suggested                     a second ANPR to solicit comment on
                                             members of the Board’s Consumer                         that a disclosure on the periodic                      implementing the Bankruptcy Act
                                             Advisory Council. Industry commenters                   statement that provides context by                     amendments (October 2005 ANPR). 70
                                             supported the Board’s plan to use focus                 explaining what costs are included in                  FR 60235; October 17, 2005. In the
                                             groups or other consumer research tools                 the effective APR might improve its                    October 2005 ANPR, the Board stated its
                                             to test the effectiveness of any proposed               usefulness.                                            intent to implement the Bankruptcy Act
                                             revisions.                                                 Regarding advance notice of changes                 amendments as part of the Board’s
                                                To combat ‘‘information overload,’’                  to rates and fees, comments were                       ongoing review of Regulation Z’s open-
                                             many commenters asked the Board to                      sharply divided. Creditors generally                   end credit rules. The comment period
                                             emphasize only the most important                       believe the current notice requirements                for the October 2005 ANPR closed on
                                             information that consumers need at the                  are adequate, although for rate (and                   December 16, 2005.
                                             time the disclosure is given. They asked                other) changes not involving a                            The Board received approximately 50
                                             the Board to avoid rules that require the               consumer’s default, a number of                        comment letters in response to the
                                             repetitive delivery of complex                          creditors supported increasing the                     October 2005 ANPR. Forty-five letters
                                             information, not all of which is essential              advance notice requirement from 15 to                  were submitted by financial institutions
                                             to comparison shopping, such as a                       30 days. Consumers and consumer                        and their trade groups. Five letters were
                                             lengthy explanation of the creditor’s                   representatives generally believe that                 submitted by consumer groups.
                                             method of calculating balances now                      when terms change, consumers should                       Minimum payment warnings. Under
                                             required at account opening and on                      have the right under TILA to opt out of                the Bankruptcy Act, creditors that offer
                                             periodic statements. Commenters                         the new terms, or be allowed a much                    open-end accounts must provide
                                             suggested that the Board would most                     longer time period to find alternative                 standardized disclosures on each
                                             effectively promote comparison                          credit products. They suggested a two-                 periodic statement about the effects of
                                             shopping by focusing on essential terms                 billing cycle advance notice or as long                making only minimum payments,
                                             in a simplified way. They believe some                  as 90 days. More fundamentally, these                  including an example of how long it
                                             information could also be provided to                   commenters believe card issuers should                 would take to pay off a specified
                                             consumers through nonregulatory,                        be held to the initial terms of the credit             balance, along with a toll-free telephone
                                             educational methods. Taken together,                    contract, at least until the credit card               number that consumers can use to
                                             these approaches could lead to simpler                  expires.                                               obtain an estimate of how long it will
                                             disclosures that consumers might be                        Where triggering events are set forth               take to pay off their own balance if only
                                             more inclined to read and understand.                   in the account agreement such as events                minimum payments are made. The
                                                Content. In general, commenters                      that might trigger penalty pricing,                    Board must develop a table that
                                             provided a variety of views on how to                   creditors believe there is no need to                  creditors can use in responding to
                                             simplify TILA’s cost disclosures. For                   provide additional notice when the                     consumers requesting such estimates.
                                             example, some suggested that creditors                  event occurs; they are not changing a                     Industry commenters generally
                                             should disclose only interest as the                    term, they stated, but merely                          favored limiting the minimum payment
                                             ‘‘finance charge’’ and simply identify all              implementing the agreement. Some                       disclosure to credit card accounts (thus,
                                             other fees and charges. Others suggested                suggest that instead of providing a                    excluding HELOCs and overdraft lines
                                             all fees associated with an open-end                    notice when penalty pricing is triggered,              of credit) and to those consumers who
                                             plan should be disclosed as the ‘‘finance               penalty pricing and the triggers should                regularly make only minimum
                                             charge.’’ Creditors sought, above all,                  be better emphasized in the application                payments. Consumer groups generally
                                             clear rules.                                            and account-opening disclosures.                       favored broadly applying the rule to all
                                                Comments were divided on the                         Consumers and consumer                                 types of open-end credit and to all open-
                                             usefulness of open-end APRs. TILA                       representatives agree that creditors’                  end accountholders.
                                             requires creditors to disclose an                       policies about when terms may change                      Industry commenters supported
                                             ‘‘interest rate’’ APR for shopping                      should be more prominently displayed,                  having an option to provide customized
                                             disclosures (such as in advertisements                  including in the credit card application               information (reflecting a consumer’s
                                             and solicitations) and at account                       disclosures. They further believe the                  actual account status) on the periodic
                                             opening, and an ‘‘effective’’ APR on                    Board should provide new substantive                   statement or in response to a consumer’s
                                             periodic statements that reflects interest              protections to consumers, such as                      telephone call, but also wanted the
                                             and fees, such as transaction charges                   prohibiting the practice of increasing                 option to use a standardized formula
                                             assessed during the billing period. In                  rates merely because the consumer paid                 developed by the Board. Consumer
                                             general, consumer groups suggested that                 late on another credit account.                        group commenters asked the Board to
                                             the Board mandate for shopping                                                                                 require creditors to provide more
                                             disclosures an ‘‘average’’ or ‘‘typical’’               B. The Bankruptcy Act’s Amendments
                                                                                                                                                            customized estimates of payoff periods
                                             effective APR based on an historical                    to TILA and October 2005 Advance
                                                                                                                                                            through the toll-free telephone number
                                             average cost to consumers with similar                  Notice of Proposed Rulemaking
                                                                                                                                                            and to not allow creditors to use a
                                             accounts. An average APR, consumer                         The Bankruptcy Abuse Prevention                     standardized formula, and supported
                                             representatives stated, would give                      and Consumer Protection Act of 2005                    disclosure of an ‘‘actual’’ repayment
                                             consumers a more accurate picture of                    (the ‘‘Bankruptcy Act’’) primarily                     time on the periodic statement.
                                             what consumers’ actual cost might be.                   amended the federal bankruptcy code,                      Late-payment fees. Under the
                                             Regarding the effective APR on periodic                 but also contained several provisions                  Bankruptcy Act, creditors offering open-
                                             statements, consumer advocates stated                   amending TILA. Public Law 109–8, 119                   end accounts must disclose on each
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                                             that it is a key disclosure that is helpful,            Stat. 23. The Bankruptcy Act’s TILA                    periodic statement the earliest date on
                                             and can provide ‘‘shock value’’ to                      amendments principally deal with                       which a late payment fee may be
                                             consumers when fees cause the APR to                    open-end credit accounts and require                   charged, as well as the amount of the
                                             spike for the billing cycle. Commenters                 new disclosures on periodic statements,                fee.
                                             representing industry argued that an                    on credit card applications and                           Industry commenters urged the Board
                                             effective APR is not meaningful,                        solicitations, and in advertisements.                  to base the disclosure requirement on


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                                                                     Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules                                          32951

                                             the contractual payment due date and to                 above, the most prominent statement of                 C. Consumer Testing
                                             disregard any ‘‘courtesy’’ period that                  the temporary rate.                                       A principal goal for the Regulation Z
                                             creditors informally recognize following                   Account termination. Under the
                                                                                                                                                            review is to produce revised and
                                             the contractual payment due date.                       Bankruptcy Act, creditors are prohibited
                                                                                                                                                            improved credit card disclosures that
                                             Although the industry provided mixed                    from terminating an open-end account
                                                                                                                                                            consumers will be more likely to pay
                                             comments on any format requirements,                    before its expiration date solely because
                                                                                                                                                            attention to, understand, and use in
                                             most opposed a proximity requirement                    the consumer has not incurred finance
                                                                                                                                                            their decisions, while at the same time
                                             for disclosing the amount of the fee and                charges on the account. Creditors are
                                                                                                                                                            not creating undue burdens for
                                             the date. Comments were mixed on                        permitted, however, to terminate an
                                                                                                                                                            creditors. In April 2006, the Board
                                             adding information about penalty APRs                   account for inactivity.
                                                                                                        Regarding guidance on what should                   retained a research and consulting firm
                                             and ‘‘cut-off times’’ to the late payment
                                                                                                     be considered an ‘‘expiration date,’’                  (Macro International) that specializes in
                                             disclosures. While supporters (a mix of
                                                                                                     several industry commenters suggested                  designing and testing documents to
                                             industry and consumer commenters)
                                                                                                     using card expiration dates as the                     conduct consumer testing to help the
                                             believe the additional information is
                                                                                                     account expiration date. Others                        Board review Regulation Z’s credit card
                                             useful, others were concerned about the
                                                                                                     cautioned against using such an                        rules. Specifically, the Board used
                                             complexity of such a disclosure, and
                                                                                                     approach, because accounts do not                      consumer testing to develop proposed
                                             opposed the approach for that reason.
                                                                                                     terminate upon a card expiration date.                 model forms for the following credit
                                             Consumer commenters suggested
                                                                                                     Regarding what constitutes ‘‘inactivity,’’             card disclosures required by
                                             substantive protections to ensure
                                             consumers’ payments are timely                          many industry commenters stated no                     Regulation Z:
                                                                                                     further guidance is necessary. Among                      • Summary table disclosures
                                             credited, such as considering the
                                                                                                     those suggesting additional guidance,                  provided in direct-mail solicitations and
                                             postmark date to be the date of receipt.
                                                Internet solicitations. The Bankruptcy               most suggested ‘‘activity’’ should be                  applications;
                                             Act provides that credit card issuers                   measured only by consumers’ actions                       • Disclosures provided at account
                                             offering cards on the Internet must                     (charges and payments) as opposed to                   opening;
                                             include the same tabular summary of                     card issuer activity (for example,                        • Periodic statement disclosures; and
                                             key terms that is currently required for                refunding fees, billing inactivity fees, or               • Subsequent disclosures, such as
                                             applications or solicitations sent by                   waiving unpaid balances).                              notices provided when key account
                                             direct mail.                                               High loan-to-value mortgage credit.                 terms are changed, and notices on
                                                Although the Bankruptcy Act refers                   For home-secured credit that may                       checks provided to access credit card
                                             only to solicitations (where no                         exceed the dwelling’s fair-market value,               accounts.
                                             application is required), most                          the Bankruptcy Act amendments require                     Working closely with the Board,
                                             commenters (both industry and                           creditors to provide additional                        Macro International conducted several
                                             consumer groups) agreed that Internet                   disclosures at the time of application                 tests. Each round of testing was
                                             applications should be treated the same                 and in advertisements (for both open-                  conducted in a different city,
                                             as solicitations. Many industry                         end and closed-end credit). The                        throughout the United States. In
                                             commenters stated that the Board’s                      disclosures would warn consumers that                  addition, the consumer testing groups
                                             interim final rule on electronic                        interest on the portion of the loan that               contained participants with a range of
                                             disclosures, issued in 2001, would be                   exceeds the home’s fair-market value is                ethnicities, ages, educational levels,
                                             appropriate to implement the                            not tax deductible and encourage                       credit card behavior, and whether a
                                             Bankruptcy Act. Regarding accuracy                      consumers to consult a tax advisor.                    consumer likely has a prime or
                                             standards, the majority of industry                     Because these amendments deal with                     subprime credit card.
                                             commenters addressing this issue                        home-secured credit, the Board is not                     Exploratory focus groups. In May and
                                             indicated that issuers should be                        proposing revisions to Regulation Z to                 June 2006, the Board worked with
                                             required to update Internet disclosures                 implement these provisions at this time.               Macro International to conduct two sets
                                             every 30 days, while consumer groups                    The Board anticipates implementing                     of focus groups with credit card
                                             suggested that the disclosures should be                these provisions in connection with the                consumers, in part, to learn more about
                                             updated in a ‘‘timely fashion,’’ with 30                upcoming review of Regulation Z’s rules                what information consumers currently
                                             days being too long in some instances.                  for mortgage transactions. Nevertheless,               use in making decisions about their
                                                Introductory rate offers. Under the                  the following is a summary of the                      credit card accounts. Each focus group
                                             Bankruptcy Act, credit card issuers                     comments received.                                     consisted of between eight and thirteen
                                             offering discounted introductory rates                     In general, creditors asked for                     people that discussed issues identified
                                             must clearly and conspicuously disclose                 flexibility in providing the disclosure,               by the Board and raised by a moderator
                                             in marketing materials the expiration                   either by permitting the notice to be                  from Macro International. Through
                                             date of the offer, the rate that will apply             provided to all mortgage applicants, or                these focus groups, the Board gathered
                                             after that date, and an explanation of                  to be provided later in the approval                   information on what credit terms
                                             how the introductory rate may be                        process after creditors have determined                consumers usually consider when
                                             revoked (for example, if the consumer                   the disclosure is triggered. Similarly, a              shopping for a credit card, what
                                             makes a late payment).                                  number of industry commenters                          information they find useful when they
                                                In general, industry commenters                      advocated limiting the advertising rule                receive a new credit card in the mail,
                                             asked for flexibility in complying with                 to creditors that specifically market high             and what information they find useful
                                             the new requirements. Consumer groups                   loan-to-value mortgage loans. Creditor                 on periodic statements.
                                             supported stricter standards, such as                   commenters asked for guidance on loan-                    Cognitive interviews on existing
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                                             requiring an equivalent typeface for the                to-value calculations and safe harbors                 disclosures. In August 2006, the Board
                                             word ‘‘introductory’’ in immediate                      for how creditors determine property                   worked with Macro International to
                                             proximity to the temporary rate and                     values. Consumer advocates favored                     conduct nine cognitive interviews with
                                             requiring the expiration date and                       triggering the disclosure when the                     credit card customers. These cognitive
                                             subsequent rate to appear either side-by-               possibility of negative amortization                   interviews consisted of one-on-one
                                             side with, or immediately under or                      could occur.                                           discussions with consumers, during


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                                             32952                   Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules

                                             which consumers were asked to view                      Thus, the proposal requires creditors to               Z’s open-end credit rules. During 2005
                                             existing sample credit card disclosures.                group transactions together by type,                   and 2006, for example, the Council
                                             The goals of these interviews were: (1)                 such as purchases, cash advances, and                  discussed the feasibility and
                                             To learn more about what information                    balance transfers. In addition, many                   advisability of reviewing Regulation Z
                                             consumers read when they receive                        consumers more easily noticed the                      in stages, ways to improve the summary
                                             current credit card disclosures; (2) to                 number and amount of fees when the                     table provided on or with credit card
                                             research how easily consumers can find                  fees were itemized and grouped together                applications and solicitations, issues
                                             various pieces of information in these                  with interest charges. Consumers also                  related to TILA’s substantive protections
                                             disclosures; and (3) to test consumers’                 noticed fees and interest charges more                 (including dispute resolution
                                             understanding of certain credit card-                   readily when they were located near the                procedures), and issues related to the
                                             related words and phrases.                              disclosure of the transactions on the                  Bankruptcy Act amendments. In
                                                1. Initial design of disclosures for                 account. Thus, under the proposal,                     addition, the Board met or conducted
                                             testing. In the fall of 2006, the Board                 creditors would be required to group all               conference calls with various industry
                                             worked with Macro International to                      fees together and describe them in a                   and consumer group representatives
                                             develop sample credit card disclosures                  manner consistent with consumers’                      throughout the review process leading
                                             to be used in the later rounds of testing,              general understanding of costs (‘‘interest             to this proposal. The Board also
                                             taking into account information learned                 charge’’ or ‘‘fee’’), without regard to                reviewed disclosures currently provided
                                             through the focus groups and the                        whether the fees would be considered                   by creditors, consumer complaints
                                             cognitive interviews.                                   ‘‘finance charges,’’ ‘‘other charges’’ or              received by the federal banking
                                                2. Additional cognitive interviews and               neither under the regulation.                          agencies, and surveys on credit card
                                             revisions to disclosures. In late 2006 and                 With respect to change-in-terms                     usage to help inform the proposal.2
                                             early 2007, the Board worked with                       notices, consumer testing indicates that
                                             Macro International to conduct four                     much like the account-opening                          E. Reviewing Regulation Z in Stages
                                             rounds of cognitive interviews (between                 disclosures, consumers may not                           Based on the comments received and
                                             seven and nine participants per round),                 typically read such notices, because                   upon its own analysis, the Board is
                                             where consumers were asked to view                      they are often in small print and dense                proceeding with a review of Regulation
                                             new sample credit card disclosures                      prose. To enhance the effectiveness of                 Z in stages. This proposal largely
                                             developed by the Board and Macro                        change-in-terms notices, when a                        contains revisions to rules affecting
                                             International. The rounds of interviews                 creditor is changing terms which were                  open-end plans other than HELOCs
                                             were conducted sequentially to allow                    required to be disclosed in the summary                subject to § 226.5b. These open-end (not
                                             for revisions to the testing materials                  table provided at account opening, the                 home-secured) plans are distinct from
                                             based on what was learned from the                      proposed rules would require the                       other TILA-covered products, and
                                             testing during each previous round.                     creditor to include a table summarizing                conducting a review in stages allows for
                                                Results of testing. Several of the                   any such changed terms. Creditors                      a manageable process. Possible revisions
                                             model forms were developed through                      commonly provide notices about                         to rules affecting HELOCs will be
                                             the testing. A report summarizing the                   changes to terms or rates in the same                  considered in the Board’s review of
                                             results of the testing is available on the              envelope with periodic statements.                     home-secured credit, currently
                                             Board’s public Web site: http://                        Consumer testing indicates that                        underway. To minimize compliance
                                             www.federalreserve.gov.                                 consumers may not typically look at the                burden for creditors offering HELOCs as
                                                Testing participants generally read the              notices if they are provided as separate               well as other open-end credit, many of
                                             summary table provided in direct-mail                   inserts given with periodic statements.                the open-end rules would be
                                             credit card solicitations and                           Thus, in such cases, a table                           reorganized to delineate clearly the
                                             applications and ignored information                    summarizing the change would have to                   requirements for HELOCs and other
                                             presented outside of the table. Thus, the               appear on the periodic statement                       forms of open-end credit. Although this
                                             proposal requires that information about                directly above the transaction list,                   reorganization would increase the size
                                             events that trigger penalty rates and                   where consumers are more likely to                     of the regulation and commentary, the
                                             about important fees (late-payment fees,                notice the changes.                                    Board believes a clear delineation of
                                             over-the-credit-limit fees, balance                        Additional testing after comment                    rules for HELOCs and other forms of
                                             transfer fees, and cash advance fees) be                period. After receiving comments from                  open-end credit pending the review of
                                             placed in the table. Currently, this                    the public on the proposal and the                     HELOC rules provides a clear
                                             information may be placed outside the                   revised disclosure forms, the Board will               compliance benefit to creditors.
                                             table.                                                  work with Macro International to revise                Creditors that generate a single periodic
                                                With respect to the account-opening                  the model disclosures. Macro                           statement for all open-end products
                                             disclosures, consumer testing indicates                 International then will conduct                        would be given the option to retain the
                                             that consumers commonly do not                          additional rounds of cognitive                         existing periodic statement disclosure
                                             review their account agreements, which                  interviews to test the revised                         scheme for HELOCs, or to disclose
                                             are often in small print and dense prose.               disclosures. After the cognitive                       information on periodic statements
                                             The proposal would require creditors to                 interviews, quantitative testing will be               under the revised rules for other open-
                                             include a table summarizing the key                     conducted. The goal of the quantitative                end plans.
                                             terms applicable to the account, similar                testing is to measure consumers’
                                             to the table required for credit card                                                                          F. Implementation Period
                                                                                                     comprehension and the usability of the
                                             applications and solicitations. Setting                 newly-developed disclosures relative to                  The Board contemplates providing
                                             apart the most important terms in this                                                                         creditors sufficient time to implement
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                                                                                                     existing disclosures and formats.
                                             way will better ensure that consumers
                                             are apprised of those terms.                            D. Other Outreach and Research                           2 Surveys reviewed include: Thomas A. Durkin,

                                                With respect to periodic statement                     The Board also solicited input from                  Credit Cards: Use and Consumer Attitudes, 1970-
                                                                                                                                                            2000, Federal Reserve Bulletin, (September 2000);
                                             disclosures, testing participants found it              members of the Board’s Consumer                        Thomas A. Durkin, Consumers and Credit
                                             beneficial to have the different types of               Advisory Council on various issues                     Disclosures: Credit Cards and Credit Insurance,
                                             transactions grouped together by type.                  presented by the review of Regulation                  Federal Reserve Bulletin (April 2002).



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                                                                     Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules                                                     32953

                                             any revisions that may be adopted. The                  requirement complicates, hinders, or                   A. Credit Card Applications and
                                             Board seeks comment on an appropriate                   makes more expensive the credit                        Solicitations
                                             implementation period.                                  process; (3) the status of the borrower,                  Under Regulation Z, credit and charge
                                                                                                     including any related financial                        card issuers are required to provide
                                             IV. The Board’s Rulemaking Authority
                                                                                                     arrangements of the borrower, the                      information about key costs and terms
                                                TILA mandates that the Board                         financial sophistication of the borrower               with their applications and
                                             prescribe regulations to carry out the                  relative to the type of transaction, and               solicitations.3 This information is
                                             purposes of the act. TILA also                          the importance to the borrower of the                  abbreviated, to help consumers focus on
                                             specifically authorizes the Board, among                credit, related supporting property, and               only the most important terms and
                                             other things, to do the following:                      coverage under TILA; (4) whether the
                                                • Issue regulations that contain such                                                                       decide whether to apply for the credit
                                                                                                     loan is secured by the principal                       card account. If consumers respond to
                                             classifications, differentiations, or other             residence of the borrower; and (5)
                                             provisions, or that provide for such                                                                           the offer and are issued a credit card,
                                                                                                     whether the exemption would                            creditors must provide more detailed
                                             adjustments and exceptions for any                      undermine the goal of consumer
                                             class of transactions, that in the Board’s                                                                     disclosures at account opening, before
                                                                                                     protection. The rationales for these                   the first transaction occurs.
                                             judgment are necessary or proper to                     proposed exemptions are explained                         The application and solicitation
                                             effectuate the purposes of TILA,                        below.                                                 disclosures are considered among the
                                             facilitate compliance with the act, or
                                                                                                     V. Discussion of Major Proposed                        most effective TILA disclosures
                                             prevent circumvention or evasion. 15
                                                                                                     Revisions                                              principally because they must be
                                             U.S.C. 1604(a).
                                                • Exempt from all or part of TILA any                                                                       presented in a standardized table with
                                                                                                        The goal of the proposed revisions is
                                             class of transactions if the Board                                                                             headings, content, and format
                                                                                                     to improve the effectiveness of the
                                             determines that TILA coverage does not                                                                         substantially similar to the model forms
                                                                                                     Regulation Z disclosures that must be
                                             provide a meaningful benefit to                                                                                published by the Board. In 2001, the
                                                                                                     provided to consumers for open-end
                                             consumers in the form of useful                                                                                Board revised Regulation Z to enhance
                                                                                                     accounts. A summary of the key account
                                             information or protection. The Board                                                                           the application and solicitation
                                                                                                     terms must accompany applications and
                                             must consider factors identified in the                                                                        disclosures by adding rules and
                                                                                                     solicitations for credit card accounts.
                                             act and publish its rationale at the time                                                                      guidance concerning the minimum type
                                                                                                     For all open-end credit plans, creditors
                                             it proposes an exemption for comment.                                                                          size and requiring additional fee
                                                                                                     must disclose costs and terms at account
                                             15 U.S.C. 1604(f).                                      opening, generally before the first                    disclosures.
                                                • Add or modify information required                                                                           Penalty pricing. The proposal would
                                                                                                     transaction. Consumers must receive
                                             to be disclosed with credit and charge                                                                         make several revisions that seek to
                                                                                                     periodic statements of account activity,
                                             card applications or solicitations if the                                                                      improve consumers’ understanding of
                                                                                                     and creditors must provide notice before
                                             Board determines the action is                                                                                 default or penalty pricing. Currently,
                                                                                                     certain changes in the account terms
                                             necessary to carry out the purposes of,                                                                        credit card issuers must disclose inside
                                                                                                     may become effective.
                                             or prevent evasions of, the application                    To shop for and understand the cost                 the table the APR that will apply in the
                                             and solicitation disclosure rules. 15                   of credit, consumers must be able to                   event of the consumer’s ‘‘default.’’ Some
                                             U.S.C. 1637(c)(5).                                      identify and understand the key terms                  creditors define a ‘‘default’’ as making
                                                • Require disclosures in                             of open-end accounts. But the terms and                one late payment or exceeding the credit
                                             advertisements of open-end plans. 15                    conditions affecting credit card account               limit once. The actions that may trigger
                                             U.S.C. 1663.                                            pricing can be complex. The proposed                   the penalty APR are currently required
                                                In the course of developing the                      revisions to Regulation Z are intended                 to be disclosed outside the table.
                                             proposal, the Board has considered the                  to provide the most essential                             Consumer testing indicated that many
                                             information collected from comment                      information to consumers when the                      consumers did not notice the
                                             letters submitted in response to its                    information would be most useful to                    information about penalty pricing when
                                             ANPRs, its experience in implementing                   them, with content and formats that are                it was disclosed outside the table. Under
                                             and enforcing Regulation Z, and the                     clear and conspicuous. The proposed                    the proposal, card issuers would be
                                             results obtained from testing various                   revisions are expected to improve                      required to include in the table the
                                             disclosure options in controlled                        consumers’ ability to make informed                    specific actions that trigger penalty
                                             consumer tests. For the reasons                         credit decisions and enhance                           APRs (such as a late payment), the rate
                                             discussed in this notice, the Board                     competition among credit card issuers.                 that will apply, the balances to which
                                             believes this proposal is appropriate to                Many of the changes are based on the                   the penalty rate will apply, and the
                                             effectuate the purposes of TILA, to                     consumer testing that was conducted in                 circumstances under which the penalty
                                             prevent the circumvention or evasion of                 connection with the review of                          rate will expire or, if true, the fact that
                                             TILA, and to facilitate compliance with                 Regulation Z.                                          the penalty rate could apply
                                             the act.                                                   In considering the proposed revisions,              indefinitely. The regulation would
                                                Also as explained in this notice, the                the Board has also sought to balance the               require card issuers to use the term
                                             Board believes that the specific                        potential benefits for consumers with                  ‘‘penalty APR’’ because the testing
                                             exemptions proposed are appropriate                     the compliance burdens imposed on                      demonstrated that some consumers are
                                             because the existing requirements do                    creditors. For example, the proposed                   confused by the term ‘‘default rate.’’
                                             not provide a meaningful benefit to                     revisions seek to provide greater                         Similarly, the proposal requires card
                                             consumers in the form of useful                         certainty to creditors in identifying what             issuers to disclose inside (rather than
                                             information or protection. In reaching                  costs must be disclosed for open-end                   outside) the table the fees for paying
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                                             this conclusion, the Board considered                   plans, and when those costs must be                    late, exceeding a credit limit, or making
                                             (1) the amount of the loan and whether                  disclosed. More effective disclosures                  a payment that is returned, along with
                                             the disclosure provides a benefit to                    may also reduce customer confusion                       3 Charge cards are a type of credit card for which
                                             consumers who are parties to the                        and misunderstanding, which may also                   full payment is typically expected upon receipt of
                                             transaction involving a loan of such                    ease creditors’ costs relating to                      the billing statement. To ease discussion, this notice
                                             amount; (2) the extent to which the                     consumer complaints and inquiries.                     will refer simply to ‘‘credit cards.’’



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                                             32954                   Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules

                                             a cross-reference to the penalty rate if,               the account. Typically, fees for the                   that may be imposed as part of the
                                             for example, paying late could also                     issuance or availability of credit are                 credit plan (‘‘other charges’’), such as a
                                             trigger the penalty rate. Cash advance                  billed to consumers on the first periodic              late-payment charge. Consumers’’ rights
                                             fees and balance transfer fees would                    statement, and can substantially reduce                and responsibilities in the case of
                                             also be disclosed inside the table. This                the amount of credit available to the                  unauthorized use or billing disputes
                                             proposed change is also based on                        consumer. For example, the initial fees                must also be explained. Currently, there
                                             consumer testing results; fees disclosed                on an account with a $250 credit limit                 are few format requirements for these
                                             outside the table were often not noticed.               may reduce the available credit to less                account-opening disclosures, which are
                                             Requiring card issuers to disclose                      than $100. Consumer complaints                         typically interspersed among other
                                             returned-payment fees would be a new                    received by the federal banking agencies               contractual terms in the creditor’s
                                             disclosure.                                             state that consumers were unaware                      account agreement.
                                                Variable-rate information. Currently,                when they applied for cards of how                        Account-opening summary table.
                                             applications and solicitations offering                 little credit would be available after all             Account-opening disclosures have often
                                             variable APRs must disclose inside the                  the fees were assessed at account                      been criticized because the key terms
                                             table the index or formula used to make                 opening.                                               TILA requires to be disclosed are often
                                             adjustments and the amount of any                          To address this concern, the proposal               interspersed within the credit
                                             margin that is added. Additional details,               would require additional disclosures if                agreements, and such agreements are
                                             such as how often the rate may change,                  the card issuer requires fees or a                     long and complex. The proposal to
                                             must be disclosed outside the table.                    security deposit to issue the card that                require creditors to include a table
                                             Under the proposal, information about                   are 25 percent or more of the minimum                  summarizing the key terms addresses
                                             variable APRs would be reduced to a                     credit limit offered for the account. In               that concern by making the information
                                             single phrase indicating the APR varies                 such cases, the card issuer would be                   more conspicuous. Creditors may
                                             ‘‘with the market,’’ along with a                       required to include an example in the                  continue, however, to provide other
                                             reference to the type of index, such as                 table of the amount of available credit                account-opening disclosures, aside from
                                             ‘‘Prime.’’ Consumer testing indicated                   the consumer would have after paying                   the fees and terms specified in the table,
                                             that few consumers use the variable-rate                the fees or security deposit, assuming                 with other terms in their account
                                             information when shopping for a card.                   the consumer receives the minimum                      agreements.
                                             Moreover, participants were distracted                  credit limit.                                             The new table provided at account
                                             or confused by details about margin                        Balance computation methods. TILA                   opening would be substantially similar
                                             values, how often the rate may change,                  requires creditors to identify their                   to the table provided with direct-mail
                                             and where an index can be found.                        balance computation method by name,                    credit card applications and
                                                Payment allocation. The proposal                     and Regulation Z requires that the                     solicitations. Consumer testing and
                                             would add a new disclosure to the table                 disclosure be inside the table. However,               surveys indicate that consumers
                                             about the effect on credit costs of                     consumer testing suggests that these                   generally are aware of the table on
                                             creditors’ payment allocation methods                   names, such as the ‘‘two-cycle average                 applications and solicitations.
                                             when payments are applied entirely to                   daily balance method,’’ hold little                    Consumer testing also indicates that
                                             transferred balances at low introductory                meaning for consumers, and that                        consumers may not typically read their
                                             APRs. If, as is common, a creditor                      consumers do not consider such                         account agreements, which are often in
                                             allocates payments to low-rate balances                 information when shopping for                          small print and dense prose. Thus,
                                             first, consumers who make purchases on                  accounts. Accordingly, the proposed                    setting apart the most important terms
                                             the account will not be able to take                    rule requires creditors to place the name              in a summary table will better ensure
                                             advantage of any ‘‘grace period’’ on                    of the balance computation method                      that consumers are aware of those terms.
                                             purchases, without paying off the entire                outside the table, so that the disclosure                 The table required at account opening
                                             balance, including the low-rate balance                 does not detract from information that is              would include more information than
                                             transfer. Consumer testing indicated                    more important to consumers.                           the table required at application. For
                                             that consumers are often confused about                                                                        example, it would include a disclosure
                                                                                                     B. Account-Opening Disclosures                         of any fee for transactions in a foreign
                                             this aspect of balance transfer offers.
                                             The new disclosure would alert                             Regulation Z requires creditors to                  currency or that take place in a foreign
                                             consumers that they will pay interest on                disclose costs and terms before the first              country. However, to reduce compliance
                                             their purchases until the transferred                   transaction is made on the account. The                burden for creditors that provide
                                             balance is paid in full.                                disclosures must specify the                           account-opening disclosures at
                                                Web site reference. The proposal                     circumstances under which a ‘‘finance                  application, the proposal would allow
                                             would also require card issuers to                      charge’’ may be imposed and how it will                creditors to provide the more specific
                                             include a reference to the Board’s Web                  be determined. A ‘‘finance charge’’ is                 and inclusive account-opening table at
                                             site, where additional information is                   any charge that may be imposed as a                    application in lieu of the table otherwise
                                             available about how to compare credit                   condition of or an incident to the                     required at application.
                                             cards and what factors to consider. This                extension of credit, and includes, for                    How charges are disclosed. Under the
                                             responds to commenters who suggested                    example, interest, transaction charges,                current rules, a creditor must disclose
                                             that the Board consider nonregulatory                   and minimum charges. The finance                       any ‘‘finance charge’’ or ‘‘other charge’’
                                             approaches to provide opportunities for                 charge disclosures include a disclosure                in the written account-opening
                                             consumers to learn about credit                         of each periodic rate of interest that may             disclosures. A subsequent written notice
                                             products.                                               be applied to an outstanding balance                   is required if one of the fees disclosed
                                                Subprime accounts. The proposal also                 (e.g., purchases, cash advances) as well               at account opening increases or if
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                                             addresses a concern that has been raised                as the corresponding annual percentage                 certain fees are newly introduced during
                                             about subprime credit cards, which are                  rate (APR). Creditors must also explain                the life of the plan. The terms ‘‘finance
                                             generally offered to consumers with low                 any grace period for making a payment                  charge’’ and ‘‘other charge’’ are given
                                             credit scores or credit problems.                       without incurring a finance charge.                    broad and flexible meanings in the
                                             Subprime credit cards often have                        They must also disclose the amount of                  regulation and commentary. This
                                             substantial fees associated with opening                any charge other than a finance charge                 ensures that TILA adapts to changing


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                                                                     Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules                                           32955

                                             conditions, but it also creates                         that the charges were disclosed long                   amount of fees when the fees are
                                             uncertainty. The distinctions among                     before they became relevant to the                     itemized and grouped together.
                                             finance charges, other charges, and                     consumer. The Board believes it would                     Thus, under the proposal, creditors
                                             charges that do not fall into either                    be useful to consumers to cover such                   would be required to group all charges
                                             category are not always clear. As                       charges under TILA as part of a rule that              together and describe them in a manner
                                             creditors develop new kinds of services,                permits their disclosure at a relevant                 consistent with consumers’ general
                                             some find it difficult to determine if                  time. Further, as new services (and                    understanding of costs (‘‘interest
                                             associated charges for the new services                 associated charges) are developed, the                 charge’’ or ‘‘fee’’), without regard to
                                             meet the standard for a ‘‘finance charge’’              proposal minimizes risk of civil liability             whether the charges would be
                                             or ‘‘other charge’’ or are not covered by               associated with the determination as to                considered ‘‘finance charges,’’ ‘‘other
                                             TILA at all. This uncertainty can pose                  whether a fee is a finance charge or an                charges,’’ or neither. Interest charges
                                             legal risks for creditors that act in good              other charge, or is not covered by TILA                would be identified by type (for
                                             faith to comply with the law. Examples                  at all.                                                example, interest on purchases or
                                             of included or excluded charges are in                                                                         interest on balance transfers) as would
                                             the regulation and commentary, but                      C. Periodic Statements                                 fees (for example, cash advance fee or
                                             these examples cannot provide                              Creditors are required to provide                   late-payment fee).
                                             definitive guidance in all cases.                       periodic statements reflecting the                        Consumer testing also indicated that
                                             Creditors are subject to civil liability                account activity for the billing cycle                 many consumers more quickly and
                                             and administrative enforcement for                      (typically, about one month). In                       accurately determined the total dollar
                                             underdisclosing the finance charge or                   addition to identifying each transaction               cost of credit for the billing cycle when
                                             otherwise making erroneous                              on the account, creditors must identify                a total dollar amount of fees for the
                                             disclosures, so the consequences of an                  each ‘‘finance charge’’ using that term,               cycle was disclosed. Thus, the proposal
                                             error can be significant. Furthermore,                  and each ‘‘other charge’’ assessed                     would require creditors to disclose the
                                             overdisclosure of rates and finance                     against the account during the statement               (1) total fees and (2) total interest
                                             charges is not permitted by Regulation                  period. When a periodic interest rate is               imposed for the cycle. The proposal
                                             Z for open-end credit.                                  applied to an outstanding balance to                   would also require disclosure of year-to-
                                                The fee disclosure rules also have                   compute the finance charge, creditors                  date totals for interest charges and fees.
                                             been criticized as being outdated. These                must disclose the periodic rate and its                For many consumers, costs disclosed in
                                             rules require creditors to provide fee                  corresponding APR. Creditors must also                 dollars are more readily understood
                                             disclosures at account opening, which                   disclose an ‘‘effective’’ or ‘‘historical’’            than costs disclosed as percentage rates.
                                             may be months, and possibly years,                      APR for the billing cycle, which, unlike               The year-to-date figures are intended to
                                             before a particular disclosure is relevant                                                                     assist consumers in better
                                                                                                     the corresponding APR, includes not
                                             to the consumer, such as when the                                                                              understanding the overall cost of their
                                                                                                     just interest but also finance charges
                                             consumer calls the creditor to request a                                                                       credit account and would be an
                                                                                                     imposed in the form of fees (such as
                                             service for which a fee is imposed. In                                                                         important disclosure and an effective
                                                                                                     cash advance fees or balance transfer
                                             addition, an account-related transaction                                                                       aid in understanding annualized costs,
                                                                                                     fees). Periodic statements must also
                                             may occur by telephone, when a written                                                                         especially if the Board were to eliminate
                                                                                                     state the time period a consumer has to
                                             disclosure is not feasible.                                                                                    the requirement to disclose the effective
                                                                                                     pay an outstanding balance to avoid
                                                The proposed rule is intended to                                                                            APR on periodic statements, as
                                                                                                     additional finance charges (the ‘‘grace
                                             respond to these criticisms while still                                                                        discussed below.
                                                                                                     period’’), if applicable.                                 The effective APR. The ‘‘effective’’
                                             giving full effect to TILA’s requirement
                                             to disclose credit charges before they are                 Fees and interest costs. The proposal               APR disclosed on periodic statements
                                             imposed. Accordingly, under the                         contains a number of revisions to the                  reflects the cost of interest and certain
                                             proposal, the rules would be revised to                 periodic statement to improve                          other finance charges imposed during
                                             (1) specify precisely the charges that                  consumers’ understanding of fees and                   the statement period. For example, for a
                                             creditors must disclose in writing at                   interest costs. Currently, creditors must              cash advance, the effective APR reflects
                                             account opening (interest, minimum                      identify on periodic statements any                    both interest and any flat or
                                             charges, transaction fees, annual fees,                 ‘‘finance charges’’ that have been added               proportional fee assessed for the
                                             and penalty fees such as for paying late),              to the account during the billing cycle,               advance.
                                             which would be listed in the summary                    and creditors typically list these charges                For the reasons discussed below, the
                                             table, and; (2) permit creditors to                     with other transactions, such as                       Board is proposing two alternative
                                             disclose other less critical charges orally             purchases, chronologically on the                      approaches to address the effective APR.
                                             or in writing before the consumer agrees                statement. The finance charges must be                 The first approach would try to improve
                                             to or becomes obligated to pay the                      itemized by type. Thus, interest charges               consumer understanding of this rate and
                                             charge. Although the proposal would                     might be described as ‘‘finance charges                reduce creditor uncertainty about its
                                             permit creditors to disclose certain costs              due to periodic rates.’’ Charges such as               calculation. The second approach
                                             orally for purposes of TILA, the Board                  late payment fees, which are not                       would eliminate the requirement to
                                             anticipates that creditors will continue                ‘‘finance charges,’’ are typically                     disclose the effective APR.
                                             to identify fees in the account agreement               disclosed individually and are                            Creditors believe the effective APR
                                             for contract or other reasons.                          interspersed among other transactions.                 should be eliminated. They believe
                                                Under the proposal, some charges                        Consumer testing indicated that                     consumers do not understand the
                                             would be covered by TILA that the                       consumers generally understand that                    effective APR, including how it differs
                                             current regulation, as interpreted by the               ‘‘interest’’ is the cost that results from             from the corresponding (interest rate)
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                                             staff commentary, excludes from TILA                    applying a rate to a balance over time                 APR, why it is often ‘‘high,’’ and which
                                             coverage, such as fees for expedited                    and distinguish ‘‘interest’’ from other                fees the effective APR reflects. Creditors
                                             payment and expedited delivery. It may                  fees, such as a cash advance fee or a late             say they find it difficult, if not
                                             not have been useful to consumers to                    payment fee. Consumer testing also                     impossible, to explain the effective APR
                                             cover such charges under TILA when                      indicated that many consumers more                     to consumers who call them with
                                             such coverage would have meant only                     easily determine the number and                        questions or concerns. They note that


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                                             callers sometimes believe, erroneously,                 however, the Board is also seeking                        Minimum payments. The Bankruptcy
                                             that the effective APR signals a                        comment on an alternative proposal to                  Act requires creditors offering open-end
                                             prospective increase in their interest                  eliminate the disclosure on the basis                  plans to provide a warning about the
                                             rate, and they may make uninformed                      that it may not provide consumers a                    effects of making only minimum
                                             decisions as a result. And, creditors say,              meaningful benefit.                                    payments. The proposal would
                                             even if the consumer does understand                       Transactions. Currently, there are no               implement this requirement solely for
                                             the effective APR, the disclosure does                  format requirements for disclosing                     credit card issuers. Under the proposal,
                                             not provide any more information than                   different types of transactions, such as               card issuers must provide (1) a
                                             a disclosure of the total dollar costs for              purchases, cash advances, and balance                  ‘‘warning’’ statement indicating that
                                             the billing cycle. Moreover, creditors                  transfers on periodic statements. Often,               making only the minimum payment will
                                             say the effective APR is arbitrary and                  transactions are presented together in                 increase the interest the consumer pays
                                             inherently inaccurate, principally                      chronological order. Consumer testing                  and the time it takes to repay the
                                             because it amortizes the cost for credit                indicated that participants found it                   consumer’s balance; (2) a hypothetical
                                             over only one month (billing cycle) even                helpful to have similar types of                       example of how long it would take to
                                             though the consumer may take several                    transactions grouped together on the                   pay a specified balance in full if only
                                             months (or longer) to repay the debt.                   statement. Consumers also found it                     minimum payments are made; and (3) a
                                                Consumer groups acknowledge that                     helpful, within the broad grouping of                  toll-free telephone number that
                                             the effective APR is not well                           fees and transactions, when transactions               consumers may call to obtain an
                                             understood, but argue that it                           were segregated by type (e.g., listing all             estimate of the time it would take to
                                             nonetheless serves a useful purpose by                  purchases together, separate from cash                 repay their actual account balance using
                                             showing the higher cost of some credit                  advances or balance transfers). Further,               minimum payments. Most card issuers
                                             transactions. They contend the effective                consumers noticed fees and interest                    must establish and maintain their own
                                             APR helps consumers decide each                         charges more readily when they were                    toll-free telephone numbers to provide
                                             month whether to continue using the                     located near the transactions. For these               the repayment estimates. However, the
                                             account, to shop for another credit                     reasons, the proposal requires creditors               Board is required to establish and
                                             product, or to use an alternative means                 to: (1) Group similar transactions                     maintain, for two years, a toll-free
                                             of payment such as a debit card.                        together by type, such as purchases,                   telephone number for creditors that are
                                             Consumer groups also contend that                       cash advances, and balance transfers,                  depository institutions having assets of
                                             reflecting costs, such as cash advance                  and (2) group fees and interest charges                $250 million or less. This number is for
                                             fees and balance transfer fees, in the                  together, itemized by type, with the list              the customers of those institutions to
                                             effective APR creates a ‘‘sticker shock’’               of transactions.                                       call to get answers to questions about
                                             and alerts consumers that the overall                                                                          how long it will take to pay their
                                                                                                        Late payments. Currently, creditors                 account in full making only the
                                             cost of a transaction for the cycle is high             must disclose the date by which
                                             and exceeds the advertised                                                                                     minimum payment. The Federal Trade
                                                                                                     consumers must pay a balance to avoid                  Commission (FTC) must maintain a
                                             corresponding APR. This shock, they                     finance charges. Creditors must also
                                             say, may persuade some consumers not                                                                           similar toll-free telephone number for
                                                                                                     disclose any cut-off time for receiving                use by customers of creditors that are
                                             to use certain features on the account,                 payments on the payment due date; this
                                             such as cash advances, in the future. In                                                                       not depository institutions. In order to
                                                                                                     is usually disclosed on the reverse side               standardize the information provided to
                                             their view, the utility of the effective                of periodic statements. The Bankruptcy
                                             APR would be maximized if it reflected                                                                         consumers through the toll-free
                                                                                                     Act amendments expressly require                       telephone numbers, the Bankruptcy Act
                                             all costs imposed during the cycle                      creditors to disclose the payment due
                                             (rather than only some costs as is                                                                             amendments direct the Board to prepare
                                                                                                     date (or if different, the date after which            a ‘‘table’’ illustrating the approximate
                                             currently the case).                                    a late-payment fee may be imposed)
                                                As part of the consumer testing, mock                                                                       number of months it would take to
                                                                                                     along with the amount of the late-                     repay an outstanding balance if the
                                             periodic statements were developed in
                                                                                                     payment fee.                                           consumer pays only the required
                                             an attempt to improve consumers’
                                             understanding of the effective APR. A                      Under the proposal, creditors would                 minimum monthly payments and if no
                                             written explanation and varying                         be required to disclose the payment due                other advances are made (‘‘generic
                                             terminology were tested. In most rounds                 date on the front side of the periodic                 repayment estimate’’).
                                             participants showed little                              statement and, closely proximate to the                   Pursuant to the Bankruptcy Act
                                             understanding of the effective APR, but                 date, any cut-off time if it is before 5               amendments, the proposal also allows a
                                             the form was adjusted between rounds                    p.m. Consumer testing indicates that                   card issuer to establish a toll-free
                                             as to terminology and format, and in the                many consumers believe cut-off times                   telephone number to provide customers
                                             last round a number of participants                     are the close of the business day and                  with the actual number of months that
                                             showed more understanding of the                        more readily notice the cut-off time                   it will take consumers to repay their
                                             effective APR.                                          when it is located near the due date.                  outstanding balance (‘‘actual repayment
                                                Thus, the draft proposal includes a                     Creditors would also be required to                 disclosure’’) instead of providing an
                                             number of revisions to the presentation                 disclose, in close proximity to the due                estimate based on the Board-created
                                             of the effective APR intended to help                   date, the amount of the late-payment fee               table. A card issuer that does so need
                                             consumers understand the figure. In                     and the penalty APR that could be                      not include a hypothetical example on
                                             addition, the proposal seeks to improve                 triggered by a late payment. Applying                  its periodic statements, but must
                                             consumer understanding and reduce                       the penalty APR to outstanding balances                disclose the warning statement and the
                                                                                                                                                            toll-free telephone number.
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                                             creditor uncertainty by specifying more                 can significantly increase costs. Thus, it
                                                                                                     is important for consumers to be alerted                  The proposal also allows card issuers
                                             clearly which fees are to be included in
                                                                                                     to the consequence of paying late.                     to provide the actual repayment
                                             the effective APR.4 As mentioned,
                                                                                                                                                            disclosure on their periodic statements.
                                               4 The proposal also would reverse a staff             address for the first time foreign transaction fees,
                                                                                                                                                            Card issuers would be encouraged to
                                             commentary provision that excludes ATM fees from        which it would clarify are to be included in the       use this approach. Participants in
                                             the finance charge and effective APR; and it would      finance charge and effective APR.                      consumer testing who typically carry


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                                                                     Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules                                             32957

                                             credit card balances (revolvers) found                  which would give consumers about a                     proposal, if a notice enclosed with a
                                             an estimated repayment period based on                  month to pursue their options.                         periodic statement discusses a change to
                                             terms that apply to their own account                      Penalty rates. Currently, creditors                 a term that must be disclosed in the
                                             more useful than a hypothetical                         must inform consumers about rates that                 account-opening summary table, or
                                             example. To encourage card issuers to                   are increased due to default or                        announces that a penalty rate will be
                                             provide the actual repayment disclosure                 delinquency, but not in advance of                     imposed on the account, a table
                                             on their periodic statements, the                       implementation of the increase.                        summarizing the impending change
                                             proposal provides that if card issuers do               Contractual thresholds for default are                 must appear on the periodic statement.
                                             so, they need not disclose the warning,                 sometimes very low, and penalty                        The table would have to appear directly
                                             the hypothetical example and a toll-free                pricing commonly applies to all existing               above the transaction list, in light of
                                             telephone number on the periodic                        balances, including low-rate                           testing that shows many consumers tend
                                             statement, nor need they maintain a toll-               promotional balances. An event                         to focus on the list of transactions.
                                             free telephone number to provide the                    triggering the default may occur a year                Consumers who participated in testing
                                             actual repayment disclosure.                            or more after the account is opened. For               set aside change-in-terms pamphlets
                                                As described above, the Bankruptcy                   example, a consumer may open an                        that accompanied periodic statements.
                                             Act also requires the Board to develop                  account, and a year or more later may                  Participants uniformly looked at the
                                             a ‘‘table’’ that creditors, the Board and               take advantage of a low promotional rate               front side of periodic statements and
                                             the FTC must use to create generic                      to transfer balances from another                      reviewed at least the transactions.
                                             repayment estimates. Instead of creating                account. That consumer reasonably may
                                             a table, the proposal contains guidance                 not recall reading in the account-                     E. Advertisements
                                             for how to calculate generic repayment                  opening disclosure that a single
                                             estimates. Consumers that call the toll-                transaction exceeding the credit limit                    Advertising minimum payments.
                                             free telephone number could be                          could cause the interest rates on existing             Consumers commonly are offered the
                                             prompted to input information about                     balances, including on the promotional                 option to finance the purchase of goods
                                             their outstanding balance and the APR                   transfer, to increase. Thus, the proposal              or services (such as appliances or
                                             applicable to their account. Although                   would expand the events triggering                     furniture) by establishing an open-end
                                             issuers have the ability to program their               advance notice to include increases                    credit plan. The monthly minimum
                                             systems to obtain consumers’ account                    triggered by default or delinquency.                   payments associated with the purchase
                                             information from their account                          Advance notice of a potentially                        are often advertised as part of the offer.
                                             management systems, for the reasons                     significant increase in the cost of credit             Under current rules, advertisements for
                                             discussed in the section-by-section                     is intended to allow consumers to                      open-end credit plans are not required
                                             analysis to Appendix M–1, the proposal                  consider alternatives before the increase              to include information about the time it
                                             does not require issuers to do so.                      is imposed, such as making other                       will take to pay for a purchase or the
                                                                                                     financial arrangements or choosing not                 total cost if only minimum payments are
                                             D. Changes in Consumer’s Interest Rate
                                                                                                     to engage in additional transactions that              made; if the transaction were a closed-
                                             and Other Account Terms
                                                                                                     will increase the balances on their                    end installment loan, the number of
                                                Regulation Z requires creditors to                   account. Comment is solicited on                       payments and the total cost would be
                                             provide advance written notice of some                  whether a shorter time period than 45                  disclosed. Under the proposal,
                                             changes to the terms of an open-end                     days’ advance notice would be                          advertisements stating a minimum
                                             plan. The proposal includes several                     adequate. Actions creditors may engage                 monthly payment for an open-end credit
                                             revisions to Regulation Z’s requirements                in to mitigate risk, such as by lowering               plan that would be established to
                                             for notifying consumers about such                      credit limits or suspending credit                     finance the purchase of goods or
                                             changes.                                                privileges, are not affected by the                    services must state, in equal prominence
                                                Currently, Regulation Z requires                     proposal.                                              to the minimum payment, the time
                                             creditors to send, in most cases, notices                  Format. Currently, there are few                    period required to pay the balance and
                                             15 days before the effective date of                    format requirements for change-in-terms                the total of payments if only minimum
                                             certain changes in the account terms.                   disclosures. As with account-opening                   payments are made.
                                             However, creditors need not inform                      disclosures, creditors commonly
                                             consumers in advance if the rate                        intersperse change-in-terms notices with                  Advertising ‘‘fixed’’ rates. Creditors
                                             applicable to their account increases                   other amendments to the account                        sometimes advertise the APR for open-
                                             due to default or delinquency. Thus,                    agreement, and both are provided in                    end accounts as a ‘‘fixed’’ rate even
                                             consumers may not realize until they                    pamphlets in small print and dense                     though the creditor reserves the right to
                                             receive their monthly statement for a                   prose. Consumer testing indicates many                 change the rate at any time for any
                                             billing cycle that their late payment                   consumers set aside and do not read                    reason. Consumer testing indicated that
                                             triggered application of the higher                     densely-worded pamphlets.                              many consumers believe that a ‘‘fixed
                                             penalty rate, effective the first day of the               Under the proposal, creditors may                   rate’’ will not change, and do not
                                             month’s statement.                                      continue to notify consumers about                     understand that creditors may use the
                                                Timing. Currently, Regulation Z                      changes to terms required to be                        term ‘‘fixed’’ as a shorthand reference
                                             generally requires creditors to mail a                  disclosed by Regulation Z, along with                  for rates that do not vary based on
                                             change-in-terms notice 15 days before a                 other changes to the account agreement.                changes in an index or formula. Under
                                             change takes effect. Consumer groups                    However, if a changed term is one that                 the proposal, an advertisement may
                                             and others have criticized the 15-day                   must be provided in the account-                       refer to a rate as ‘‘fixed’’ if the
                                             period as providing too little time after               opening summary table, creditors must                  advertisement specifies a time period
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                                             the notice is sent for the consumer to                  provide that change in a summary table                 the rate will be fixed and the rate will
                                             receive the notice, shop for alternative                to enhance the effectiveness of the                    not increase during that period. If a time
                                             credit and possibly pay off the existing                change-in-terms notice.                                period is not specified, the
                                             credit card account. Under the proposal,                   Creditors commonly enclose notices                  advertisement may refer to a rate as
                                             notice must be sent at least 45 days                    about changes to terms or rates with                   ‘‘fixed’’ only if the rate will not increase
                                             before the effective date of the change,                periodic statements. Under the                         while the plan is open.


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                                             32958                   Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules

                                             F. Other Disclosures and Protections                    the disclosures are conspicuous,                       that case they must mail written
                                                ‘‘Open-end’’ plans comprised of                      creditors would be required to provide                 disclosures within three days of the
                                             closed-end features. Some creditors give                the information in a table, on the front               call.5
                                             open-end credit disclosures on credit                   side of the page containing the checks.
                                                                                                        Credit insurance, debt cancellation,                VI. Section-by-Section Analysis
                                             plans that include closed-end features,
                                                                                                     and debt suspension coverage. Under                      In reviewing the rules affecting open-
                                             that is, separate loans with fixed
                                                                                                     Regulation Z, premiums for credit life,                end credit, the Board has reorganized
                                             repayment periods. These creditors treat
                                                                                                     accident, health, or loss-of-income                    some provisions to make the regulation
                                             these loans as advances on a revolving
                                                                                                     insurance are considered finance                       easier to use. Rules affecting home-
                                             credit line for purposes of Regulation Z
                                                                                                     charges if the insurance is written in                 equity lines of credit (HELOCs) subject
                                             even though the consumer’s credit
                                                                                                     connection with a credit transaction.                  to § 226.5b are separately delineated in
                                             information is separately evaluated and
                                                                                                     However, these costs may be excluded                   § 226.6 (account-opening disclosures),
                                             he or she may have to complete a
                                                                                                     from the finance charge and APR (for                   § 226.7 (periodic statements), and
                                             separate application for each ‘‘advance,’’              both open-end and closed-end credit
                                             and the consumer’s payments on the                                                                             § 226.9 (subsequent disclosures)
                                                                                                     transactions), if creditors disclose the               Footnotes have been moved to the text
                                             ‘‘advance’’ do not replenish the ‘‘line.’’              cost and the fact that the coverage is not
                                             Provisions in the commentary lend                                                                              of the regulation or commentary, as
                                                                                                     required to obtain credit, and the                     appropriate. These proposed revisions
                                             support to this approach. The proposal                  consumer signs or initials an affirmative
                                             would revise these provisions to                                                                               are identified in a table below.
                                                                                                     written request for the insurance. Since               See IX. Redesignation Table.
                                             indicate closed-end disclosures rather                  1996, the same rules have applied to
                                             than open-end disclosures are                           creditors’ ‘‘debt cancellation’’                       Introduction
                                             appropriate when the credit being                       agreements, in which a creditor agrees
                                             extended is individual loans that are                                                                             The official staff commentary to
                                                                                                     to cancel the debt, or part of it, on the              Regulation Z begins with an
                                             individually approved and                               occurrence of specified events.
                                             underwritten.                                                                                                  Introduction. Comment I–6 discusses
                                                                                                        Under the proposal, the existing rules              reference materials published at the end
                                                Checks that access a credit card                     for debt cancellation coverage would
                                             account. Many credit card issuers                                                                              of each section of the commentary
                                                                                                     also be applied to ‘‘debt suspension’’                 adopted in 1981. 46 FR 50,288; October
                                             provide accountholders with checks                      coverage (for both open-end credit and
                                             that can be used to obtain cash, pay the                                                                       9, 1981. The references were intended
                                                                                                     closed-end transactions). ‘‘Debt                       as a compliance aid during the
                                             outstanding balance on another account,                 suspension’’ products are related to, but
                                             or purchase goods and services directly                                                                        transition to the 1981 revisions to
                                                                                                     different from, debt cancellation. Debt                Regulation Z. The Board would delete
                                             from merchants. The solicitation letter                 suspension products merely defer
                                             accompanying the checks may offer a                                                                            these references and comment I–6, as
                                                                                                     consumers’ obligation to make the
                                             low introductory APR for transactions                                                                          obsolete. Comment I–3, I–4(b), and I–7,
                                                                                                     minimum payment for some period after
                                             that use the checks. The proposed                                                                              which address 1981 rules of transition,
                                                                                                     the occurrence of a specified event.
                                             revisions would require the checks                                                                             also would be deleted as obsolete.
                                                                                                     During the suspension period, interest
                                             mailed by card issuers to be                            may continue to accrue, or it may be                   Section 226.1 Authority, Purpose,
                                             accompanied by cost disclosures.                        suspended as well. Under the proposal,                 Coverage, Organization, Enforcement,
                                                Currently, creditors need not disclose               to exclude the cost of debt suspension                 and Liability
                                             costs associated with using the checks if               coverage from the finance charge and
                                             the finance charges that would apply                                                                              Section 226.1(c) generally outlines the
                                                                                                     APR, creditors must inform consumers                   persons and transactions covered by
                                             (that is, the interest rate and transaction             that the coverage suspends, but does not
                                             fees) have been previously disclosed,                                                                          Regulation Z. Comment 1(c)–1 provides,
                                                                                                     cancel, the debt.
                                             such as in the account agreement. If the                                                                       in part, that the regulation applies to
                                                                                                        Under the current rules, charges for
                                             check is sent 30 days or more after the                 credit insurance and debt cancellation                 consumer credit extended to residents
                                             account is opened, creditors must refer                 coverage are deemed not to be finance                  (including resident aliens) of a state.
                                             consumers to their account agreements                   charges if a consumer requests coverage                Technical revisions are proposed for
                                             for more information about how the rate                 after an open-end credit account is                    clarity. Comment is requested if further
                                             and fees are determined.                                opened or after a closed-end credit                    guidance on the scope of coverage
                                                Consumers may receive these checks                   transaction is consummated (the                        would be helpful.
                                             throughout the life of the credit card                  coverage is deemed not to be ‘‘written                    Section 226.1(d)(2), which
                                             account. Thus, significant time may                     in connection’’ with the credit                        summarizes the organization of the
                                             elapse between the time account-                        transaction). Because in such cases the                regulation’s open-end credit rules
                                             opening disclosures are provided and                    charges are defined as non-finance                     (Subpart B), would be amended to
                                             the time a consumer considers using the                 charges, Regulation Z does not require                 reinsert text inadvertently deleted in a
                                             check. In addition, consumer testing                    a disclosure or written evidence of                    previous rulemaking. See 54 FR 24670;
                                             indicates that consumers may not notice                 consent to exclude them from the                       June 9, 1989. Section 226.1(d)(4), which
                                             references to other documents such as                   finance charge. The proposed revisions                 summarizes miscellaneous provisions in
                                             the account-opening disclosures or                      to Regulation Z would implement a                      the regulation (Subpart D), would be
                                             periodic statements for rate information                broader interpretation of ‘‘written in                 updated to describe amendments made
                                             because they tend to look for                           connection’’ with a credit transaction                 in 2001 to Subpart D relating to
                                             percentages and dollar figures when                     and require creditors to provide                         5 The proposed revisions to Regulation Z
                                             looking for the costs of using the checks.              disclosures, and obtain evidence of
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                                                                                                                                                            requiring disclosures to be mailed within three days
                                             Under the proposed revisions, checks                    consent, on sales of credit insurance or               of a telephone request for these products are
                                             that can access credit card accounts                    debt cancellation or suspension                        consistent with the rules of the federal banking
                                             must be accompanied by information                      coverage during the life of an open-end                agencies governing insured depository institutions’
                                                                                                                                                            sales of insurance and with guidance published by
                                             about the rates and fees that will apply                account. If a consumer requests the                    the Office of the Comptroller of the Currency (OCC)
                                             if the checks are used, and about                       coverage by telephone, creditors may                   concerning national banks’ sales of debt
                                             whether a grace period exists. To ensure                provide the disclosures orally, but in                 cancellation and debt suspension products.



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                                                                     Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules                                           32959

                                             disclosures made in languages other                     obtaining money, property, labor, or                   them. In addition, one consumer group
                                             than English. See 66 FR 17339; March                    services on credit.’’ TILA Section                     commented that the Board could
                                             30, 2001. The substance of Footnote 1                   103(k); 15 U.S.C. 1602(k). In addition,                address non-physical credit cards by
                                             would be deleted as unnecessary.                        Regulation Z provides that a credit card               clarifying that the term ‘‘device’’ as it
                                                                                                     is a ‘‘single credit device that may be                appears in the definition of ‘‘credit
                                             Section 226.2       Definitions and Rules of
                                                                                                     usable from time to time to obtain                     card’’ can include any physical object or
                                             Construction
                                                                                                     credit.’’ See § 226.2(a)(15). The                      a method or process.
                                             2(a) Definitions                                        definition of ‘‘credit card’’ in the                      Industry commenters opposed
                                                                                                     regulation would remain largely                        expanding the definition of ‘‘credit
                                             2(a)(2) Advertisement
                                                                                                     unchanged; however, the current                        card’’ to cover checks that access credit
                                               For clarity, the Board proposes                       reference to a ‘‘coupon book’’ in the                  card accounts, for various reasons. In
                                             technical revisions to the commentary                   definition would be deleted as obsolete.               general, industry commenters stated
                                             to § 226.2(a)(2), with no intended                         Checks that access credit card                      that they were aware of few complaints
                                             change in substance or meaning. No                      accounts. Credit card issuers sometimes                regarding such checks, and that in their
                                             changes are proposed for the text of                    provide cardholders with checks that                   experience, most consumers find the
                                             § 226.2(a)(2).                                          access a credit card account, which can                checks useful and convenient, as
                                             2(a)(4) Billing Cycle                                   be used to obtain cash, purchase goods                 demonstrated by their frequent use. In
                                                                                                     or services, or pay the outstanding                    addressing unsolicited issuance
                                                TILA Section 127(b) provides that, for               balance on another account. These                      concerns specifically, industry
                                             an open-end credit plan, the creditor                   checks are often mailed to consumers                   commenters noted that upon a
                                             shall send the consumer a periodic                      unsolicited, sometimes with consumers’                 consumer’s request, most issuers will
                                             statement for each billing cycle at the                 monthly statements. When a consumer                    discontinue sending checks that access
                                             end of which there is an outstanding                    uses such a check, the amount of the                   a credit card account.
                                             balance or with respect to which a                      check will be billed to the cardholder’s                  Industry commenters also stated that
                                             finance charge is imposed. 15 U.S.C.                    account.                                               it was unnecessary to extend the
                                             1637(b). ‘‘Billing cycle’’ is not defined                  Historically, checks that access credit             unauthorized use protections to
                                             in the statute, but is defined in                       card accounts have not been treated as                 convenience checks because
                                             § 226.2(a)(4) of Regulation Z as ‘‘the                  ‘‘credit cards’’ under TILA because each               convenience check transactions are
                                             interval between the days or dates of                   check can be used only once and not                    generally subject to the Uniform
                                             regular periodic statements.’’ In                       ‘‘from time to time.’’ See comment                     Commercial Code (UCC) provisions
                                             addition, § 226.2(a)(4) requires that                   2(a)(15)–1. As a result, TILA’s                        governing checks, and thus a consumer
                                             billing cycles be equal and no longer                   protections involving merchant                         generally would not have any liability
                                             than a quarter of a year, and allows a                  disputes, unauthorized use of the                      for a forged check, provided the
                                             variance of up to four days from the                    account, and the prohibition against                   consumer complies with certain timing
                                             regular day or date of the statement.                   unsolicited issuance, which apply only                 requirements. Industry commenters also
                                             Comment 2(a)(4)–3 provides an                           to ‘‘credit cards,’’ do not apply to these             opposed applying the merchant dispute
                                             exception to the requirement for equal                  checks. See § 226.12. However, other                   provisions (in § 226.12) to checks that
                                             cycles: the ‘‘transitional billing cycle                protections do apply to such checks. See               access a credit card account, stating that
                                             that can occur when the creditor                        § 226.13. In the December 2004 ANPR,                   these checks are not processed through
                                             occasionally changes its billing cycles                 the Board solicited comment as to                      the payment card associations’
                                             so as to establish a new statement day                  whether it should extend TILA’s                        networks. Because card issuers may
                                             or date.’’ Under the proposal, the Board                protections for credit cards to other                  have no connection to or relationship
                                             would clarify that creditors may also                   extensions on credit card accounts, in                 with merchants that accept these
                                             vary the length of the first cycle on an                particular checks that access credit card              checks, industry commenters stated that
                                             open-end account in certain situations.                 accounts. Q45. The Board also asked                    issuers do not have the ability to charge
                                                Questions have sometimes arisen                      whether the industry is developing                     back to that merchant transactions
                                             about the first cycle that occurs when a                open-end credit plans that would allow                 conducted with these checks.
                                             consumer opens an open-end credit                       consumers to conduct transactions                      Accordingly, industry commenters
                                             account, and specifically, about whether                using only account numbers and that do                 believed that the consumer was in the
                                             the first cycle may vary by more than                   not involve the issuance of physical                   best position to contact the merchant in
                                             four days from the regular cycle interval               devices traditionally considered to be                 the event of a dispute involving a
                                             without violating the equal-cycle                       credit cards. Q44.                                     transaction using one of these checks.
                                             requirement. For example, in order to                      In response to the December 2004                       In the proposal, the definition of
                                             establish the consumer’s account on the                 ANPR, several consumer commenters                      ‘‘credit card’’ would remain unchanged.
                                             creditor’s billing system, the first cycle              urged the Board to expand the                          The Board believes it may be
                                             may need to be longer or shorter than                   definition of ‘‘credit card’’ to include               unnecessary to address unauthorized
                                             a monthly period by more than four                      checks that access a credit card account,              use concerns by treating checks that
                                             days, depending upon the date the                       in particular to address the risk of                   access credit card accounts as credit
                                             account is opened. The Board believes                   increased fraud and heightened identity                cards, to the extent existing law or
                                             that such a variance for a first cycle,                 theft stemming from the unrestricted                   agreements provide protections to these
                                             within reason, would not harm                           issuance of such checks. Specifically,                 transactions. Moreover, under
                                             consumers and would facilitate                          these commenters cited concerns that                   Regulation Z, a consumer is currently
                                             compliance. Comment 2(a)(4)–3 would                     these checks could be sent to a                        able to assert billing error claims for
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                                             be revised to clarify this point.                       consumer at any time without the                       transactions involving checks that
                                                                                                     consumer’s request. Alternatively, some                access a credit card account because the
                                             2(a)(15) Credit Card                                    consumer commenters suggested that if                  billing error provisions in § 226.13
                                               TILA defines ‘‘credit card’’ as ‘‘any                 these checks continued to be issued on                 apply to any extension of credit under
                                             card, plate, coupon book or other credit                an unsolicited basis, consumers should                 an open-end plan, and are not limited
                                             device existing for the purpose of                      at least be able to opt out from receiving             to credit cards. The Board also does not


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                                             32960                   Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules

                                             believe that it is necessary to require                 reference to a ‘‘coupon book.’’ Neither                consumer credit extended by a creditor
                                             issuers to provide consumers with the                   the statute nor the regulation provides                under a plan in which (1) the creditor
                                             ability to opt out of receiving checks                  any guidance on the types of devices                   reasonably contemplates repeated
                                             that access credit card accounts. The                   that would constitute a ‘‘coupon book’’                transactions, (2) the creditor may
                                             Board understands that in many                          so as to qualify as a ‘‘credit card’’ under            impose a finance charge from time to
                                             instances, issuers will honor consumer                  the definition. Comment 2(a)(15)–1, as                 time on an outstanding unpaid balance,
                                             requests to opt out of receiving such                   discussed above, states that checks and                and (3) the amount of credit that may be
                                             checks, and the Board encourages                        similar instruments that can be used                   extended to the consumer during the
                                             creditors to continue the practice. In                  only once to obtain a single credit                    term of the plan, up to any limit set by
                                             addition, as noted above, consumers                     extension are not ‘‘credit cards,’’ and,               the creditor, generally is made available
                                             would be able to assert a billing error                 logically such instruments, even if                    to the extent that any outstanding
                                             claim with respect to any unauthorized                  issued in a separate booklet or in                     balance is repaid. Comment 2(a)(20)–1
                                             transactions involving such checks and                  conjunction with a periodic statement,                 reiterates that consumer credit must
                                             is not liable for unauthorized                          also would not be considered to be                     meet all three of these criteria to be
                                             transactions, as provided for under                     coupon books. Thus, as the Board is not                open-end credit. Comment 2(a)(20)–5
                                             § 226.13.                                               aware of devices existing today that                   currently states, with respect to
                                                Plans in which no physical device is                 would qualify as a coupon book under                   replenishment of the credit line, that a
                                             issued. The proposal does not address                   the statute and regulation, the Board is               creditor need not establish a specific
                                             circumstances where a consumer may                      proposing to delete the reference to such              credit limit for the line of credit and that
                                             conduct a transaction on an open-end                    devices in the definition of ‘‘credit                  the line need not always be replenished
                                             plan that does not have a physical                      card’’ as obsolete. Comment is requested               to its original amount.
                                             device. The Board had solicited                         as to whether removal of the reference                    ‘‘Spurious’’ open-end credit. The
                                             comment on such plans because it has                    to ‘‘coupon book’’ in § 226.2(a)(15)                   Board has received comments from time
                                             received anecdotal information about                    would help clarify the definition of                   to time from state attorneys general and
                                             limited cases in which consumers                        ‘‘credit card’’ without inadvertently                  consumer groups voicing concern that
                                             obtained credit by providing an account                 limiting the availability of Regulation Z              the definition of open-end credit
                                             number (for example, to obtain food and                 protections.                                           permits creditors to treat as open-end
                                             services at a resort) and where a                          Charge cards. Comment 2(a)(15)–3                    plans certain credit transactions that
                                             physical device was not issued to the                   discusses charge cards and identifies                  would be more properly characterized
                                             consumer. Industry commenters stated                    provisions in Regulation Z in which a                  as closed-end credit. These commenters
                                             that, in general, they were unaware of                  charge card is distinguished from a                    note that as a practical matter, such
                                             any plans to provide open-end accounts                  credit card. As discussed in detail in the             ‘‘spurious’’ open-end credit is unlikely
                                             that did not involve the issuance of a                  section-by-section analysis to                         to be used for repeated transactions and
                                             card or other physical device. In                       § 226.7(b)(11) and § 226.7(b)(12), the                 the credit line does not replenish to the
                                             particular, industry commenters noted                   new late payment and minimum                           extent that the consumer pays down his
                                             that creditors will continue to issue                   payment disclosure requirements                        or her balance. Furthermore, these open-
                                             physical devices because transactions                   contained in the Bankruptcy Act do not                 end plans may be established primarily
                                             where a card or other physical device is                apply to charge card issuers. Thus,                    to finance an infrequently purchased
                                             present are generally far more secure                   comment 2(a)(15)–3 is updated to reflect               product or service, the credit limits for
                                             and less likely to involve fraud                        those changes.                                         many of the creditor’s customers may be
                                             compared to those in which only the                                                                            close to the cost of that product or
                                             account number, along with other                        2(a)(17) Creditor                                      service, and the creditor may have no
                                             information, is used to verify the                         For reasons explained in the section-               reasonable grounds for expecting that
                                             identity of the user. Moreover, industry                by-section analysis to § 226.3, the Board              there will be repeated transactions by
                                             commenters noted that consumers still                   is proposing to exempt from TILA                       many of its customers. When open-end
                                             need a tangible device bearing account                  coverage credit extended under                         disclosures are given for such products,
                                             information that they can easily carry                  employee-sponsored retirement plans.                   the concern voiced by state attorneys
                                             with them. As a result, industry                        Comment 2(a)(17)(i)–8, which provides                  general and consumer groups is that
                                             commenters generally believed that                      guidance on whether such a plan is a                   those disclosures fail to adequately
                                             issuers would be unlikely to abandon                    creditor for purposes of TILA, would be                disclose the period of time that it will
                                             the issuance of a physical card or                      deleted. The guidance would no longer                  take to repay the balance, the total of the
                                             device.                                                 be necessary because loans granted                     payments that a consumer will be
                                                The Board believes that it is not                    under such plans would be exempt from                  required to make (assuming in both
                                             necessary at this time to address this                  TILA and, as such, the definition of                   cases that the consumer makes only the
                                             issue, but it will continue to monitor                  ‘‘creditor’’ would not need to be                      minimum required payments).
                                             developments in the marketplace. Of                     clarified.                                                In an effort to address these concerns,
                                             course, to the extent a creditor has                       In addition, the substance of footnote              in 1997 the Board proposed adding two
                                             issued a device that meets the definition               3 would be moved to a new                              sets of factors to the commentary, one
                                             of a ‘‘credit card’’ for an account,                    § 226.2(a)(17)(v), and references revised,             set that creditors should consider when
                                             transactions on that account are subject                accordingly. The dates used to illustrate              determining whether they ‘‘reasonably
                                             to the provisions that apply to                         numerical tests for determining whether                contemplate repeated transactions,’’ and
                                             transactions involving the use of a                     a creditor ‘‘regularly’’ extends consumer              another set to provide guidance on
                                             ‘‘credit card,’’ even if the particular                                                                        whether a credit line is ‘‘reusable.’’ 6
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                                                                                                     credit are updated in comments
                                             transaction itself is not conducted using               2(a)(17)–3 through –6.
                                             the device (for example, in the case of                                                                           6 The factors that were proposed regarding the

                                             phone or Internet transactions).                        2(a)(20) Open-End Credit                               ‘‘repeated transactions’’ portion of the definition
                                                                                                                                                            were: (1) Whether the product is something that
                                                Coupon books. As noted above, the                      Under TILA Section 103(i), as                        consumers would most likely not purchase in
                                             definition of ‘‘credit card’’ under both                implemented by § 226.2(a)(20) of                       multiples, (2) whether the line of credit is
                                             TILA and Regulation Z includes a                        Regulation Z, ‘‘open-end credit’’ is                   established for the purpose of purchasing a



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                                                                       Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules                                          32961

                                             The Board received many comments                           products are treated as open-end plans,              approval for each subsequent advance.
                                             from industry in response to this                          with open-end disclosures given to                   Replenishment of the amount of credit
                                             proposal, most of which criticized the                     consumers, when such products would                  available to a consumer in good
                                             factors on the grounds that they would                     more appropriately be treated as closed-             standing without the need for separate
                                             result in excluding from the definition                    end transactions. Closed-end                         underwriting or approval of each
                                             of ‘‘open-end credit’’ legitimate open-                    disclosures are more appropriate than                advance distinguishes open-end credit
                                             end credit products. In particular,                        open-end disclosures when the credit                 from a series of advances made pursuant
                                             commenters were concerned about the                        being extended is individual loans that              to separate closed-end loan
                                             status of private label credit cards that                  are individually approved and                        commitments, such as the automobile
                                             offer an incentive to the consumer to                      underwritten. The Board is particularly              loan described above. For example, if a
                                             make a large initial purchase. In                          concerned about certain credit plans,                consumer makes two payments of $500
                                             response to these concerns, the two sets                   where each individual credit transaction             that reduce the outstanding principal
                                             of factors were not adopted in the final                   is separately evaluated.                             balance on the line of credit, the
                                             commentary revisions.                                         For example, under certain so-called              consumer generally should be able to
                                                As discussed further in the section-                    multifeatured open-end plans, creditors              obtain an additional $1,000 of credit
                                             by-section analysis to § 226.16, the                       may offer loans to be used for the                   under the open-end plan without having
                                             Board proposes to address potential                        purchase of an automobile. These                     a creditor separately underwriting or
                                             ‘‘spurious’’ open-end credit transactions                  automobile loan transactions are                     evaluating whether the consumer can
                                             through improved advertising                               approved and underwritten separately                 borrow the $1,000.
                                             disclosures. The Board believes this to                    from other credit made available on the                 The Board proposes to revise
                                             be a more targeted and effective                           plan. (In addition, the consumer                     comment 2(a)(20)–2 to clarify that while
                                             approach than revising the definition of                   typically has no right to borrow                     a consumer’s account may contain
                                             open-end credit. One of the major                          additional amounts on the automobile                 different sub-accounts, each with
                                             problems with ‘‘spurious’’ open-end                        loan ‘‘feature’’ as the loan is repaid.) If          different minimum payment or other
                                             credit highlighted by commenters is that                   the consumer repays the entire                       payment options, each sub-account
                                             creditors advertise a low minimum                          automobile loan, he or she may have no               must meet the self-replenishing
                                             monthly payment which can mislead                          right to take further advances on that               criterion. In particular, proposed
                                             consumers, who may not be aware of                         ‘‘feature,’’ and must separately reapply             comment 2(a)(20)–2 would provide that
                                             the total amount of payments they                          if he or she wishes to obtain another                repayments of an advance for any sub-
                                             would be required to make, or the term                     automobile loan, or use that aspect of               account must generally replenish a
                                             over which they would be obligated to                      the plan for similar purchases.                      single credit line for that sub-account so
                                             make those payments. As discussed                          Typically, while the consumer may be                 that the consumer may continue to
                                             below in the section-by-section analysis                   able to obtain additional advances                   borrow and take advances under the
                                             to § 226.16(b), the proposed rule would                    under the plan as a whole, the creditor              plan to the extent that he or she repays
                                             require a creditor that states a minimum                   separately evaluates each request.                   outstanding balances without having to
                                             monthly payment in an advertisement                           Currently, some creditors may be                  obtain separate approval for each
                                             also to state the term that it will take to                treating such plans as open-end credit,              subsequent advance.
                                             repay the debt at that minimum                             in light of several sections in the current             Due to the concerns noted above
                                             payment level, as well as the total                        commentary. Current comment 2(a)(20)–                regarding closed-end automobile loans
                                                                                                        2 provides that if a program as a whole              being characterized as features of so-
                                             amount of the payments. The proposed
                                                                                                        meets the definition of open-end credit,             called open-end plans, the Board
                                             rule would require that disclosure of the
                                                                                                        such a program may be considered a                   proposes to delete comment 2(a)(20)–
                                             term and total amount of payments be
                                                                                                        single multifeatured plan,                           3.ii. While there may be circumstances
                                             equally prominent to the advertisement
                                                                                                        notwithstanding the fact that certain                under which it would be more
                                             of the minimum payment. The Board
                                                                                                        features might be used infrequently. In              reasonable for a financial institution to
                                             believes that disclosure of the term and
                                                                                                        addition, current comment 2(a)(20)–3                 make advances from an open-end line of
                                             total of payments in advertisements will
                                                                                                        indicates that, for a multifeatured open-            credit for the purchase of an automobile
                                             help to improve consumer
                                                                                                        end plan, a creditor need not believe a              than for an automobile dealer to sell a
                                             understanding about the cost of credit
                                                                                                        consumer will reuse a particular feature             car under an open-end plan, the Board
                                             products for which a low monthly                           of the plan. Also, current comment                   believes that the current example places
                                             payment is advertised, addressing one                      2(a)(20)–5 indicates that a creditor may             inappropriate emphasis on the identity
                                             of the major concerns regarding                            verify credit information such as a                  of the creditor rather than the type of
                                             ‘‘spurious’’ open-end credit.                              consumer’s continued income and                      credit being extended by that creditor.
                                                ‘‘Open-end’’ plans comprised of                                                                                 TILA Section 103(i) provides that a
                                                                                                        employment status or information for
                                             closed-end features. The Board also is                                                                          plan can be an open-end credit plan
                                                                                                        security purposes.
                                             concerned that, under current guidance                        The Board believes that in certain                even if the creditor verifies credit
                                             in the commentary, some credit                             circumstances treating such credit as                information from time to time. 15 U.S.C.
                                                                                                        open-end is inappropriate under                      1602(i). The Board believes this
                                             designated item, (3) the amount of the initial
                                             purchase relative to the credit limit, (4) the extent
                                                                                                        Regulation Z, and accordingly proposes               provision is not intended to permit a
                                             to which the creditor reasonably solicits customers        a number of revisions to § 226.2(a)(20)              creditor to separately underwrite each
                                             to make additional purchases, and (5) whether the          and the accompanying commentary.                     advance made to a consumer under an
                                             creditor has information on consumers with the             Closed-end disclosures are more                      open-end plan or account. Such a
                                             credit line showing that they have made repeat
                                                                                                        appropriate than open-end disclosures                process could result in closed-end credit
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                                             purchases. The proposed revisions also would have
                                             provided that a line of credit generally is not self-      unless the consumer’s credit line                    being deemed open-end credit. The
                                             replenishing if the initial line of credit is less than,   generally replenishes to the extent that             Board proposes to clarify in comment
                                             or not much more than, the amount of the item              he or she repays outstanding balances so             2(a)(20)–5 that in general, a credit line
                                             purchased to open the credit line (or the minimum
                                             monthly payments are so low that the credit line
                                                                                                        that the consumer may continue to                    is self-replenishing if a consumer can
                                             is not reusable for an extended period of time). See       borrow and take advances under the                   obtain further advances or funds
                                             62 FR 64,769, December 9, 1997.                            plan without having to obtain separate               without being required to separately


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                                             32962                   Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules

                                             apply for those additional advances, and                substance of footnote 4 is moved to the                end credit provisions of Regulation Z
                                             without undergoing a separate review                    commentary. See comment 3–1.                           and is not proposing to take any action
                                             by the creditor of that consumer’s credit                                                                      at the present time. In delaying
                                                                                                     3(a) Business, Commercial, Agricultural,
                                             information, in order to obtain approval                                                                       consideration of the $25,000 threshold
                                                                                                     or Organizational Credit
                                             for each such additional advance.                                                                              to the closed-end Regulation Z review,
                                                Notwithstanding this proposed                           Section 226.3(a) provides, in part, that            the Board expresses no view on whether
                                             change, a creditor could verify credit                  the regulation does not apply to                       the $25,000 threshold is appropriate for
                                             information to ensure that the                          extensions of credit primarily for                     open-end (not home-secured) credit.
                                             consumer’s creditworthiness has not                     business, commercial or agricultural                   Rather, the Board proposes to review the
                                             deteriorated (and could revise the                      purposes. The Board received no                        threshold for all credit covered by TILA
                                             consumer’s credit limit or account terms                comments regarding this exemption in                   at the same time.
                                             accordingly). However, to perform such                  regard to the December 2004 ANPR.
                                                                                                     Questions have arisen from time to time,               3(c) Public Utility Credit
                                             an inquiry for each specific credit
                                             request would go beyond verification                    however, regarding whether                                Section 226.3(c) exempts from
                                             and would more closely resemble                         transactions made for business purposes                Regulation Z extensions of credit
                                             underwriting of closed-end credit. The                  on a consumer purpose credit card are                  involving public utility services
                                             Board recognizes that a creditor may                    exempt from TILA. The Board seeks to                   provided through pipe, wire, other
                                             need to review, and as appropriate,                     provide clarification regarding this                   connected facilities, or radio or similar
                                             decrease the amount of credit available                 question. The determination as to                      transmission, if the charges for service,
                                             to a consumer from time to time to                      whether a credit card account is                       delayed payment, or any discounts for
                                             address safety and soundness and other                  primarily for consumer purposes or                     prompt payment are filed with or
                                             concerns. Such a review would not be                    business purposes is best made when                    regulated by any government unit. 15
                                             affected by the proposed changes, as                    the account is opened, rather than on a                U.S.C. 1603(4).
                                             explained in proposed comment                           transaction-by-transaction basis, and                     The Board received no comments on
                                             2(a)(20)–5.                                             thus the Board is proposing to add a                   the December 2004 ANPR regarding the
                                                These revisions are not intended to                  new comment 3(a)–2 to clarify that                     applicability and scope of § 226.3(c).
                                             impact home-equity lines of credit                      transactions made for business purposes                However, the Board has received
                                             (HELOCs), which may have a fixed draw                   on a consumer-purpose credit card are                  inquiries from time to time regarding
                                             period (during which time a consumer                    covered by TILA (and, conversely, that                 the applicability of Regulation Z to
                                             may continue to take advances to the                    purchases made for consumer purposes                   service plans for cellular telephones. In
                                             extent that he or she repays the                        on a business-purpose credit card are                  addition, in light of the deregulation in
                                             outstanding balance) followed by a                      exempt from TILA). Other sections of                   recent years by some states of utilities
                                             repayment period where the consumer                     the commentary regarding § 226.3(a)                    such as gas and electric services, the
                                             may no longer draw against the line, as                 would be renumbered accordingly. A                     Board believes that it may be
                                             closed-end credit. The Board seeks                      new comment 3(a)–7 would provide                       appropriate to reconsider the scope of
                                             comment regarding the proposed rule’s                   guidance on card renewals, consistent                  the public utility credit exemption more
                                             impact on HELOCs.                                       with proposed comment 3(a)–2.                          generally. The Board also notes that due
                                                Comment 2(a)(20)–5.ii. currently                                                                            to technological advances, there may be
                                                                                                     3(b) Credit Over $25,000 Not Secured by                additional types of services, such as
                                             notes that a creditor may reduce a credit               Real Property or a Dwelling
                                             limit or refuse to extend new credit due                                                                       certain Internet services, for which
                                                                                                        Section 226.3(b) exempts from                       exemption from Regulation Z may be
                                             to changes in the economy, the
                                                                                                     Regulation Z extensions of credit not                  appropriate. The Board is not proposing
                                             creditor’s financial condition, or the
                                                                                                     secured by real property or a dwelling,                to take any action at the present time,
                                             consumer’s creditworthiness. The
                                                                                                     in which the amount financed exceeds                   however, because these issues would be
                                             Board’s proposal would delete the
                                                                                                     $25,000 or in which there is an express                better considered in the context of the
                                             reference to changes in the economy to
                                                                                                     written commitment to extend credit in                 Board’s upcoming rulemaking regarding
                                             simplify this provision.
                                                The Board also proposes a technical                  excess of $25,000. The $25,000                         the closed-end credit provisions of
                                             update to comment 2(a)(20)–4 to delete                  threshold in § 226.3(b) is the same as the             Regulation Z.
                                             a reference to ‘‘china club plans,’’ which              statutory threshold set in TILA Section
                                                                                                     104(3). 15 U.S.C. 1603(3).                             3(g) Employer-Sponsored Retirement
                                             may no longer be very common. No                                                                               Plans
                                                                                                        In the December 2004 ANPR, the
                                             substantive change is intended.
                                                                                                     Board solicited comment as to whether                     The Board has received questions
                                             2(a)(24) Residential Mortgage                           the rules implementing TILA Section                    from time to time regarding the
                                             Transaction                                             104 needed to be updated. Q58. The                     applicability of TILA to loans taken
                                                Comment 2(a)(24)–1, which identifies                 Board received several comments                        against employer-sponsored retirement
                                             key provisions affected by the term                     regarding the $25,000 threshold. One                   plans. Pursuant to TILA Section 104(5),
                                             ‘‘residential mortgage transaction,’’ is                consumer group noted that the $25,000                  the Board has the authority to exempt
                                             revised to include a reference to                       figure is outdated due to inflation and                transactions for which it determines that
                                             § 226.32, correcting an inadvertent                     should be increased. One bank noted                    coverage is not necessary in order to
                                             omission.                                               that the threshold remains appropriate                 carry out the purposes of TILA. 15
                                                                                                     for unsecured credit but suggested that                U.S.C. 1603(5). The Board also has the
                                             Section 226.3 Exempt Transactions                       the Board might consider at a later stage              authority pursuant to TILA Section
                                               Section 226.3 implements TILA                         of the Regulation Z review whether the                 105(a) to provide adjustments and
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                                             Section 104 and provides exemptions                     $25,000 figure should be raised for                    exceptions for any class of transactions,
                                             for certain classes of transactions                     secured credit, such as automobile                     as in the judgment of the Board are
                                             specified in the statute. 15 U.S.C. 1603.               loans. The Board agrees that the                       necessary or proper to effectuate the
                                               The Board proposes a number of                        § 226.3(b) threshold would be more                     purposes of TILA. 15 U.S.C. 1604(a).
                                             substantive and technical revisions to                  appropriately considered in connection                 The Board proposes to add to the
                                             § 226.3 as described below. The                         with its planned review of the closed-                 regulation a new § 226.3(g), which


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                                             would exempt loans taken by employees                   Congress, the Board discussed these                    issuer charged the same fee for using a
                                             against their employer-sponsored                        concerns, and proposed solutions, in the               debit card to withdraw cash from an
                                             retirement plans qualified under Section                context of closed-end mortgage loans.7                 asset account. The Board solicited
                                             401(a) of the Internal Revenue Code and                 In this proposal, the Board addresses                  comment on this question in 1983 and
                                             tax-sheltered annuities under Section                   concerns about the definition of the                   adopted staff comment 4(a)–4 in 1984.
                                             403(b) of the Internal Revenue Code,                    ‘‘finance charge’’ in the context of open-             48 FR 54,642; December 6, 1983 and 49
                                             provided that the extension of credit is                end (not home-secured) plans through                   FR 40,560; October 17, 1984. That
                                             comprised of fully-vested funds from                    changes to § 226.5, § 226.6, and § 226.7               comment indicates that the fee is not a
                                             such participant’s account and is made                  to simplify disclosure of charges on                   finance charge to the extent that it does
                                             in compliance with the Internal                         such plans. The Board is not proposing                 not exceed the charge imposed by the
                                             Revenue Code. 26 U.S.C. 1 et seq.; 26                   to address these concerns through                      card issuer on its cardholders for using
                                             U.S.C. 401(a); 26 U.S.C. 403(b).                        changes to § 226.4, with limited                       the ATM to withdraw cash from a
                                                The Board believes that an exemption                 exceptions. The Board proposes to                      consumer asset account, such as a
                                             for loans taken against funds invested in               revise § 226.4 and related commentary                  checking or savings account. Another
                                             such types of employer-sponsored                        to address (1) transaction charges                     comment indicates that the fee is an
                                             retirement plans is appropriate for the                 imposed by credit card issuers, such as                ‘‘other charge.’’ See current comment
                                             following reasons. The consumer’s                       charges for obtaining cash advances                    6(b)–1(vi). Accordingly, the fee must be
                                             interest and principal payments on such                 from ATMs and for making purchases in                  disclosed at account opening and on the
                                             a loan are reinvested in the consumer’s                 foreign currencies, and (2) charges for                periodic statement, but it is not labeled
                                             own account, and there is no third-party                credit insurance, debt cancellation                    as a ‘‘finance charge’’ nor included in
                                             creditor imposing finance charges on                    coverage, and debt suspension coverage.                the effective APR.
                                             the consumer. Also, TILA disclosures
                                             would be of very limited, if any, value.                4(a) Definition                                           Since comment 4(a)–4 was adopted,
                                             The costs of a loan taken against assets                   Under the definition of ‘‘finance                   questions have been raised about its
                                             invested in a 401(k) plan, for example,                 charge’’ in TILA Section 106 and                       scope and application. For example, the
                                             are not comparable to the costs of a                    Regulation Z § 226.4(a), a charge                      comment does not address whether it
                                             third party loan product, because a                     specific to a credit transaction is                    applies when an affiliate of the card
                                             consumer pays the interest on a 401(k)                  ordinarily a finance charge. 15 U.S.C.                 issuer, but not the card issuer itself,
                                             loan to himself or herself rather than to               1605. See also § 226.4(b)(2). However,                 issues a debit card. Even in the
                                             a third party. Moreover, plan                           also under Section 106 and § 226.4(a),                 seemingly simple case where the credit
                                             administration fees must be disclosed                   the finance charge does not include any                card issuer itself issues a debit card, a
                                             under Department of Labor regulations.                  charge of a type payable in a                          variety of complexities arise. The issuer
                                             See 29 CFR 2520.1023(1).                                ‘‘comparable cash transaction.’’ Under                 may assess an ATM fee for one kind of
                                                                                                     the staff commentary to § 226.4(a), in                 deposit account (for example, an
                                             Family Trusts                                           determining whether a charge                           account with a low minimum balance)
                                               The Board also has from time to time                  associated with a credit transaction is a              but not for another. The comment does
                                             received inquiries regarding TILA                       finance charge, the creditor should                    not indicate which account is the proper
                                             coverage of family trusts created for                   compare the credit transaction in                      basis for comparison.
                                             estate planning purposes. Because most                  question with a ‘‘similar’’ cash                          Questions have also been raised about
                                             of these questions pertain to real-estate               transaction, if one exists. See comment                whether disclosure of the charge
                                             secured loans, the applicability of the                 4(a)–1. The commentary states a general                pursuant to comments 4(a)–4 and 6(b)–
                                             exemptions in § 226.3 to these types of                 principle for applying this rule in the                1.iv. is meaningful to consumers. Under
                                             estate planning arrangements would be                   case of credit that finances the sale of               the comment, the disclosure a consumer
                                             better considered in the context of the                 property or services: the creditor should              receives after incurring a fee for taking
                                             Board’s upcoming closed-end                             compare charges with those that would                  a cash advance through an ATM
                                             Regulation Z review.                                    be payable if the services or property                 depends on the structure of the
                                                                                                     were purchased using cash rather than                  institution that issued the credit card. If
                                             Section 226.4 Finance Charge                            a loan. Thus, for example, if an escrow                the credit card issuer does not provide
                                                Various provisions of TILA and                       agent charges the same fee regardless of               asset accounts and is not affiliated with
                                             Regulation Z specify how and when the                   whether real estate is bought in cash or               an institution that does, then it must
                                             cost of consumer credit as a dollar                     with a mortgage loan, then the agent’s                 disclose the charge as a finance charge.
                                             amount, the ‘‘finance charge,’’ is to be                fee is not a finance charge.                           If the credit card issuer provides asset
                                             disclosed. The rules for determining                       In other cases, however, particularly               accounts and offers debit cards on those
                                             which charges make up the finance                       in cases involving credit cards,                       accounts, then, depending on the
                                             charge are set forth in TILA Section 106                determining which, if any, transaction is              circumstances, the issuer must not
                                             and Regulation Z § 226.4. 15 U.S.C.                     a ‘‘similar’’ or ‘‘comparable’’ cash                   disclose the charge as a finance charge.
                                             1605. Some rules apply only to open-                    transaction for purposes of § 226.4(a)                 It is not clear that the distinction is
                                             end credit and others apply only to                     can be difficult. For example, when                    meaningful to consumers.
                                             closed-end credit, while some apply to                  consumers became able to take cash
                                             both. With limited exceptions discussed                 advances on credit card accounts using                    Recently, a question has arisen about
                                             below, the Board is not proposing to                    ATMs, a question arose as to whether a                 the proper disclosure of another kind of
                                             change § 226.4 for either closed-end                    fee charged by a card issuer for the                   transaction fee imposed on credit cards.
                                             credit or open-end credit.                              transaction was a finance charge if the                The question is whether fees that credit
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                                                The Board is aware of longstanding                                                                          cardholders are assessed for making
                                             criticisms that the definition of the                     7 Board of Governors of the Federal Reserve          purchases in a foreign currency or
                                             ‘‘finance charge’’ in § 226.4, as                       System and Department of Housing and Urban             outside the United States—for example,
                                                                                                     Development, Joint Report to the Congress              when the cardholder travels abroad—
                                             interpreted in the regulation and the                   Concerning Reform to the Truth in Lending Act and
                                             related commentary, is too narrow, too                  the Real Estate Settlement Procedures Act, July
                                                                                                                                                            are finance charges. The question has
                                             broad, or too vague. In a 1998 report to                1998.                                                  arisen in litigation between consumers


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                                             32964                   Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules

                                             and major card issuers.8 Some card                      rules would be deciding whether to                     consumer understanding. See TILA
                                             issuers have argued by analogy to                       adopt the perspective of the card issuer               Section 105(a), 15 U.S.C. 1604(a).
                                             comment 4(a)–4 that a foreign                           or that of the cardholder. For example,                  The Board seeks comment on whether
                                             transaction fee is not a finance charge if              a transaction on an asset account with                 this new approach would facilitate
                                             the fee does not exceed the issuer’s fee                a card issuer may be comparable to a                   compliance and improve consumer
                                             for using a debit card for the same                     credit card transaction from the                       understanding without causing
                                             purchase. Some card issuers disclose                    perspective of the card issuer, but not                unintended consequences.
                                             the foreign transaction fee as a finance                from the perspective of a cardholder                     Comment 4(a)–1 provides examples of
                                             charge and include it in the effective                  who does not have an asset account                     charges in comparable cash transactions
                                             APR, but others do not.                                 with the issuer. A rule based on the                   that are not finance charges. Among the
                                                The uncertainty about proper                         issuer’s perspective may confuse                       examples are discounts available to a
                                             disclosure of charges for foreign                       consumers; it may not be reasonable to                 particular group of consumers because
                                             transactions and for cash advances from                 expect a consumer to understand that                   they meet certain criteria, such as being
                                             ATMs reflects the inherent complexity                   one transaction fee is a finance charge                members of an organization or having
                                             of seeking to distinguish transactions                  and the other is not because one card                  accounts at a particular institution. The
                                             that are ‘‘comparable cash transactions’’               issuer issues a debit card and the other               Board solicits comment on whether the
                                             to credit card transactions from                        does not. Yet a rule based on the                      example is still useful, or should be
                                             transactions that are not. The Board                    cardholder’s perspective may not be                    deleted as unnecessary or obsolete.
                                             believes that clearer guidance may                      practicable for the issuer to implement;               4(b) Examples of Finance Charges
                                             result from a new and simpler approach                  the issuer may not be able to determine
                                             that treats as a finance charge any fee                 whether a particular consumer has an                      Charges for credit insurance or debt
                                             charged by credit card issuers for                      asset account with another institution                 cancellation or suspension coverage.
                                             transactions on their credit card plans.                                                                       Premiums or other charges for credit
                                                                                                     and, if so, the amount of the fee charged
                                             This guidance may be helpful to                                                                                life, accident, health, or loss-of-income
                                                                                                     on the account. As explained above in
                                             creditors in determining which charges                                                                         insurance are finance charges if the
                                                                                                     the context of the fee for cash advances
                                             must be included in the computation of                                                                         insurance or coverage is ‘‘written in
                                                                                                     from ATMs, even when a rule is based
                                             the effective APR, if the Board retains                                                                        connection with’’ a credit transaction.
                                                                                                     on the card issuer’s perspective, the
                                             the effective APR. See section-by-                                                                             15 U.S.C. 1605(b); § 226.4(b)(7).
                                                                                                     card issuer may have difficulty
                                             section analysis to § 226.7(b)(7). Such an                                                                     Creditors may exclude from the finance
                                                                                                     determining which asset account,
                                             approach would also provide more                                                                               charge premiums for credit insurance if
                                                                                                     precisely, is the relevant basis for
                                             meaningful disclosures to consumers by                                                                         they disclose the cost of the insurance
                                                                                                     comparison. The difficulty of
                                             assuring a consistent approach to the                                                                          and the fact that the insurance is not
                                                                                                     determining which perspective to adopt                 required to obtain credit. In addition,
                                             disclosure of transaction fees.                         increases in a case such as a fee for a
                                                The current approach of providing                                                                           the statute requires creditors to obtain
                                                                                                     purchase conducted in a foreign                        an affirmative written indication of the
                                             guidance on a case-by-case (fee-by-fee)                 currency. From the perspective of the
                                             basis, such as for ATM fees, has not                                                                           consumer’s desire to obtain the
                                                                                                     consumer, the debit card is not the only               insurance, which, as implemented in
                                             provided sufficient certainty for many                  alternative to the credit card; the
                                             creditors about how to disclose                                                                                § 226.4(d)(1)(iii), requires creditors to
                                                                                                     consumer may also pay in cash.                         obtain the consumer’s initials or
                                             transaction charges on credit cards.                       Thus, having considered alternative
                                             Moreover, to the extent creditors have                                                                         signature. 15 U.S.C. 1605(b). In 1996,
                                                                                                     approaches, the Board is proposing to
                                             adopted different disclosure practices in                                                                      the Board expanded the scope of the
                                                                                                     adopt a simple interpretive rule that any
                                             the face of regulatory uncertainty,                                                                            rule to include plans involving charges
                                                                                                     transaction fee on a credit card plan is
                                             consumers may have had difficulty                                                                              or premiums for debt cancellation
                                                                                                     a finance charge, regardless of whether
                                             understanding the disclosures, since, for                                                                      coverage. See § 226.4(b)(10),
                                                                                                     the issuer in its capacity as a depository
                                             example, one creditor might disclose an                                                                        § 226.4(d)(3). See also 61 FR 49,237;
                                                                                                     institution imposes the same or lesser
                                             ATM fee as a finance charge while                                                                              September 19, 1996. Currently,
                                                                                                     charge on withdrawals of funds from an
                                             another creditor may disclose the fee as                                                                       however, insurance or coverage sold
                                                                                                     asset account such as a checking or
                                             an ‘‘other’’ charge. Thus, while the                                                                           after consummation of a closed-end
                                                                                                     savings account. This proposal would
                                             Board could adopt guidance specific to                                                                         credit transaction or after the opening of
                                                                                                     be implemented by removing staff
                                             fees as they arise, such as the Board did                                                                      an open-end plan and upon a
                                                                                                     comment 4(a)–4 and replacing it with a
                                             in 1984 for the ATM fee and could do                                                                           consumer’s request is considered not to
                                                                                                     new comment of the same number
                                             for the foreign transaction fee, it is not                                                                     be ‘‘written in connection with the
                                                                                                     reflecting this rule. The comment would
                                             clear that fee-by-fee guidance is                                                                              credit transaction,’’ and, therefore, a
                                                                                                     give as examples of such finance
                                             sufficient to both facilitate compliance                                                                       charge for such insurance or coverage is
                                                                                                     charges a fee imposed by the issuer for
                                             by credit card issuers and promote                                                                             not a finance charge. See comment
                                                                                                     foreign transactions and a fee imposed
                                             understanding by consumers.                                                                                    4(b)(7) and (8)–2.
                                                It is also not clear that an attempt to              by the issuer for taking a cash advance                   The Board is proposing a number of
                                             adopt general rules for distinguishing                  at an ATM.9 Such guidance would be                     revisions to these rules:
                                             comparable transactions from non-                       consistent with TILA Section 106, 15                      (1) The same rules that apply to debt
                                             comparable transactions, in the case of                 U.S.C. 1605, which gives the Board                     cancellation coverage would be applied
                                             credit cards, would adequately facilitate               discretion to determine whether a given                explicitly to debt suspension coverage.
                                             compliance by credit card issuers and                   credit transaction has a comparable cash               However, to exclude the cost of debt
                                             promote understanding by cardholders.                   transaction within the meaning of the                  suspension coverage from the finance
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                                             One major difficulty in formulating such                statute. This guidance would also                      charge, creditors would be required to
                                                                                                     facilitate compliance and promote                      inform consumers, as applicable, that
                                               8 See Third Consolidated Amended Class Action
                                                                                                       9 The proposed change to comment 4(a)–4 would
                                                                                                                                                            the obligation to pay loan principal and
                                             Complaint at 47–48, In re Currency Conversion Fee                                                              interest is only suspended, and that
                                             Antitrust Litigation, MDL Docket No. 1409               not affect disclosure of ATM fees assessed by
                                             (S.D.N.Y.). The court approved a settlement on a        institutions other than the credit card issuer. See    interest will continue to accrue during
                                             preliminary basis on November 8, 2006.                  proposed § 226.6(b)(1)(ii)(A).                         the period of suspension. These


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                                                                     Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules                                            32965

                                             proposed revisions would apply to all                   4(b)(7) and (8) Insurance Written in                   term ‘‘finance charge’’ includes charges
                                             open-end plans and closed-end credit                    Connection With Credit Transaction                     or premiums paid for debt cancellation
                                             transactions.                                              Premiums or other charges for                       coverage. See § 226.4(b)(10). Although
                                                (2) Creditors could exclude from the                 insurance for credit life, accident,                   debt cancellation fees meet the
                                             finance charge the cost of debt                         health, or loss-of-income, loss of or                  definition of ‘‘finance charge,’’ they may
                                             cancellation and suspension coverage                    damage to property or against liability                be excluded from the finance charge on
                                             for events beyond those permitted                       arising out of the ownership or use of                 the same conditions as credit insurance
                                             today, namely, life, accident, health, or               property are finance charges if the                    premiums. See § 226.4(d)(3).
                                             loss-of-income. This proposed revision                  insurance or coverage is written in                       Recent years have seen two
                                             would also apply to all open-end plans                  connection with a credit transaction. 15               developments in the market for coverage
                                             and closed-end credit transactions.                     U.S.C. 1605(b) and (c); § 226.4(b)(7) and              of this type. First, creditors have been
                                                                                                     (8). Comment 4(b)(7) and (8)–2 provides                selling a related, but different, product
                                                (3) The meaning of insurance or                      that insurance is not written in
                                             coverage ‘‘written in connection with’’                                                                        called debt suspension. Debt suspension
                                                                                                     connection with a credit transaction if                is essentially the creditor’s agreement to
                                             an open-end plan would be expanded to                   the insurance is sold after
                                             cover sales made throughout the life of                                                                        suspend, on the occurrence of a
                                                                                                     consummation on a closed-end
                                             an open-end (not home-secured) plans.                                                                          specified event, the consumer’s
                                                                                                     transaction or after an open-end plan is
                                             Under the proposal, for example,                                                                               obligation to make the minimum
                                                                                                     opened and the consumer requests the
                                             consumers solicited for the purchase of                 insurance. The Board believes this                     payment(s) that would otherwise be
                                             optional insurance or debt cancellation                 approach remains sound for closed-end                  due. During the suspension period,
                                             or suspension coverage for existing                     transactions, which typically consist of               interest may continue to accrue or it
                                             credit card accounts would receive                      a single transaction with a single                     may be suspended as well, depending
                                             disclosures about the cost and optional                 advance of funds. Consumers with                       on the plan. The borrower may be
                                             nature of the product at the time of the                open-end plans, however, retain the                    prohibited from using the credit plan
                                             consumer’s request to purchase the                      ability to obtain advances of funds long               during the suspension period. In a
                                             insurance or coverage. Home-equity                      after account opening, so long as they                 second development, creditors have
                                             lines of credit (HELOCs) subject to                     pay down the principal balance. That is,               been selling debt suspension coverage
                                             § 226.5b and closed-end transactions                    a consumer can engage in credit                        for events other than loss of life, health,
                                             would not be affected by this proposed                  transactions throughout the life of a                  or income, such as a wedding, a divorce,
                                             revision.                                               plan.                                                  the birth of child, a medical emergency,
                                                                                                        Accordingly, under proposed                         and military deployment.
                                                (4) For telephone sales, creditors
                                                                                                     revisions to comment 4(b)(7) and (8)–2,                   The Board is proposing to revise
                                             offering open-end (not home-secured)
                                                                                                     insurance purchased after an open-end                  § 226.4(b)(10) to make it explicit that
                                             plans would be provided with flexibility
                                                                                                     (not home-secured) plan was opened                     charges for debt suspension coverage are
                                             in evidencing consumers’ requests for                   would be considered to be written ‘‘in
                                             optional insurance or debt cancellation                                                                        finance charges. In the proposed
                                                                                                     connection with a credit transaction.’’
                                             or suspension coverage, consistent with                                                                        commentary, debt suspension coverage
                                                                                                     Proposed new comment 4(b)(10)–2
                                             rules published by federal banking                      would give the same treatment to                       would be defined as coverage that
                                             agencies to implement Section 305 of                    purchases of debt cancellation or                      suspends the consumer’s obligation to
                                             the Gramm-Leach-Bliley Act regarding                    suspension coverage. As proposed,                      make one or more payments on the
                                             the sale of insurance products by                       therefore, purchases of voluntary                      date(s) otherwise required by the credit
                                             depository institutions and guidance                    insurance or coverage after account                    agreement, when a specified event
                                             published by the Office of the                          opening would trigger disclosure and                   occurs. The commentary would clarify
                                             Comptroller of the Currency (OCC)                       consent requirements. For purchases by                 that the term debt suspension coverage
                                             regarding the sale of debt cancellation                 telephone, creditors would be permitted                as used in § 226.4(b)(10) does not
                                             and suspension products. See 12 CFR                     to provide disclosures and obtain                      include ‘‘skip payment’’ arrangements
                                             part 208.81 et seq. regarding insurance                 consent orally, so long as they meet                   in which the triggering event is the
                                             sales; 12 CFR part 37 regarding debt                    requirements intended to ensure the                    borrower’s unilateral election to defer
                                             cancellation and debt suspension                        purchase is voluntary. See proposed                    repayment, or the bank’s unilateral
                                             products. For telephone sales, creditors                § 226.4(d)(4).                                         decision to allow a deferral of payment.
                                             could provide disclosures orally, and                                                                          (A skip payment fee, although a finance
                                                                                                     4(b)(9) Discounts
                                             consumers could request the insurance                                                                          charge, would not be factored into the
                                             or coverage orally, if the creditor                       Comment 4(b)(9)–2, which addresses                   effective APR under the proposal. See
                                             maintains evidence of compliance with                   cash discounts to induce consumers to                  proposed § 226.14(e).) These revisions
                                             the requirements, and mails written                     use cash or other payment means                        would apply to closed-end as well as
                                             information within 3 days after the sale.               instead of credit cards or open-end                    open-end credit transactions. It appears
                                             HELOCs subject to § 226.5b and closed-                  plans is revised for clarity. No                       appropriate to consider charges for debt
                                             end transactions would not be affected                  substantive change is intended.
                                                                                                                                                            suspension products to be finance
                                             by this proposed revision.                              4(b)(10) Debt Cancellation and Debt                    charges, because these products operate
                                                All of these products serve similar                  Suspension Fees                                        in a similar manner to debt cancellation,
                                             functions but some are considered                          As discussed above, premiums or                     and re-allocate the risk of non-payment
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                                             insurance under state law and others are                other charges for credit life, accident,               between the borrower and the creditor.
                                             not. Taken together, the proposed                       health, or loss-of-income insurance are                The conditions under which debt
                                             revisions would provide consistency in                  finance charges if the insurance or                    cancellation and debt suspension
                                             how creditors deliver, and consumers                    coverage is written in connection with                 charges may be excluded from the
                                             receive, information about the cost and                 a credit transaction. In 1996, the Board               finance charge are discussed under
                                             optional nature of similar products.                    amended § 226.4 to make clear that the                 § 226.4(d)(3), below.


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                                             32966                   Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules

                                             4(c) Charges Excluded From the Finance                  with motor vehicle loans). See current                 constant or increases, depending on
                                             Charge                                                  § 226.4(d)(3)(ii).                                     coverage terms.
                                                                                                        To address the development of debt                     The Board proposes to revise
                                             4(c)(1)
                                                                                                     cancellation and debt suspension                       § 226.4(d)(3) to expressly permit
                                                Section 226.4(c)(1) excludes from the                coverage discussed earlier, the OCC                    creditors to exclude charges for
                                             finance charge application fees charged                 adopted, for national banks, substantive               voluntary debt suspension coverage
                                             to all applicants for credit, whether or                limitations and procedures for                         from the finance charge when, after
                                             not credit is actually extended.                        disclosure and affirmative election on                 receiving certain disclosures, the
                                             Application fees are charged for both                   the sale of such coverage. See 12 CFR                  consumer affirmatively requests such a
                                             closed-end and open-end credit                          part 37. Some states have also adopted                 product. The Board also proposes to add
                                             transactions, and represent an                          regulations that address these products,               a disclosure, to be provided as
                                             additional cost to consumers who obtain                 or incorporate the OCC regulations                     applicable, that the obligation to pay
                                             credit. Because application fees are                    under parity laws.                                     loan principal and interest is only
                                             more prevalent for home-secured credit,                   The Board solicited comment in 2003                  suspended, and that interest will
                                             the Board will consider whether to                      on whether and how to address                          continue to accrue during the period of
                                             revise § 226.4(c)(1) in its upcoming                    disclosure of these kinds of coverage                  suspension. These revisions would
                                             review of rules for home-secured credit.                under TILA. 68 FR 68,793; December                     apply to closed-end as well as open-end
                                                As discussed below in the section-by-                10, 2003. About 30 commenters                          credit transactions. Model Clauses and
                                             section analysis to § 226.6, the Board                  responded, the vast majority of them                   Samples are proposed at Appendix G–
                                             proposes to require for open-end (not                   creditors or vendors. Several creditors                16(A) and G–16(B) and H–17(A) and H–
                                             home-secured) plans, the disclosure of                  and vendors urged the Board to                         17(B).
                                             charges imposed as part of the plan,                                                                              The same industry coalition has also
                                                                                                     expressly permit creditors to exclude
                                             which include fees that must be paid to                                                                        requested that charges for debt
                                                                                                     from the finance charge fees for
                                             receive access to the plan, without                                                                            cancellation or debt suspension
                                                                                                     products that cover any event to which
                                             regard to whether the fees are or are not                                                                      coverage be excludable from the finance
                                                                                                     a creditor and borrower agree, not just
                                             finance charges. Application fees                                                                              charge when the coverage applies to
                                                                                                     the events listed in the regulation, and
                                             charged to all applicants for credit,                                                                          events other than the events covered by
                                                                                                     fees for agreements that suspend, rather
                                             whether or not credit is actually                                                                              the product lines identified in current
                                                                                                     than cancel, debt repayment. Some
                                             extended, would be considered charges                                                                          § 226.4(d)(3)(ii), namely, accident or
                                                                                                     commenters disagreed. A major
                                             imposed as part of the plan, and would                                                                         loss of life, health, or income. The
                                                                                                     consumer group urged the Board to
                                             be included in the account-summary                                                                             identification of those events in
                                                                                                     include even voluntary credit insurance                § 226.4(d)(3)(ii) is based on TILA
                                             table given at account opening. See                     premiums and debt cancellation fees in
                                             proposed § 226.6(b)(1)(i). This would                                                                          Section 106(b), which addresses credit
                                                                                                     the finance charge. The Board deferred                 insurance for accident or loss of life or
                                             provide useful information to                           a decision on these issues until this
                                             consumers about the total cost of                                                                              health. 15 U.S.C. 1605(b). That statutory
                                                                                                     review.                                                provision reflects the regulation of
                                             obtaining credit. The fee, if financed,                   The December 2004 ANPR did not
                                             would also be included among the fees                                                                          credit insurance by the states, which
                                                                                                     specifically seek comment again on                     may limit the types of insurance that
                                             required to be grouped on periodic                      these issues. Nonetheless, a coalition of
                                             statements. See proposed § 226.7(b)(6).                                                                        insurers may sell. Many states, however,
                                                                                                     companies that issue or administer debt                do not restrict debt cancellation or debt
                                             4(d) Insurance and Debt Cancellation                    cancellation and debt suspension                       suspension coverage to a select few
                                             Coverage                                                agreements submitted two comments in                   events, and regulations of the OCC
                                                                                                     response to the December 2004 ANPR                     expressly permit national banks to sell
                                             4(d)(3) Voluntary Debt Cancellation or                  reiterating the 2003 request by industry
                                             Debt Suspension Fees                                                                                           debt cancellation and debt suspension
                                                                                                     commenters that the Board modify                       coverage for any event.
                                                As explained under § 226.4(b)(10),                   § 226.4(d)(3) to cover any triggering                     The Board proposes to continue to
                                             debt cancellation fees and, as clarified                event and explicitly recognize that debt               limit the exclusion permitted by
                                             in this proposal, debt suspension fees                  suspension agreements are also covered                 § 226.4(d)(3) to charges for coverage for
                                             meet the definition of ‘‘finance charge.’’              by that provision. These companies also                accident or loss of life, health, or
                                             Under current § 226.4(d)(3), debt                       requested that the Board revise                        income. The Board also proposes,
                                             cancellation fees may be excluded from                  § 226.4(d)(3) to provide that the                      however, to add comment 4(d)(3)–3 to
                                             the finance charge on the same                          disclosures and consumer affirmative                   clarify that, if debt cancellation or debt
                                             conditions as credit insurance                          request required as conditions to                      suspension coverage for two or more
                                             premiums. These conditions are: The                     excluding the fee from the finance                     events is sold at a single charge, the
                                             coverage is not required and this fact is               charge may be provided orally.                         entire charge may be excluded from the
                                             disclosed in writing, and the consumer                    Debt cancellation coverage and debt                  finance charge if at least one of the
                                             affirmatively indicates in writing a                    suspension coverage are fundamentally                  events is accident or loss of life, health,
                                             desire to obtain the coverage after                     similar to the extent they offer a                     or income. This approach would
                                             written disclosure to the consumer of                   consumer the ability to pay in advance                 recognize that debt cancellation and
                                             the cost. Debt cancellation coverage that               for the right to reduce the consumer’s                 suspension coverage often are not
                                             may be excluded from the finance                        obligations under the plan on the                      limited by applicable law to the events
                                             charge is limited to coverage that                      occurrence of specified events that                    allowed for insurance and it also would
                                             provides for cancellation of all or part                could impair the consumer’s ability to                 be consistent with the purpose of
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                                             of a debtor’s liability (1) in case of                  satisfy those obligations. The two types               Section 106(b). 15 U.S.C. 1605(b).
                                             accident or loss of life, health, or                    of coverage are, however, different in a                  The regulation provides guidance on
                                             income; or (2) for amounts exceeding                    key respect. One cancels debt, at least                how to disclose the cost of debt
                                             the value of collateral securing the debt               up to a certain agreed limit, while the                cancellation coverage. See proposed
                                             (commonly referred to as ‘‘gap’’                        other merely suspends the payment                      § 226.4(d)(3)(ii). The Board seeks
                                             coverage, frequently sold in connection                 obligation while the debt remains                      comment on whether additional


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                                             guidance is needed for debt suspension                     Requiring a consumer’s written                      relative to the type of transaction, and
                                             coverage, particularly for closed-end                   signature or initials is intended to                   the importance to the borrower of the
                                             loans.                                                  evidence that the consumer is                          credit, related supporting property, and
                                                For the reasons discussed below,                     purchasing the product voluntarily; the                coverage under TILA; (4) whether the
                                             § 226.4(d)(4) would be added to provide                 proposal contains safeguards intended                  loan is secured by the principal
                                             flexibility in telephone sales to obtain                to insure that oral purchases are                      residence of the borrower; and (5)
                                             consumers’ requests for voluntary debt                  voluntary. Under the proposal, creditors               whether the exemption would
                                             cancellation and debt suspension                        must maintain tapes or other evidence                  undermine the goal of consumer
                                             coverage on open-end (not home-                         that the consumer received required                    protection.
                                             secured) plans.                                         disclosures orally and affirmatively                      The Board has considered each of
                                                In a technical revision, the substance               requested the product. Comment                         these factors carefully, and based on
                                             of footnotes 5 and 6 would be moved to                  4(d)(4)–1 indicates that a creditor does               that review, believes it is appropriate to
                                             the text.                                               not satisfy the requirement to obtain an               exempt, for open-end (not home-
                                             4(d)(4) Telephone Purchases                             affirmative request if the creditor uses a             secured) plans, telephone sales of credit
                                                                                                     script with leading questions or negative              insurance or debt cancellation or debt
                                                As discussed above, TILA Section                                                                            suspension plans from the requirement
                                                                                                     consent. In addition to oral disclosures,
                                             106(b), 15 U.S.C. 1605(b), permits                                                                             to obtain a written signature or initials
                                                                                                     under the proposal consumers will
                                             creditors to exclude from the finance                                                                          from the consumer. As noted above, the
                                                                                                     receive written disclosures shortly after
                                             charge premiums for credit insurance if,                                                                       consumer would continue to be
                                                                                                     the transaction. The fee will also appear
                                             among other conditions, the creditor                                                                           protected by a variety of safeguards to
                                                                                                     on the first monthly periodic statement
                                             obtains a specific written indication of                                                                       assure that the purchase is voluntary,
                                                                                                     after the purchase, and, as applicable,
                                             the consumer’s desire to obtain the                                                                            including a requirement that the
                                                                                                     thereafter. Consumer testing conducted
                                             insurance. This requirement is                                                                                 creditor maintain tapes or other
                                                                                                     for the Board suggests that consumers
                                             implemented in § 226.4(d)(1) by                                                                                evidence of the transaction, the receipt
                                                                                                     review the transactions on their
                                             requiring written initials or a signature.                                                                     of written disclosures shortly after the
                                             The Board expanded in 1996 the types                    statements carefully. Moreover, the
                                                                                                     Board proposes to better highlight fees,               transaction, and inclusion of fees on
                                             of products covered by the exclusion to                                                                        periodic statements, for which
                                             include debt cancellation agreements,                   including insurance and coverage fees,
                                                                                                     on statements. Consumers who are                       consumers may dispute billing errors.
                                             and now proposes to extend the                                                                                 At the same time, the proposal should
                                             exclusion to debt suspension products.                  billed for insurance or coverage they did
                                                                                                     not purchase may dispute the charge as                 facilitate the convenience to both
                                             As mentioned, an industry coalition has                                                                        consumers and creditors of conducting
                                             requested that the Board permit the                     a billing error. These safeguards are
                                                                                                     expected to ensure that purchases of                   transactions by telephone. The proposal,
                                             disclosures and affirmative consumer                                                                           therefore, has the potential to better
                                             request, which are conditions to this                   credit insurance or debt cancellation or
                                                                                                     suspension coverage by telephone are                   inform consumers and further the goals
                                             exclusion, to be provided orally.                                                                              of consumer protection and the
                                                Congress has recognized the practice                 voluntary.
                                                                                                                                                            informed use of credit for open-end (not
                                             of telephone sales for the purchase of                     The Board proposes this approach                    home-secured) credit. The Board
                                             insurance products. 12 U.S.C.                           pursuant to its exception and exemption                welcomes comment on this matter.
                                             1831x(c)(1)(E). Similarly, the OCC has                  authorities under TILA Section 105.
                                             issued telephone sales guidelines for                   Section 105(a) authorizes the Board to                 Section 226.5 General Disclosure
                                             national banks that sell debt                           make exceptions to TILA to effectuate                  Requirements
                                             cancellation and debt suspension                        the statute’s purposes, which include                     Section 226.5 contains format and
                                             coverage. 12 CFR parts 37.6(c)(3),                      facilitating consumers’ ability to                     timing requirements for open-end credit
                                             37.7(b). Accordingly, the Board is                      compare credit terms and helping                       disclosures. Under the current rules, a
                                             proposing an exception to the                           consumers avoid the uniformed use of                   creditor must disclose a charge that is a
                                             requirement to obtain a written                         credit. 15 U.S.C. 1601(a), 1604(a).                    ‘‘finance charge’’ or ‘‘other charge’’
                                             signature or initials for telephone                     Section 105(f) authorizes the Board to                 before the account is opened, before the
                                             purchases of credit insurance or debt                   exempt any class of transactions (with                 charge is added to the plan after account
                                             cancellation and debt suspension                        an exception not relevant here) from                   opening and before the charge is
                                             coverage on an open-end (not home-                      coverage under any part of TILA if the                 increased. These disclosures must be in
                                             secured) plan. Under new § 226.4(d)(4),                 Board determines that coverage under                   writing. As discussed below, the
                                             for telephone purchases the creditor                    that part does not provide a meaningful                proposal seeks to reform the rules
                                             may make the disclosures orally and the                 benefit to consumers in the form of                    governing disclosure of charges before
                                             consumer may affirmatively request the                  useful information or protection. 15                   they are imposed. Under the proposal:
                                             insurance or coverage orally, provided                  U.S.C. 1604(f)(1). Section 105(f) directs              (1) All charges imposed as part of the
                                             that the creditor (1) maintains                         the Board to make this determination in                plan would be disclosed before they are
                                             reasonable procedures to provide the                    light of specific factors. 15 U.S.C.                   imposed; (2) specified charges would
                                             consumer with the oral disclosures and                  1604(f)(2). These factors are (1) the                  continue to be disclosed in writing at
                                             maintains evidence that demonstrates                    amount of the loan and whether the                     account opening, and before being
                                             the consumer then affirmatively elected                 disclosure provides a benefit to                       increased or newly introduced; and (3)
                                             to purchase the insurance or coverage;                  consumers who are parties to the                       other charges imposed as part of the
                                             and (2) mails the disclosures under                     transaction involving a loan of such                   plan could be disclosed orally at any
                                             § 226.4(d)(1) or § 226.4(d)(3) within                   amount; (2) the extent to which the                    relevant time before the consumer
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                                             three business days after the telephone                 requirement complicates, hinders, or                   becomes obligated to pay the charge.
                                             purchase. Comment 4(d)(4)–1 would                       makes more expensive the credit                        The proposed reform is intended to
                                             provide that a creditor does not satisfy                process; (3) the status of the borrower,               assure that all charges imposed as part
                                             the requirement to obtain an affirmative                including any related financial                        of the plan are disclosed before they are
                                             request if the creditor uses a script with              arrangements of the borrower, the                      imposed, simplify the rules for
                                             leading questions or negative consent.                  financial sophistication of the borrower               identifying such charges, and better


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                                             match the timing and method of                          disclosures when a rate is increased due               readable type font; easily readable type
                                             disclosure with reasonable industry                     to delinquency, default or as a penalty                font includes a minimum of 10-point
                                             practices and consumer expectations.                    pursuant to § 226.9(g)(3)(ii). As                      font and sufficient spacing between the
                                             The proposal responds to comments                       discussed in further detail in the                     lines of type.
                                             received on the December 2004 ANPR                      section-by-section analysis to                            2. Disclosures subject to the clear and
                                             that criticize current rules (1) as unduly              §§ 226.6(b), 226.9(b), 226.9(c), and                   conspicuous standard. The Board has
                                             vague and inconsistent in identifying                   226.9(g), consumer testing conducted                   received questions on the types of
                                             charges covered by TILA, and (2) as                     for the Board suggests that highlighting               communications that are subject to the
                                             failing to recognize that some                          important information in a tabular                     clear and conspicuous standard. Thus,
                                             transactions on the plan between the                    format helps consumers locate the                      the Board proposes comment 5(a)(1)–5
                                             consumer and the creditor are                           information disclosed in these tables                  to make clear that all required
                                             appropriately, or even necessarily,                     much more easily. Because these                        disclosures and other communications
                                             conducted by telephone.                                 disclosures would be highlighted in a                  under Subpart B of Regulation Z are
                                                                                                     tabular format similar to the table                    considered disclosures required to be
                                             5(a) Form of Disclosures                                                                                       clear and conspicuous. This would
                                                                                                     required with respect to credit card
                                               The Board is proposing substantive                    applications and solicitations under                   include, for example, the disclosure by
                                             changes to § 226.5(a) and the associated                § 226.5a, the Board is proposing that                  a person other than the creditor of a
                                             commentary regarding the standard to                    these disclosures also be in a reasonably              finance charge imposed at the time of
                                             provide ‘‘clear and conspicuous’’                       understandable form and readily                        honoring a consumer’s credit card under
                                             disclosures. In addition, creditors would               noticeable to the consumer. The Board                  § 226.9(d) and the correction notice
                                             be required to use consistent                           is proposing to amend comment 5(a)(1)–                 required to be sent to the consumer
                                             terminology in all open-end TILA-                       1 accordingly. The Board also is                       under § 226.13(e).
                                             required disclosures. In technical                      proposing to move the guidance on the                     Oral disclosure. In order to give
                                             revisions, the Board proposes to                        meaning of ‘‘reasonably understandable                 guidance about the meaning of clear and
                                             rearrange certain provisions in                         form’’ to comment 5(a)(1)–2. Current                   conspicuous for oral disclosures, the
                                             § 226.5(a) for clarity.                                 comment 5(a)(1)–2, which provides                      Board proposes to amend the guidance
                                                                                                     guidance on what constitutes an                        on what constitutes a ‘‘reasonably
                                             5(a)(1) General
                                                                                                     ‘‘integrated document,’’ is moved to                   understandable form,’’ in proposed
                                                Clear and conspicuous standard.                                                                             comment 5(a)(1)–2. This amendment is
                                             TILA Section 122(a) mandates that all                   comment 5(a)(1)–4.
                                                                                                                                                            based in part on the Federal Trade
                                             TILA-required disclosures be made                          The Board also proposes to add                      Commission’s (FTC) guidance on oral
                                             clearly and conspicuously. 15 U.S.C.                    comment 5(a)(1)–3 to provide guidance                  disclosure in its publication Complying
                                             1632(a). The Board has implemented                      on the meaning of the readily noticeable               with the Telemarketing Sales Rule
                                             this requirement for open-end credit                    standard. Specifically, new comment                    (available at the FTC’s Web site). Oral
                                             plans in § 226.5(a)(1). Under current                   5(a)(1)–3 provides that to meet the                    disclosures would be considered to be
                                             comment 5(a)(1)–1, the Board has                        readily noticeable standard, disclosures               in a reasonably understandable form
                                             interpreted clear and conspicuous to                    for credit card applications and                       when they are given at a volume and
                                             mean that the disclosure must be in a                   solicitations under § 226.5a, highlighted              speed sufficient for a consumer to hear
                                             reasonably understandable form. In                      account-opening disclosures under                      and comprehend the disclosures.
                                             most cases, this standard does not                      § 226.6(b)(4), highlighted disclosures on
                                             require that disclosures be segregated                  checks that access a credit card account               5(a)(1)(ii)
                                             from other material or located in any                   under § 226.9(b)(3); highlighted change-                 Section 226.5(a)(1)(ii) provides that in
                                             particular place on the disclosure                      in-terms disclosures under                             general, disclosures for open-end plans
                                             statement, nor that numerical amounts                   § 226.9(c)(2)(iii)(B), and highlighted                 must be provided in writing and in a
                                             or percentages be in any particular type                disclosures when a rate is increased due               retainable form.
                                             size.                                                   to delinquency, default or as a penalty                  Oral disclosures. The Board is
                                                However, the Board has previously                    under § 226.9(g)(3)(ii) must be given in               proposing that certain charges may be
                                             determined that certain disclosures in                  a minimum of 10-point font. The Board                  disclosed after account opening. See
                                             Subpart B of Regulation Z are subject to                believes that with respect to these                    proposed § 226.5(b)(1)(ii). The goal of
                                             a higher standard in meeting the clear                  disclosures, special formatting                        this proposal is to better ensure that
                                             and conspicuous requirement due to the                  requirements, such as a tabular format                 consumers receive disclosures at
                                             importance of the disclosures and the                   and font size requirements, are needed                 relevant times; some charges may not be
                                             context in which they are given.                        to highlight for consumers the                         relevant to a consumer at account
                                             Specifically, disclosures in credit and                 importance and significance of the                     opening but may become relevant later.
                                             charge card applications and                            disclosures. The Board notes that this                 The Board is also proposing to permit
                                             solicitations subject to § 226.5a must be               approach of requiring a minimum of 10-                 creditors to make the form of disclosure
                                             both in a reasonably understandable                     point font for certain disclosures is                  more relevant to consumers. A written
                                             form and readily noticeable to the                      consistent with the approach taken                     form of disclosure has obvious merit at
                                             consumer. See current comment                           recently by eight federal agencies                     account opening, when a consumer
                                             5a(a)(2)–1, which the Board is proposing                (including the Board) in issuing a                     must assimilate a lot of information that
                                             to amend as discussed below.                            proposed model form that financial                     may influence major decisions by the
                                                1. Readily noticeable standard. The                  institutions may use to comply with the                consumer about how, or even whether,
                                             Board is proposing to highlight certain                 privacy notice requirements under                      to use the account. During the life of the
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                                             information in a tabular format in the                  Section 503 of the Gramm-Leach-Bliley                  account, in contrast, a consumer will
                                             account-opening disclosures pursuant to                 Act. 15 U.S.C. 6803(e); 72 FR 14,940;                  sometimes need to decide whether to
                                             § 226.6(b)(4); on checks that access a                  Mar. 29, 2007. In the privacy proposal,                purchase a single service from the
                                             credit card account pursuant to                         the eight federal agencies indicate that               creditor, a service that may not be
                                             § 226.9(b)(3); in change-in-terms notices               financial institutions that use the                    central to the consumer’s use of the
                                             pursuant to § 226.9(c)(2)(iii)(B); and in               privacy model form must use an easily                  account (for example, the service of


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                                             providing documentary evidence of                       charge is imposed by a person other                    § 226.9(b)(3); in change-in-terms notices
                                             transactions). Moreover, during the life                than the card issuer at the time of a                  pursuant to § 226.9(c)(2)(iii)(B); and in
                                             of the account, the consumer may                        transaction.                                           disclosures when a rate is increased due
                                             become accustomed to purchasing such                       In another technical revision, the                  to delinquency, default or as a penalty
                                             services by telephone. The consumer                     substance of footnote 8, regarding                     pursuant to § 226.9(g)(3)(ii). These
                                             and the creditor may find it convenient                 disclosures that do not need to be in a                disclosures are meant to be highlighted
                                             to conduct the transaction by telephone,                retainable form the consumer may keep,                 in a tabular format similar to the table
                                             and will, accordingly, expect to receive                is moved to proposed                                   currently required with respect to credit
                                             a disclosure of the charge for the service              § 226.5(a)(1)(ii)(B).                                  card applications and solicitations
                                             during the same telephone call. For                        Electronic communication. In April                  under § 226.5a.
                                             these reasons, the Board is proposing to                2007, the Board issued for public                         Currently, disclosures required for
                                             permit creditors to disclose orally                     comment a proposal on electronic                       credit card applications and solicitation
                                             charges not specifically identified by the              communication which would withdraw                     under § 226.5a must use the term ‘‘grace
                                             proposed regulation in § 226.6(b)(4) as                 portions of the interim final rules issued             period’’ to describe the date by which or
                                             critical to disclose in writing at account              in 2001 and to implement certain                       the period within which any credit
                                             opening. Further, the Board proposes                    provisions of the Bankruptcy Act (‘‘2007               extended for purchases may be repaid
                                             that creditors be provided with the same                Electronic Disclosure Proposal’’). See 72              without incurring a finance charge. The
                                             flexibility when the cost of such a                     FR 21,141; April 30, 2007. Proposed                    Board proposes in new § 226.5(a)(2)(iii)
                                             charge changes or is newly introduced,                  § 226.5(a)(1)(iii) and the proposal to                 to extend this requirement to use the
                                             as discussed in the section-by-section                  delete current § 226.5(a)(5) is also                   term ‘‘grace period’’ to all references to
                                             analysis to § 226.9(c). The proposal, set               proposed in the 2007 Electronic                        such a term for the disclosures required
                                             forth in§ 226.5(a)(1)(ii)(A), is intended               Disclosure Proposal. The language in                   to be in the form of a table as discussed
                                             to be consistent with consumers’                        proposed § 226.5(a)(1)(iii) clarifies that             above. In addition, proposed
                                             expectations and with the business                      creditors may provide open-end                         § 226.5(a)(2)(iii) provides that if
                                             practices of card issuers.                              disclosures to consumers in electronic                 disclosures are required to be presented
                                                Under the proposal, creditors may                    form, subject to compliance with the                   in a tabular format, the term ‘‘penalty
                                             continue to comply with TILA by                         consumer consent and other applicable                  APR’’ shall be used to describe an
                                             providing written disclosures at                        provisions of the E-Sign Act. 15 U.S.C.                increased rate that may result because of
                                             account-opening for all fees. In                        1001, et seq. The language also provides               the occurrence of one or more specific
                                             proposing to permit creditors to disclose               that the open-end disclosures required                 events specified in the account
                                             certain costs orally for purposes of                    by §§ 226.5a, 226.5b, and 226.16 may be                agreement, such as a late payment or an
                                             TILA, the Board anticipates that                        provided to the consumer in electronic                 extension of credit that exceeds the
                                             creditors will continue to identify fees                form, under the circumstances set forth                credit limit. For example, creditors
                                             in the account agreement for contract                   in those sections, without regard to the               would be required to provide
                                             and other reasons, although the                         consumer consent or other provisions in                information about penalty rates in the
                                             proposal would not require creditors to                 the E-Sign Act.                                        table given with credit card applications
                                             do so. For example, some creditors                      5(a)(2) Terminology                                    and solicitations under § 226.5a; in the
                                             identify the types of fees that could be                                                                       summary table given at account opening
                                             assessed on the account in the account                    Consistent terminology. Currently,                   under § 226.6(b)(4); if the penalty rate is
                                             agreement. The Board anticipates that                   disclosures given pursuant to                          changing, in the summary table given on
                                             such practices will continue.                           §§ 226.5a(b), 226.6, and 226.7 must use                or with the change-in-terms notice
                                                Creditors are permitted to provide in                consistent terminology. See current                    under § 226.9(c)(2)(iii)(B), or if a penalty
                                             electronic form any TILA disclosure that                § 226.5a(a)(2)(iv), comment 5a(a)(2)–6,                rate is triggered, in the table given under
                                             is required to be provided or made                      and comment 6–1. The Board proposes                    § 226.9(g)(3)(ii).
                                             available to consumers in writing if the                to expand this requirement more                           Requiring card issuers to use a
                                             consumer affirmatively consents to                      generally in new § 226.5(a)(2)(i) to                   uniform term to describe the grace
                                             receipt of electronic disclosures in a                  include other disclosures required by                  period and disallowing variants like
                                             prescribed manner. Electronic                           the open-end provisions of the                         ‘‘free-ride period’’ may improve
                                             Signatures in Global and National                       regulation (Subpart B), such as                        consumers’ understanding of the
                                             Commerce Act (the E-Sign Act), 15                       subsequent disclosures under § 226.9. A                concept. Similarly, requiring card
                                             U.S.C. 7001 et seq. The Board requests                  new comment 5(a)(2)–4 would clarify                    issuers to use a uniform term to describe
                                             comment on whether there are                            that terms do not need to be identical                 the increased rate may improve
                                             circumstances in which creditors                        but must be close enough in meaning to                 consumers’ understanding of the rate
                                             should be permitted to provide cost                     enable the consumer to relate the                      and when it applies. In the consumer
                                             disclosures in electronic form to                       disclosures to one another, which is                   testing conducted for the Board, many
                                             consumers who have not affirmatively                    consistent with current guidance in                    participants believed the term ‘‘Penalty
                                             consented to receive electronic                         current comment 5a(a)(2)–6 and current                 APR’’ as opposed to ‘‘Default APR’’ or
                                             disclosures for the account, such as                    comment 6–1. The Board believes that                   ‘‘Highest Possible APR’’ more clearly
                                             when a consumer seeks to make a                         the use of consistent terminology should               conveyed the increased rate. In testing
                                             payment online, and the creditor                        be applied to all open-end TILA-                       the term ‘‘Default APR,’’ some
                                             imposes a fee for the service.                          required disclosures to allow consumers                participants said that the word
                                                In technical revisions, the Board                    to better identify the terms across all                ‘‘default’’ indicated to them that it
                                             proposes to move to proposed                            disclosures.                                           would only apply when the account was
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                                             § 226.5(a)(1)(ii)(A) the current                          As discussed above, the Board is                     closed due to delinquent payments.
                                             exemption that disclosures required by                  proposing to highlight certain                         Some other participants said that the
                                             § 226.9(d) need not be in writing. (This                information in a tabular format in the                 word ‘‘default’’ seemed like the
                                             exemption currently is in footnote 7                    account-opening disclosures pursuant to                ‘‘normal’’ rate, not something that
                                             under § 226.5(a)(1).) Section 226.9(d)                  § 226.6(b)(4); on checks that access a                 occurs because a cardholder does
                                             requires disclosure when a finance                      credit card account pursuant to                        something wrong. Some participants


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                                             also were confused by the term ‘‘Highest                terms do not need to be more                           proposed § 226.9(b)(3), the information
                                             Possible APR;’’ one participant, for                    conspicuous when used under                            on change-in-terms notices that would
                                             example, assumed that this was the                      §§ 226.5a, 226.7(d), 226.9(e), and                     be highlighted under proposed
                                             highest point to which variable rates                   226.16.                                                § 226.9(c)(2)(iii)(B), the disclosures
                                             could increase.                                            In September 2006, the United States                given when a rate is increased due to
                                                Moreover, if credit insurance or debt                Government Accountability Office                       delinquency, default or as a penalty
                                             cancellation or debt suspension                         (GAO) issued a report that analyzed                    under proposed § 226.9(g)(3)(ii).
                                             coverage is required as part of the plan                current credit card disclosures and                    Currently, the requirement that the
                                             and information about that coverage is                  recommended improvements to these                      terms ‘‘finance charge’’ and ‘‘annual
                                             required to be disclosed in a tabular                   disclosures (GAO Report on Credit Card                 percentage rate’’ be more conspicuous
                                             format, proposed § 226.5(a)(2)(iii)                     Rates and Fees).10 The GAO criticized                  than other disclosures does not apply to
                                             requires that in describing the coverage,               credit card disclosure documents that                  disclosures highlighted in the tabular
                                             the term ‘‘required’’ shall be used and                 ‘‘unnecessarily emphasized specific                    format used for credit card application
                                             the program shall be identified by its                  terms.’’ GAO Report on Credit Card                     and solicitations under § 226.5a. All of
                                             name. For example, creditors would be                   Rates and Fees, p. 43. As an illustration              the disclosures discussed above must be
                                             required to provide information about                   of this point, the GAO reprinted a                     highlighted in a tabular format similar
                                             the required coverage in the table given                paragraph of text from a creditor’s credit             to the table required for credit card
                                             with credit card applications and                       card disclosure documents where the                    applications and solicitations under
                                             solicitations under § 226.5a, in the                    phrase ‘‘periodic finance charge’’ was                 § 226.5a. The Board believes the rule
                                             summary table given at account opening                  singled out for emphasis each time the                 should be consistent across these
                                             under § 226.6(b)(4), and if certain                     phrase was used, even when such term                   disclosures. Moreover, the Board
                                             information about the coverage is                       was not disclosed with a corresponding                 believes that the tabular format
                                             changing, in the summary table given in                 amount or percentage rate. The usability               sufficiently highlights the disclosures,
                                             change-in-terms notice under                            consultant used by the GAO commented                   so that the ‘‘more conspicuous’’ rule is
                                             § 226.9(c)(2)(iii)(B). In consumer testing              that this type of emphasis potentially                 not needed. Finally, for organizational
                                             conducted for the Board, the Board                      required readers to work harder to                     purposes, the Board proposes to
                                             tested disclosing information about the                 understand the passage’s message.                      consolidate current § 226.5(a)(2) and
                                             required debt suspension coverage in                       The Board agrees that overemphasis                  current footnote 9 into § 226.5(a)(2)(ii).
                                             the disclosure table given with a mock                  of these terms may make disclosures
                                             credit card solicitation. The Board                     more difficult for consumers to read. In               5(a)(3) Specific Formats
                                             found that describing the coverage by its               order to address this problem, the Board                 There are special rules regarding the
                                             name allowed participants to link                       considered a proposal to prohibit the                  specific format for disclosures under
                                             disclosures that were provided in the                   terms ‘‘finance charge’’ and ‘‘annual                  § 226.5a for credit and charge card
                                             table to other information about the                    percentage rate’’ from being disclosed                 applications and solicitations and
                                             coverage that was provided elsewhere in                 more conspicuously than other required                 § 226.5b for home-equity plans, as noted
                                             the solicitation materials given to the                 disclosures except when the regulation                 in current § 226.5(a)(3) and current
                                             participants.                                           so requires. However, this proposal                    § 226.5(a)(4), respectively. These rules
                                                Furthermore, the Board proposes in                   could produce unintended                               would be consolidated in proposed
                                             § 226.5(a)(2)(iii) that if required to be               consequences. For example, in a                        § 226.5(a)(3), for clarity. In addition, as
                                             disclosed in a tabular format, APRs may                 change-in-terms notice, the term                       discussed below, the Board is proposing
                                             be described as ‘‘fixed’’ or any similar                ‘‘annual percentage rate’’ may appear as               that certain account-opening
                                             term only if that rate will remain in                   a heading, and thus be disclosed more                  disclosures, periodic statement
                                             effect unconditionally until the                        conspicuously than other disclosures in
                                                                                                                                                            disclosures and subsequent disclosures,
                                             expiration of a specified time period. If               the notice even though the term is not
                                                                                                                                                            such as change-in-terms disclosures,
                                             no time period is specified, then the                   disclosed with a rate figure. It appears,
                                                                                                                                                            must be provided in specific formats
                                             term ‘‘fixed’’ or any similar term may                  therefore, that a rule prohibiting more
                                                                                                                                                            under proposed § 226.6(b)(4);
                                             not be used unless the rate remains in                  conspicuous terms in certain cases
                                                                                                                                                            §§ 226.7(b)(6), (b)(7) and (b)(13); and
                                             effect unconditionally until the plan is                would need to include detailed safe
                                                                                                                                                            §§ 226.9(b), (c) and (g) and these special
                                             closed. As further discussed in the                     harbors or exceptions, which might
                                                                                                                                                            format rules are noted in proposed
                                             section-by-section analysis to proposed                 make it unworkable. Therefore, the
                                                                                                                                                            § 226.5(a)(3).
                                             § 226.16(g) below, the Board is                         Board seeks comment on how to address
                                             proposing these rules in order to avoid                 this issue.                                            5(b) Time of Disclosures
                                             consumer confusion and the                                 Furthermore, the Board is proposing
                                                                                                                                                            5(b)(1) Account-opening Disclosures
                                             uninformed use of credit.                               to amend the regulation to expand the
                                                Terms required to be more                            list of disclosures where the terms                       TILA Section 127(a) requires creditors
                                             conspicuous than others. TILA Section                   ‘‘finance charge’’ and ‘‘annual                        to provide disclosures ‘‘before opening
                                             122(a) requires that the terms ‘‘annual                 percentage rate’’ need not be more                     any account.’’ 15 U.S.C. 1637(a). Section
                                             percentage rate’’ and ‘‘finance charge’’                conspicuous to include the account-                    226.5(b)(1) requires these disclosures
                                             be disclosed more conspicuously than                    opening disclosures that would be                      (identified in § 226.6) to be furnished
                                             other terms, data, or information. 15                   highlighted under proposed                             ‘‘before the first transaction is made
                                             U.S.C. 1632(a). The Board has                           § 226.6(b)(4), the disclosure of the                   under the plan,’’ which is interpreted as
                                             implemented this provision in current                   effective APR under proposed                           ‘‘before the consumer becomes obligated
                                             § 226.5(a)(2)(iii) by requiring that the                § 226.7(b)(7), disclosures on checks that              on the plan.’’ Comment 5(b)(1)–1. Also
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                                             terms ‘‘finance charge’’ and ‘‘annual                   access a credit card account under                     under the existing commentary,
                                             percentage rate,’’ when disclosed with a                                                                       creditors may provide the disclosures
                                             corresponding amount or percentage                        10 United States Government Accountability
                                                                                                                                                            required by § 226.6 after the first
                                             rate, be disclosed more conspicuously                   Office, Credit Cards: Increased Complexity in Rates    transaction only in limited
                                                                                                     and Fees Heightens Need for More Effective
                                             than any other required disclosure.                     Disclosures to Consumers, 06–929 (September            circumstances. This guidance would be
                                             Under current footnote 9, however, the                  2006).                                                 moved from the commentary to the


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                                                                     Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules                                          32971

                                             regulation. See proposed                                creditor before the balance is transferred             proposes to except charges imposed as
                                             § 226.5(b)(1)(iii)–(v). In addition, the                and decline the transfer.                              part of an open-end (not home-secured)
                                             Board is proposing revisions to the                       Guidance in current comment 5(b)(1)–                 plan, other than those specified in
                                             timing rules for disclosing certain costs               1 regarding account-opening disclosures                proposed § 226.6(b)(4)(iii), from the
                                             imposed on an open-end (not home-                       provided with cash advance checks                      requirement to disclose charges before
                                             secured) plan, and in connection with                   would be deleted as unnecessary.                       the first transaction. Creditors would be
                                             certain transactions conducted by                         Assessing fees on an account as                      permitted, at their option, to disclose
                                             telephone, as discussed below.                          acceptance of the account. Comment                     those charges either before the first
                                             Additional guidance is proposed on                      5(b)(1)(i)–1(i), as renumbered, currently              transaction or later, though before the
                                             providing timely disclosures when the                   provides that if after receiving the                   cost is imposed. Examples of these
                                             first transaction is a balance transfer.                account-opening disclosures, the                       charges would be fees to obtain
                                             Technical revisions would change                        consumer uses the account, pays a fee                  documentary evidence or to expedite
                                             references from ‘‘initial’’ disclosures                 or negotiates a cash advance check, the                payments or delivery of a credit card.
                                             required by § 226.6 to ‘‘account-                       creditor may consider the account not                  Creditors may, of course, continue to
                                             opening’’ disclosures, without any                      rejected. The comment would be                         disclose any charge imposed as part of
                                             intended substantive change. In today’s                 amended to clarify that if the only                    an open-end (not home-secured) plan at
                                             marketplace, there are few open-end                     activity on account is the creditors’                  account opening (or when increased or
                                             products for which consumers receive                    assessment of fees (such as start-up                   newly introduced under § 226.9(c)(2)).
                                             the disclosures required under § 226.6                  fees), the consumer is not considered to                  The charges covered by the proposed
                                             as their ‘‘initial’’ Truth in Lending                   have accepted the account until the                    exception are triggered by events or
                                             disclosure. See §§ 226.5a, 226.5b, which                consumer is provided with a billing                    transactions that may take place
                                             require creditors to provide disclosures                statement and makes a payment. The                     months, or even years, into the life of
                                             before consumers apply for a credit or                  clarification addresses concerns about                 the account, when the consumer may
                                             charge card, or for a HELOC.                            some subprime card accounts that                       not reasonably be expected to recall the
                                                                                                     assess a large number of fees at account               amount of the charge from the account-
                                             5(b)(1)(i) General Rule                                 opening. Consumers who have not made                   opening disclosure, nor readily to find
                                                Section 226.5(b)(1)(i), as renumbered,               purchases or otherwise obtained credit                 or obtain a copy of the account-opening
                                             would state the general timing rule for                 on the account would have an                           disclosure or most recent change-in-
                                             furnishing account-opening disclosures.                 opportunity to review their account-                   term notice. Requiring such charges to
                                             Specifically, creditors generally must                  opening disclosures and decide whether                 be disclosed before account opening
                                             provide the account-opening disclosures                 to reject the account and decline to pay               may not provide a meaningful benefit to
                                                                                                     the fees.                                              consumers in the form of useful
                                             before the first transaction is made
                                             under the plan.                                         5(b)(1)(ii) Charges Imposed as Part of an              information or protection. Consumers
                                                                                                     Open-End (Not Home-Secured) Plan                       would benefit, however, from a rule that
                                                Balance transfers. Creditors
                                                                                                                                                            permits creditors to disclose charges
                                             commonly extend credit to consumers                        Currently, charges imposed on an                    when consumers reasonably expect to
                                             for the purpose of paying off consumers’                open-end plan that are a ‘‘finance                     receive the disclosures, and, thus, are
                                             existing credit balances with other                     charge’’ or an ‘‘other charge’’ must be                most likely to notice and use the
                                             creditors. Requests for these ‘‘balance                 disclosed before the first transaction. 15             disclosures. The proposal assures that
                                             transfers’’ are often part of an offer to               U.S.C. 1637(a); current § 226.5(b)(1) and              consumers continue to receive
                                             open a credit card account, and                         § 226.6(a) and (b). When a new service                 disclosure of charges imposed as part of
                                             consumers may request transfers as part                 (and associated charge) is introduced or               the plan before they become obligated to
                                             of the application for the new account.                 an existing charge is increased, creditors             pay them.
                                             Comment 5(b)(1)(i)–5, as renumbered,                    must provide a change-in-terms notice                     Examples of the charges to which the
                                             provides that creditors must provide                    to update account-opening disclosures                  proposed exception would apply are
                                             account-opening disclosures before the                  for all accountholders if the new charge               fees to expedite payments or delivery of
                                             balance transfer occurs.                                is a finance charge or an other charge.                a card. Fees to expedite payments or
                                                The Board proposes to update this                    See current § 226.9(c).                                card delivery are now excluded from
                                             comment to reflect current business                        For the reasons discussed in the                    TILA coverage. In a 2003 rulemaking
                                             practices. Some creditors provide                       section-by-section analysis to § 226.6,                concerning those two charges, the Board
                                             account-opening disclosures, including                  the Board is proposing revisions to the                determined that neither was required to
                                             APRs, along with the balance transfer                   rules identifying charges required to be               be disclosed under TILA. 68 FR 16,185;
                                             offer and account application, and these                disclosed under open-end (not home-                    April 3, 2003. In the supplementary
                                             creditors would not be affected by the                  secured) plans. The current rule                       information accompanying the final
                                             proposal. Other creditors offer balance                 requiring the disclosure of costs before               rule, the Board noted some commenters’
                                             transfers for which the APRs that may                   the first transaction (in writing and in a             views that requiring a written disclosure
                                             apply are disclosed as a range,                         retainable form) would continue to                     of a charge for a service long before the
                                             depending on the consumer’s                             apply to specified costs. See proposed                 consumer might consider purchasing
                                             creditworthiness. Consumers who                         § 226.6(b)(4)(iii) for the charges, and                the service did not provide the
                                             respond to such an offer and apply for                  § 226.9(c)(2) where such charges are                   consumer material benefit. The Board
                                             the transfer later receive account-                     changing or newly introduced. These                    also noted creditors’ practice of
                                             opening disclosures, including the APR                  costs are fees of which consumers                      disclosing the charge when the service
                                             that will apply to the transferred                      should be aware before using the                       is requested, and encouraged them to
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                                             balance. The proposed change would                      account such as annual or late payment                 continue that practice. The Board
                                             clarify that the creditor must provide                  fees, or fees that the creditor would not              believes that flexible disclosure of such
                                             disclosures sufficiently in advance of                  otherwise have an opportunity to                       charges may better serve TILA’s
                                             the transfer to allow the consumer to                   disclose before the fee is triggered, such             purposes than the present exclusion of
                                             respond to the terms that will apply to                 as a fee for using a cash advance check                the charges from TILA’s coverage
                                             the transfer, including to contact the                  during the first billing cycle. The Board              altogether.


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                                             32972                   Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules

                                                The Board also believes the proposed                 offer discounted purchase prices or                    periodic statements for open-end credit
                                             exception may facilitate compliance by                  promotional payment plans to                           accounts. 15 U.S.C. 1637(b) and 15
                                             creditors. As stated earlier, it can be                 consumers who finance the purchase by                  U.S.C. 1666b. The Board proposes to
                                             challenging under the current rule to                   establishing a new open-end credit plan                retain the existing regulation and
                                             determine whether charges are a finance                 with the retailer. Under the current                   commentary, with a few changes
                                             charge or an other charge or not covered                timing rule, retailers must provide TILA               discussed below.
                                             by TILA, and thus whether advance                       account-opening disclosures before the
                                                                                                                                                            5(b)(2)(i)
                                             notice is required if a charge is                       first transaction. This means retailers
                                             increased or newly introduced. The                      must delay the shipment of goods until                    TILA Section 127(b) establishes that
                                             proposal reduces these uncertainties                    a consumer has received the                            creditors generally must send periodic
                                             and risks. Under the proposal, the                      disclosures. Consumers who want goods                  statements at the end of billing cycles in
                                             creditor could disclose a new or                        shipped immediately may use another                    which there is an outstanding balance or
                                             increased charge only to those                          credit card to finance the purchase but                a finance charge is imposed. Section
                                             consumers for whom it is relevant                       they lose any discount or promotion                    226.5(b)(2)(i) provides for a number of
                                             because they are considering at the time                that may be associated with opening a                  exceptions to a creditor’s duty to send
                                             of disclosure whether to take the action                new plan. The Board proposes to                        periodic statements.
                                             that would trigger the charge. Moreover,                provide additional flexibility to retailers               De minimis amounts. Creditors need
                                             the creditor would not have to                          and consumers for such transactions.                   not send periodic statements if an
                                             determine whether a charge was a                           Under proposed § 226.5(b)(1)(iii),                  account balance (debit or credit) is $1 or
                                             finance charge or other charge or not                   retailers that establish an open-end plan              less (and no finance charge is imposed).
                                             covered by TILA so long as the creditor                 in connection with a telephone                         In the December 2004 ANPR, the Board
                                             disclosed the charge, orally or in                      purchase of goods or services initiated                requested comment on whether the de
                                             writing, before the consumer became                     by the consumer may provide account-                   minimis amount should be adjusted.
                                             obligated to pay it, which creditors, in                opening disclosures as soon as                         Q53. Few commented on this issue;
                                             general, already do for business and                    reasonably practicable after the first                 there was little support for an
                                             other legal reasons.                                    transaction if the retailer (1) permits                adjustment. One major credit card issuer
                                                The proposal would allow flexibility                 consumers to return any goods financed                 stated that the cost to reprogram systems
                                             in the timing of certain cost disclosures.              under the plan at the time the plan is                 would exceed the benefit. Thus, the
                                             In proposing to permit creditors to                     opened and provides the consumer                       Board proposes to retain the $1
                                             disclose certain charges—orally or in                   sufficient time to reject the plan and                 threshold.
                                             writing—before the fee is imposed, the                  return the items free of cost after                       Uncollectible accounts. Creditors are
                                             Board would require creditors to                        receiving the written disclosures                      not required to send periodic statements
                                             disclose a charge at a time consumers                   required by § 226.6, and (2) informs the               on accounts the creditor has deemed
                                             would likely notice the charge when the                 consumer about the return policy as a                  ‘‘uncollectible.’’ That term is not
                                             consumer decides whether to take the                    part of the offer to finance the purchase.             defined. The Board understands that
                                             action that would trigger the charge,                   Alternatively, the retailer may delay                  creditors typically send statements on
                                             such as purchasing a service. Proposed                  shipping the goods until after the                     past-due accounts until the account is
                                             comment 5(b)(1)(ii)–1 would provide an                  account disclosures have been provided.                charged-off for purposes of loan-loss
                                             example that illustrates the standard.                     Proposed commentary provisions                      provisions, which is typically after 180
                                                The limited exception to TILA’s                      would clarify that creditors may provide               days of nonpayment. The Board is not
                                             requirement to disclose charges                         disclosures with the goods, or for                     proposing regulatory or commentary
                                             imposed as part of the plan before the                  creditors that have separate distribution              provisions on when an account is
                                             first transaction is proposed pursuant to               systems for credit documents and for                   deemed ‘‘uncollectible’’ but seeks
                                             TILA Section 105(a). Specifically, the                  goods, by establishing procedures                      comment on whether additional
                                             Board has authority under TILA Section                  reasonably designed to have the                        guidance would be helpful.
                                             105(a) to adopt ‘‘such adjustments and                  disclosures sent within the same time                     Instituting collection proceedings.
                                             exceptions for any class of transactions,               period after the purchase as when the                  Creditors need not send statements if
                                             as in the judgment of the Board are                     goods will be sent. A return policy                    ‘‘delinquency collection proceedings
                                             necessary or proper to effectuate the                   would be of sufficient duration if the                 have been instituted.’’ Over the years,
                                             purposes of the title, to prevent                       consumer is likely to receive the                      the Board’s staff has been asked for
                                             circumvention or evasion thereof, or to                 disclosures and have sufficient time to                guidance on what actions a creditor
                                             facilitate compliance therewith.’’ 15                   decide about the financing plan. A                     must take to be covered by the
                                             U.S.C. 1604(a). The class of transactions               return policy would include returns via                exception. The Board proposes to add
                                             that would be affected is transactions on               the United States Postal Service for                   comment 5(b)(2)(i)–3 to clarify that a
                                             open-end plans not secured by a                         goods delivered by private couriers. The               collection proceeding entails a filing of
                                             dwelling, though only with respect to                   commentary would also clarify that                     a court action or other adjudicatory
                                             certain charges. On the basis of the                    retailers’ policies regarding the return of            process with a third party, and not
                                             information currently available to the                  merchandise need not provide a right to                merely assigning the debt to a debt
                                             Board, a narrow adjustment and                          return goods if the consumer consumes                  collector.
                                             exception appears necessary and proper                  or damages the goods. The proposal                        Workout arrangements. Comment
                                             to effectuate TILA’s purpose to assure                  does not affect merchandise purchased                  5(b)(2)(i)–2 provides that creditors must
                                             meaningful disclosure and informed                      after the plan was initially established,              continue to comply with all the rules for
                                                                                                                                                            open-end credit, including sending a
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                                             credit use, and to facilitate compliance.               or purchased by other means such as a
                                                                                                     credit card issued by another creditor.                periodic statement, when credit
                                             5(b)(1)(iii) Telephone Purchases                                                                               privileges end, such as when a
                                                                                                     See proposed comments 5(b)(1)(iii)–1.
                                               Consumers who call a retailer to order                                                                       consumer stops taking draws and pays
                                             goods by telephone commonly use an                      5(b)(2) Periodic Statements                            off the outstanding balance over time.
                                             existing credit card account to finance                   TILA Sections 127(b) and 163 provide                 Another comment provides that ‘‘if an
                                             the purchase. Some retailers, however,                  the timing requirements for providing                  open-end credit account is converted to


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                                                                     Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules                                           32973

                                             a closed-end transaction under a written                14-day period be increased to a longer                  involved, along with a toll-free
                                             agreement with the consumer, the                        time period, so that consumer will have                 telephone number to call for further
                                             creditor must provide a set of closed-                  additional time to receive their                        information.
                                             end credit disclosures before                           statements and mail their payments to                      The Board proposes a number of
                                             consummation of the closed-end                          ensure that payments will be received                   substantive and technical revisions to
                                             transaction.’’ See comment 17(b)–2.                     by the due date, and (2) if so, what time               § 226.5a and the accompanying
                                                Over the years, the Board’s staff has                period the Board should recommend to                    commentary, as described in more detail
                                             received requests for guidance on the                   Congress.                                               below. For example, the proposal
                                             effect of certain work-out arrangements                                                                         contains a number of revisions to the
                                             for past-due open-end accounts. For                     5(b)(2)(iii)                                            format and content of application and
                                             example, a borrower with a delinquent                     In a technical revision, the substance                solicitation disclosures, to make the
                                             credit card account may agree by                        of footnote 10 is moved to the regulatory               disclosures more meaningful and easier
                                             telephone to a workout plan to reduce                   text.                                                   to understand. Format changes would
                                             or extinguish the debt and the                          5(c) Through 5(e)                                       affect type size, placement of
                                             conversation is later memorialized in a                                                                         information within the table, use of
                                             writing. The Board proposes to clarify                    Sections 226.5(c), (d), and (e) address,              cross-references to related information,
                                             that creditors entering into workout                    respectively: The basis of disclosures                  and use of boldface type for certain key
                                             agreements for delinquent open-end                      and the use of estimates; multiple                      terms. Information concerning penalty
                                             plans without converting the debt to a                  creditors and multiple consumers; and                   APRs and the reasons they may be
                                             closed-end transaction comply with the                  the effect of subsequent events. The                    triggered would be more noticeable, and
                                             regulation if creditors continue to follow              Board does not propose any changes to                   information would be added about how
                                             the regulations and procedures under                    these provisions, except that the Board                 long penalty APRs may apply. The
                                             Subpart B during the work-out period.                   proposes to add new comment 5(d)–3,                     existing disclosures about how variable
                                             The Board’s proposal is intended to                     referencing the statutory provisions                    rates are determined would be
                                             provide flexibility and reduce burden                   pertaining to charge cards with plans                   shortened and simplified. Creditors that
                                             and uncertainty. The Board seeks                        that allow access to an open-end credit                 allocate payments to transferred
                                             comment on whether further guidance                     plan maintained by a person other than                  balances that carry low rates would be
                                             would be helpful, such as by                            the charge card issuer. TILA                            required to disclose to consumers that
                                             establishing a safe harbor for when an                  127(c)(4)(D); 15 U.S.C. 1637(c)(4)(D).                  they will pay interest on their (higher
                                             open-end plan is deemed to be satisfied                 (See the section-by-section analysis to                 rate) purchases until (lower rate)
                                             and replaced by a new closed-end                        § 226.5a(f).)                                           transferred balances are paid in full.
                                             obligation.                                             Section 226.5a Credit and Charge Card                   Creditors also would be required to
                                                                                                     Applications and Solicitations                          include a reference to the Board’s Web
                                             5(b)(2)(ii)
                                                                                                                                                             site where additional information about
                                               Credit card issuers commonly offer                       TILA Section 127(c), implemented by                  shopping for credit cards is available.
                                             consumers a ‘‘grace period’’ or ‘‘free-                 § 226.5a, requires card issuers to                         To address concerns about subprime
                                             ride period’’ during which consumers                    provide certain cost disclosures on or                  credit cards programs that have high
                                             can avoid finance charges on purchases                  with an application or solicitation to                  fees with low credit limits, additional
                                             by paying the balance in full. TILA does                open a credit or charge card account.11                 disclosures would be required if the fees
                                             not require creditors to provide a grace                15 U.S.C. 1637(c). The format and                       or security deposits required to receive
                                             period, but if creditors provide one,                   content requirements differ for cost                    the card are 25 percent or more of the
                                             TILA Section 163(a) requires them to                    disclosures in card applications or                     minimum credit limit that the consumer
                                             send statements at least 14 days before                 solicitations, depending on whether the                 may receive. For example, the initial
                                             the grace period ends. 15 U.S.C.                        applications or solicitations are given                 fees on an account with a $250 credit
                                             1666c(a). The rule is a ‘‘mailbox’’ rule;               through direct mail, provided                           limit may reduce the available credit to
                                             that is, the 14-day period runs from the                electronically, provided orally, or made                less than $100.
                                             date creditors mail their statements, not               available to the general public such as                    Under the proposal, the disclosure of
                                             from the end of the statement period nor                in ‘‘take-one’’ applications and in                     the balance computation method, which
                                             from the date consumers receive their                   catalogs or magazines. Disclosures in                   now appears in the table, would be
                                             statements.                                             applications and solicitations provided                 required to be outside the table so that
                                                The Board is aware of anecdotal                      by direct mail or electronically must be                the table emphasizes information that is
                                             evidence of consumers receiving                         presented in a table. For oral                          more useful to consumers when they are
                                             statements relatively close to the                      applications and solicitations, certain                 shopping for a card.
                                             payment due date, with little time                      cost disclosures must be provided                          With respect to take-one applications
                                             remaining before the payment must be                    orally, except that issuers in some cases               and solicitations, under the proposal,
                                             mailed to meet the due date. This may                   are allowed to provide the disclosures                  card issuers that provide cost
                                             be due to the fact that at the end of a                 later in a written form. Applications and               disclosures in take-one applications and
                                             billing cycle, it may take several days                 solicitations made available to the                     solicitations would be required to
                                             for a consumer to receive a statement. In               general public, such as in a take-one                   provide the disclosures in the form of a
                                             addition, for consumers who mail their                  application, must contain one of the                    table, and would no longer be allowed
                                             payments, they may need to mail their                   following: (1) The same disclosures as                  to meet the requirements of § 226.5a by
                                             payments several days before the due                    for direct mail presented in a table; (2)               providing a narrative description of
                                             date to ensure that the payment is                      a narrative description of how finance                  account-opening disclosures. This
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                                             receive by the creditor by the due date.                charges and other charges are assessed,                 proposed revision is consistent with
                                             Although the Board notes that using the                 or (3) a statement that costs are                       other revisions contained in the
                                             Internet to make payments is                              11 Charge cards are a type of credit card for which
                                                                                                                                                             proposal that would require certain
                                             increasingly common, the Board                          full payment is typically expected upon receipt of
                                                                                                                                                             account-opening information (such as
                                             requests comment on (1) whether it                      the billing statement. To ease discussion, this         information about key rates and fees) to
                                             should recommend to Congress that the                   memorandum will refer simply to ‘‘credit cards.’’       be given in the form of a table. See


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                                             32974                   Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules

                                             section-by-section analysis to                          whether card issuers making ‘‘firm                     clarify that this ‘‘invitation to apply’’ is
                                             § 226.6(b)(4).                                          offers of credit’’ as defined in the Fair              not covered by § 226.5a unless the
                                                                                                     Credit Reporting Act (FCRA) are                        contact itself includes an application
                                             5a(a) General Rules
                                                                                                     considered to be making solicitations for              form in a direct mailing, electronic
                                                Combining disclosures. Currently,                    purposes of § 226.5a. 15 U.S.C. 1681 et                communication or ‘‘take one,’’ an oral
                                             comment 5a–2 states that account-                       seq. The Board proposes to amend the                   application in a telephone contact
                                             opening disclosures required by § 226.6                 definition of ‘‘solicitation’’ to clarify              initiated by the card issuer, or an
                                             do not substitute for the disclosures                   that such ‘‘firm offers of credit’’ for                application in an in-person contact
                                             required by § 226.5a; however, a card                   credit cards are solicitations for                     initiated by the card issuer.
                                             issuer may establish procedures so that                 purposes of § 226.5a, as discussed
                                             a single disclosure document meets the                                                                         5a(a)(2) Form of Disclosures and
                                                                                                     below.
                                             requirements of both sections. The                         The definition ‘‘solicitation’’ was                 Tabular Format
                                             Board proposes to retain this comment,                  adopted in 1989 to implement part of                      Fees for late payment, over-the-credit-
                                             but to revise it to account for proposed                the Fair Credit and Charge Card                        limit, balance transfers and cash
                                             revisions to § 226.6. Specifically, the                 Disclosure Act of 1988. It captures                    advances. Currently, § 226.5a(a)(2)(ii)
                                             Board is proposing to require that                      situations where an issuer has                         and comment 5a(a)(2)–5, which
                                             certain information given at account                    preapproved a consumer to receive a                    implement TILA Section 127(c)(1)(B),
                                             opening must be disclosed in the form                   card, and thus, no application is                      provide that card issuers may disclose
                                             of a table. See proposed § 226.6(b)(4).                 required. In 1996, the FCRA was                        late payment fees, over-the-credit-limit
                                             The account-opening table would be                      amended to allow creditors to use                      fees, balance transfer fees, and cash
                                             substantially similar to the table                      consumer report information in                         advance fees in the table or outside the
                                             required by § 226.5a, but the content                   connection with pre-selecting                          table. 15 U.S.C. 1637(c)(1)(B). In the
                                             required would not be identical. The                    consumers to receive ‘‘firm offers of                  December 2004 ANPR, the Board
                                             account-opening table would require                     credit.’’ 15 U.S.C. 1681a(l), 1681b(c). A              requested comment on whether these
                                             information that would not be required                  ‘‘firm offer of credit’’ is an offer that              fees should be required to be in the
                                             in the § 226.5a table, such as a reference              must be honored by a creditor if a                     table. Q8. Many commenters indicated
                                             to billing error rights. The Board                      consumer continues to meet the specific                that the Board should require these fees
                                             proposes to revise comment 5a–2 to                      criteria used to select the consumer for               to be in the table, because these are core
                                             provide that a card issuer may satisfy                  the offer. 15 U.S.C. 1681a(l). Creditors               fees, and uniformity in the placement of
                                             § 226.5a by providing the account-                      may obtain additional credit                           the fees would make the disclosures
                                             opening summary table on or with a                      information from consumers, such as                    more familiar and predictable for
                                             card application or solicitation, in lieu               income information, when the                           consumers. Some commenters,
                                             of the § 226.5a table. For various                      consumer responds to the offer.                        however, urged the Board to retain the
                                             reasons, card issuers may want to                       However, creditors may decline to                      flexibility for card issuers to place the
                                             provide the account-opening disclosures                 extend credit to the consumer based on                 fee disclosures either in the table or
                                             with the card application or solicitation.              this additional information only where                 immediately outside the table.
                                             When issuers do so, this comment                        the consumer does not meet specific                       The Board proposes to require that
                                             allows them to provide the account-                     criteria established by the creditor                   these fees be disclosed in the table. In
                                             opening summary table in lieu of the                    before selecting the consumer for the                  the consumer testing conducted for the
                                             table containing the § 226.5a                           offer. Thus, because consumers who                     Board, participants consistently
                                             disclosures.                                            receive ‘‘firm offers of credit’’ have been            identified these fees as among the most
                                                Clear and conspicuous standard.                      preapproved to receive a credit card and               important pieces of information they
                                             Section 226.5(a) requires that                          may be turned down for credit only                     consider as part of the credit card offer.
                                             disclosures made under subpart B                        under limited circumstances, the Board                 With respect to the disclosure of these
                                             (including disclosures required by                      believes that these preapproved offers                 fees, the Board tested placement of these
                                             § 226.5a) must be clear and                             are of the type intended to be captured                fees in the table and immediately below
                                             conspicuous. Currently, comment                         as a ‘‘solicitation,’’ even though                     the table. Participants who were shown
                                             5a(a)(2)–1 provides guidance on the                     consumers are asked to provide some                    forms where the fees were disclosed
                                             clear and conspicuous standard as                       additional information in connection                   below the table tended not to notice
                                             applied to the § 226.5a disclosures. The                with accepting the offer.                              these fees compared to participants who
                                             Board proposes to provide guidance on                      Invitations to apply. The Board also                were shown forms where the fees were
                                             applying the clear and conspicuous                      proposes to add comment 5a(a)(1)–1 to                  presented in the table. The Board
                                             standard to the § 226.5a disclosures in                 distinguish solicitations from                         proposes to amend § 226.5a(a)(2)(i) to
                                             comment 5(a)(1)–1. Thus, guidance                       ‘‘invitations to apply,’’ which are not                require these fees to be disclosed in the
                                             currently in comment 5a(a)(2)–1 would                   covered by § 226.5a. An ‘‘invitation to                table, so that consumers can easily
                                             be deleted as unnecessary. The Board                    apply’’ occurs when a card issuer                      identify them. Current § 226.5a(a)(2)(ii)
                                             proposed to add comment 5a–3 to cross                   contacts a consumer who has not been                   and comment 5a(a)(2)–5, which
                                             reference the clear and conspicuous                     preapproved for a card account about                   currently allow issuers to place the fees
                                             guidance in comment 5a(a)(1)–1.                         opening an account (whether by direct                  outside the table, would be deleted.
                                                                                                     mail, telephone, or other means) and                   These proposed revisions are based in
                                             5a(a)(1) Definition of Solicitation                     invites the consumer to complete an                    part on TILA Section 127(c)(5), which
                                                Firm offers of credit. The term                      application, but the contact itself does               authorizes the Board to add or modify
                                             ‘‘solicitation’’ is defined in                          not include an application. The Board                  § 226.5a disclosures. 15 U.S.C.
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                                             § 226.5a(a)(1) of Regulation Z to mean                  believes that these ‘‘invitations to                   1637(c)(5).
                                             ‘‘an offer by the card issuer to open a                 apply’’ do not meet the definition of                     Highlighting APRs and fee amounts in
                                             credit card account that does not require               ‘‘solicitation’’ because the consumer                  the table. Section 226.5a generally
                                             the consumer to complete an                             must still submit an application in order              requires that certain information about
                                             application.’’ 15 U.S.C. 1637(c). Board                 to obtain the offered card. Thus,                      rates and fees applicable to the card
                                             staff has received questions about                      proposed comment 5a(a)(1)–1 would                      offer be disclosed to the consumer in


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                                             card applications and solicitations. This               2007, the Board issued for public                      solicitation for a credit card must be
                                             information includes not only the                       comment the 2007 Electronic Disclosure                 provided to the consumer in electronic
                                             annual percentage rates and fee amounts                 Proposal. See section-by-section                       form on or with the application or
                                             that will apply, but also explanatory                   analysis to § 226.5(a)(1).                             solicitation. A consumer accesses an
                                             information that gives context to these                    The Bankruptcy Act provision applies                application or solicitation in electronic
                                             figures. The Board seeks to enable                      to solicitations to open a card account                form when, for example, the consumer
                                             consumers to identify easily the rates                  ‘‘using the Internet or other interactive              views the application or solicitation on
                                             and fees disclosed in the table. Thus,                  computer service.’’ The term ‘‘Internet’’              his or her personal computer. On the
                                             the Board proposes to add                               is defined as the international computer               other hand, if a consumer receives an
                                             § 226.5a(a)(2)(iv) to require that when a               network of both Federal and non-                       application or solicitation in the mail,
                                             tabular format is required, issuers must                Federal interoperable packet-switched                  the creditor would not satisfy its
                                             disclose in bold text any APRs required                 data networks. The term ‘‘interactive                  obligation to provide § 226.5a
                                             to be disclosed, any discounted initial                 computer service’’ is defined as any                   disclosures at that time by including a
                                             rate permitted to be disclosed, and any                 information service, system or access                  reference in the application or
                                             fee amounts or percentages required to                  software provider that provides or                     solicitation to the Web site where the
                                             be disclosed, except for any maximum                    enables computer access by multiple                    disclosures are located. See proposed
                                             limits on fee amounts disclosed in the                  users to a computer server, including                  comment 5a(a)(2)–6. The same proposal
                                             table. Proposed Samples G–10(B) and                     specifically a service or system that                  is included in the Board’s 2007
                                             G–10(C) provide guidance on how to                      provides access to the Internet and such               Electronic Disclosure Proposal. See
                                             show the rates and fees described in                    systems operated or services offered by                § 226.5a(a)(2)(v) and comment 5a(a)(2)–
                                             bold text. Proposed Samples G–10(B)                     libraries or educational institutions. 15              9 in the 2007 Electronic Disclosure
                                             and G–10(C) also provide guidance to                    U.S.C. 1637(c)(7). Based on the                        Proposal.
                                             issuers on how to disclose the                          definitions of ‘‘Internet’’ and                           The Board also proposes to revise
                                             percentages and fees described above in                 ‘‘interactive computer service,’’ the                  existing comment 5a(a)(2)–8 added by
                                             a clear and conspicuous manner, by                      Board believes that Congress intended                  the 2001 interim final rule, which states
                                             including these percentages and fees                    to cover card offers that are provided to              that a consumer must be able to access
                                             generally as the first text in the                      consumers in electronic form, such as                  the electronic disclosures at the time the
                                             applicable rows of the table so that the                via e-mail or an Internet Web site.                    application form or solicitation reply
                                             highlighted rates and fees generally are                   In addition, although this Bankruptcy               form is made available by electronic
                                             aligned vertically. In consumer testing                 Act provision refers to credit card                    communication. The Board proposes to
                                             conducted for the Board, participants                   solicitations (where no application is                 revise this comment to describe
                                             who saw a table with the APRs and fees                  required), the Board requested comment                 alternative methods for presenting
                                             in bold and generally before any text in                in the October 2005 ANPR on whether                    electronic disclosures. This comment is
                                             the table were more likely to identify                  the provision should be interpreted also               intended to provide examples of the
                                             the APRs and fees quickly and                           to include applications. Q93. Almost all               methods rather than an exhaustive list.
                                             accurately than participants who saw                    commenters on this issue stated that                   The same proposal was included in the
                                             other forms in which the APRs and fees                  there is no reason to treat electronic                 Board’s 2007 Electronic Disclosure
                                             were not highlighted in such a fashion.                 applications differently from electronic               Proposal.
                                                Electronic applications and                          solicitations. With respect to both                       The Board also proposes to provide
                                             solicitations. Section 1304 of the                      electronic applications and solicitations,             guidance on a Bankruptcy Act provision
                                             Bankruptcy Act amends TILA Section                      it is important for consumers who are                  requiring that the § 226.5a disclosures
                                             127(c) to require solicitations to open a               shopping for credit to receive accurate                must be ‘‘readily accessible to
                                             card account using the Internet or other                cost information before submitting an                  consumers in close proximity’’ to an
                                             interactive computer service to contain                 electronic application or responding to                application or solicitation that is made
                                             the same disclosures as those made for                  an electronic solicitation. The Board                  electronically. In the October 2005
                                             applications or solicitations sent by                   proposes to apply the Bankruptcy Act                   ANPR, the Board asked whether
                                             direct mail. Regarding format, the                      provision relating to electronic offers to             additional or different guidance is
                                             Bankruptcy Act specifies that                           both electronic solicitations and                      needed from the guidance previously
                                             disclosures provided using the Internet                 applications to promote the informed                   issued by the Board in 2000 regarding
                                             or other interactive computer service                   use of credit and avoid circumvention of               how card issuers using electronic
                                             must be ‘‘readily accessible to                         TILA. 15 U.S.C. 1601(a), 1604(a). Thus,                disclosures may comply with the
                                             consumers in close proximity’’ to the                   in implementing the Bankruptcy Act                     § 226.5a requirement that certain
                                             solicitation. 15 U.S.C. 1637(c)(7).                     provision, the Board proposes to amend                 disclosures be ‘‘prominently located’’ on
                                                In September 2000, the Board revised                 § 226.5a(c) to require that applications               or with the application or solicitation.
                                             § 226.5a, and as part of these revisions,               and solicitations that are provided in                 Q95.
                                             provided guidance on how card issuers                   electronic form contain the same                          In particular, the 2000 guidance states
                                             using electronic disclosures may                        disclosures as applications and                        that the disclosures required by § 226.5a
                                             comply with the § 226.5a requirement                    solicitations sent by direct mail. The                 must be prominently located on or with
                                             that certain disclosures be ‘‘prominently               same proposal is included in the                       electronic applications and solicitations.
                                             located’’ on or with the application or                 Board’s 2007 Electronic Disclosure                     65 FR 58,903; October 3, 2000. The
                                             solicitation. 65 FR 58,903; October 3,                  Proposal.                                              guidance provides flexibility for
                                             2000. In March 2001, the Board issued                      With respect to the form of                         satisfying this requirement. For
                                             interim final rules, which are not                      disclosures required under § 226.5a, the               example, a card issuer could provide on
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                                             mandatory, containing additional                        Board proposes to amend § 226.5a(a)(2)                 the application or reply form a link to
                                             guidance for the electronic delivery of                 by adding a new paragraph (v) to                       disclosures provided elsewhere, as long
                                             disclosures under Regulation Z,                         provide that if a consumer accesses an                 as consumers cannot bypass the
                                             consistent with the requirements of the                 application or solicitation for a credit               disclosures before submitting the
                                             E-Sign Act. 66 FR 17,329; March 30,                     card in electronic form, the disclosures               application or reply form. Alternatively,
                                             2001. As discussed above, in April                      required on or with an application or                  if a link to the disclosures is not used,


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                                             32976                   Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules

                                             the electronic application or reply form                only given a link to the disclosures, but              5a(b) Required Disclosures
                                             could clearly and conspicuously                         not to the disclosures themselves. The                   Section 226.5a(b) specifies the
                                             indicate where the fact that rate, fee or               Board proposes to incorporate the                      disclosures that are required to be
                                             other cost information could be found.                  ‘‘close proximity’’ standard for                       included on or with certain applications
                                             Or the disclosures could automatically                  electronic applications and solicitations              and solicitations.
                                             appear on the screen when the                           in § 226.5a(a)(2)(vi)(B), and the guidance
                                             application or reply form appears. (See                 regarding the location of the § 226.5a                 5a(b)(1) Annual Percentage Rate
                                             current comment 5a(a)(2)–2, which                       disclosures in electronic applications                    Section 226.5a requires card issuers to
                                             would be renumbered as 5a(a)(2)–1                       and solicitations in comment 5a(a)(2)–                 disclose the rates applicable to the
                                             under the proposal.)                                    1.ii.                                                  account, such as rates applicable to
                                                Most commenters stated that the                         Terminology. Section 226.5a currently               purchases, cash advances, and balance
                                             Board should retain this existing                       requires terminology in describing the                 transfers. 15 U.S.C. 1637(c)(1)(A)(i)(I).
                                             guidance to interpret the ‘‘close                       disclosures required by § 226.5a must be                  16-point font for disclosure of
                                             proximity’’ standard. A few industry                    consistent with terminology describing                 purchase APRs. Currently, under
                                             commenters stated that the existing                     the account-opening disclosures                        § 226.5a(b)(1), the purchase rate must be
                                             guidance should not apply, and that, for                (§ 226.6) and for the periodic statement               disclosed in the table in at least 18-point
                                             example, it should suffice to provide a                 disclosures (§ 226.7). TILA and § 226.5a               font. This font requirement does not
                                             link to the disclosures that the                        also require that the term ‘‘grace period’’
                                                                                                                                                            apply to (1) a temporary initial rate for
                                             consumer could choose to access or not.                 be used to describe the date by which
                                                                                                                                                            purchases that is lower than the rate
                                             Some commenters urged the Board                         or the period within which any credit
                                                                                                                                                            that will apply after the temporary rate
                                             generally to allow maximum flexibility                  extended for purchases may be repaid
                                                                                                                                                            expires; or (2) a penalty rate that will
                                             to creditors regarding the display of                   without incurring a finance charge. 15
                                                                                                                                                            apply upon the occurrence of one or
                                             electronic disclosures, and stated that                 U.S.C. 1632(c)(2)(C). The Board
                                                                                                                                                            more specified events. In response to
                                             no guidance or specific rules were                      proposes that all guidance for
                                                                                                                                                            the December 2004 ANPR, several
                                             necessary.                                              terminology requirements with respect
                                                The Board proposes to revise the                                                                            industry commenters suggested that the
                                                                                                     to § 226.5a disclosures be placed in
                                             existing guidance to interpret the ‘‘close                                                                     Board delete this 18-point font
                                                                                                     proposed § 226.5(a)(2)(iii). The Board
                                             proximity’’ standard. The existing                      proposes to add comment 5a(a)(2)–7 to                  requirement. These commenters
                                             guidance would be revised to be                         cross-reference the guidance in                        indicated that disclosing the purchase
                                             consistent with proposed changes to                     § 226.5(a)(2).                                         rate in 18-point font size might distract
                                             comment 5a(a)(2)–8, that provides                                                                              consumers from other important terms
                                             guidance to issuers on providing access                 5a(a)(4) Certain Fees That Vary by State               being disclosed, and that disclosing the
                                             to electronic disclosures at the time the                  Currently, under § 226.5a, if the                   purchase rate in the table in large font
                                             application form or solicitation reply                  amount of a late-payment fee, over-the-                size is not necessary because simply
                                             form is made available by electronic                    credit-limit fee, cash advance fee or                  disclosing the purchase rate in the table
                                             communication. Specifically, the Board                  balance transfer fee varies from state to              provides consumers meaningful and
                                             proposes to provide that electronic                     state, a card issuer may disclose the                  comparable disclosure of that term.
                                             disclosures are deemed to be closely                    range of the fees instead of the amount                   The Board is proposing to reduce the
                                             proximate to an application or                          for each state, if the disclosure includes             18-point font requirement to a 16-point
                                             solicitation if, for example, (1) they                  a statement that the amount of the fee                 font. The purchase rate is one of the
                                             automatically appear on the screen                      varies from state to state. See existing               most important terms disclosed in the
                                             when the application or reply form                      § 226.5a(a)(5), renumbered as new                      table, and it is essential that consumers
                                             appears, (2) they are located on the same               § 226.5a(a)(4). As discussed below, the                be able to identify that rate easily. A 16-
                                             Web ‘‘page’’ as the application or reply                Board proposes to require card issuers                 point font size requirement for the
                                             form without necessarily appearing on                   to disclose in the table any fee imposed               purchase APR appears to be sufficient to
                                             the initial screen, if the application or               when a payment is returned. See                        highlight the purchase APR. (The Board
                                             reply form contains a clear and                         proposed § 226.5a(b)(12). The Board                    is proposing that other disclosures in
                                             conspicuous reference to the location of                proposes to amend new § 226.5a(a)(4) to                the table are required to be in 10-point
                                             the disclosures and indicates that the                  add returned payment fees to the list of               type. See proposed comment 5(a)(1)–3.)
                                             disclosures contain rate, fee, and other                fees for which an issuer may disclose a                In consumer testing conducted for the
                                             cost information, as applicable, or (3)                 range of fees. The Board requests                      Board, versions of the table in which the
                                             they are posted on a Web site and the                   comment on whether other fees required                 purchase rate was the same font as other
                                             application or solicitation reply form is               to be disclosed under § 226.5a should be               rates included in the table were
                                             linked to the disclosures in a manner                   added to the list of fees for which the                reviewed. In other versions, the
                                             that prevents the consumer from by-                     issuer may disclose a range of fees, such              purchase rate was in 16-point type
                                             passing the disclosures before                          as fees for required insurance or debt                 while other disclosures were in 10-point
                                             submitting the application or reply                     cancellation or suspension coverage                    type. Participants tended to notice the
                                             form. See proposed comment 5a(a)(2)–                    under proposed § 226.5a(b)(14).                        purchase rate more often when it was in
                                             1.ii.                                                                                                          a font bigger than the font used for other
                                                The Board proposes to retain the                     5a(a)(5) Exceptions                                    rates. Nonetheless, there was no
                                             requirement that if an electronic link to                 Section 226.5a currently contains                    evidence from consumer testing that it
                                             the disclosures is used, the consumer                   several exceptions to the disclosure                   was necessary to use a font size of 18-
                                             must not be able to bypass the link                     requirements. Some of these exceptions                 point in order for the purchase APR to
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                                             before submitting an application or a                   are in the regulation itself, while others             be noticeable to participants. Given that
                                             reply form. The Board believes that the                 are contained in the commentary. For                   the proposal is requiring a minimum of
                                             ‘‘close proximity’’ standard is designed                clarity, all exceptions would be placed                10-point type for the disclosure of other
                                             to ensure that the disclosures are easily               together in new § 226.5a(a)(5), as                     terms in the table, based on document
                                             noticeable to consumers, and this                       indicated in the redesignation table                   design principles, the Board believes
                                             standard is not met when consumers are                  below.                                                 that a 16-point font size for the purchase


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                                                                     Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules                                          32977

                                             APR would be effective in highlighting                  footnote to the phrase ‘‘variable rate.’’              to be disclosed in the table may distract
                                             the purchase APR in the table.                          Many participants who did find the                     from more important information in the
                                                Periodic rate. Currently, comment                    variable rate information were confused                table, and contribute to ‘‘information
                                             5a(b)(1)–1 allows card issuers to                       by the variable-rate margins, often                    overload.’’ Thus, in an effort to
                                             disclose the periodic rate in the table in              interpreting them erroneously as the                   streamline the information that may
                                             addition to the required disclosure of                  actual rate being charged. In addition,                appear in the table, the Board proposes
                                             the corresponding APR. The Board                        very few participants indicated that they              to prohibit disclosure of the rate floors
                                             proposes to delete comment 5a(b)(1)–1,                  would use the margins in shopping for                  and ceilings in the table. Nonetheless,
                                             and thus, prohibit disclosure of the                    a credit card account.                                 card issuers may disclose this
                                             periodic rate in the table. Based on                       Accordingly, the Board proposes to                  information outside of the table.
                                             consumer testing conducted for the                      amend § 226.5a(b)(1)(i) to specify that                   Discounted initial rates. Currently,
                                             Board, consumers do not appear to shop                  issuers may not disclose the amount of                 comment 5a(b)(1)–5 specifies that if the
                                             using the periodic rate, nor is it clear                the index or margins in the table.                     initial rate is temporary and is lower
                                             that this information is important to                   Specifically, card issuers would not be                than the rate that will apply after the
                                             understanding a credit card offer.                      allowed to disclose in the table the                   temporary rate expires, a card issuer
                                             Allowing the periodic rate to be                        current value of the index (for example,               must disclose the rate that will
                                             disclosed in the table may distract from                that the prime rate currently is 7.5                   otherwise apply to the account. A
                                             more important information in the table,                percent) or the amount of the margin                   discounted initial rate may be provided
                                             and contribute to ‘‘information                         that is used to calculate the variable                 in the table along with the rate required
                                             overload.’’ Thus, in an effort to                       rate. Card issuers would be allowed to                 to be disclosed if the card issuer also
                                             streamline the information that appears                 indicate only that the rate varies and the             discloses the time period during which
                                             in the table, the Board proposes to                     type of index used to determine the rate               the introductory rate will remain in
                                             prohibit disclosure of the periodic rate                (such as the ‘‘prime rate,’’ for example.)             effect. The Board proposes to move
                                             in the table. Nonetheless, card issuers                 In describing the type of index, the                   comment 5a(b)(1)–5 to new
                                             may disclose this information outside of                issuer may not include details about the               § 226.5a(b)(1)(ii). The Board also
                                             the table.                                              index in the table. For example, if the                proposes to add new comment 5a(b)(1)–
                                                Variable rate information. Section                   issuer uses a prime rate, the issuer must              3 to specify that if a card issuer
                                             226.5a(b)(1)(i), which implements TILA                  just describe the rate as tied to a ‘‘prime            discloses the discounted initial rate and
                                             Section 127(c)(1)(A)(i)(II), currently                  rate’’ and may not disclose in the table               expiration date in the table, the issuer
                                             requires for variable-rate accounts, that               that the prime rate used is the highest                is deemed to comply with the standard
                                             the card issuer must disclose the fact                  prime rate published in the Wall Street                to provide this information clearly and
                                             that the rate may vary and how the rate                 Journal two business days before the                   conspicuously if the issuer uses the
                                             is determined. 15 U.S.C.                                closing date of the statement for each                 format specified in proposed Samples
                                             1637(c)(1)(A)(i)(II). In disclosing how                 billing period. See proposed comment                   G–10(B) and G–10(C) to present this
                                             the applicable rate will be determined,                 5a(b)(1)–2. Also, the Board would                      information.
                                             the card issuer is required to provide the              require that the disclosure about a                       In addition, under TILA Section
                                             index or formula used and disclose any                  variable rate (the fact that the rate varies           127(c)(6)(A), as added by Section
                                             margin or spread added to the index or                  and the type of index used to determine                1303(a) of the Bankruptcy Act, the term
                                             formula in setting the rate. The card                   the rate) must be disclosed with the                   ‘‘introductory’’ must be used in
                                             issuer may disclose the margin or                       applicable APRs, so that consumers can                 immediate proximity to each listing of
                                             spread as a range of the highest and                    more easily locate this information. See               a discounted initial rate in the
                                             lowest margins that may be applicable                   proposed Model Form G–10(A),                           application, solicitation, or promotional
                                             to the account. A disclosure of any                     Samples G–10(B) and G–10(C).                           materials accompanying such
                                             applicable limitations on rate increases                Proposed Samples G–10(B) and G–10(C)                   application or solicitation. Thus, the
                                             or decreases may also be included in the                provide guidance to issuers on how to                  Board proposes to revise new
                                             table. See current comment 5a(b)(1)–3.                  disclose the fact that the applicable rate             § 226.5a(b)(1)(ii) to specify that if an
                                                1. Index and margins. Currently, the                 varies and how it is determined.                       issuer provides a discounted initial rate
                                             variable rate information is required to                   2. Rate floors and ceilings. Currently,             in the table along with the rate required
                                             be disclosed separately from the                        card issuers may disclose in the table,                to be disclosed, the card issuer must use
                                             applicable APR, in a row of the table                   at their option, any limitations on how                the term ‘‘introductory’’ in immediate
                                             with the heading ‘‘Variable Rate                        high (i.e., a rate ceiling) or low (i.e., a            proximity to the listing of the initial
                                             Information.’’ Some card issuers will                   rate floor) a particular rate may go. For              discounted rate.
                                             include the phrase ‘‘variable rate’’ with               example, assume that the purchase rate                    In the October 2005 ANPR,
                                             the disclosure of the applicable APR                    on an account could not go below 12                    commenters asked the Board to consider
                                             and include the details about the index                 percent or above 24 percent. An issuer                 permitting creditors to use the term
                                             and margin under the ‘‘Variable Rate                    would be required to disclose in the                   ‘‘intro’’ as an alternative to the word
                                             Information’’ heading. In the consumer                  table the current rate offered on the                  ‘‘introductory.’’ Because ‘‘intro’’ is a
                                             testing conducted for the Board, many                   credit card (for example, 18 percent),                 commonly understood abbreviation of
                                             participants who saw the variable rate                  and would be permitted to disclose in                  the term ‘‘introductory,’’ and consumer
                                             information presented as described                      the table that the rate would not go                   testing indicates that consumers
                                             above understood that the label                         below 12 percent and above 24 percent.                 understand this term, the Board
                                             ‘‘variable’’ meant that a rate could                    See current comment 5a(b)(1)–4. The                    proposes to allow creditors to use
                                             change, but could not locate information                Board proposes to revise the                           ‘‘intro’’ as an alternative to the
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                                             on the tested form regarding how or                     commentary to prohibit the disclosure                  requirement to use the term
                                             why these rates could change. This was                  of the rate floors and ceilings in the                 ‘‘introductory’’ and is proposing to
                                             true even if the index and margin                       table. Based on consumer testing                       clarify this approach in new
                                             information was taken out of the row of                 conducted for the Board, consumers do                  § 226.5a(b)(1)(ii). Also, to give card
                                             the table with the heading ‘‘Variable                   not appear to shop based on these rate                 issuers guidance on the meaning of
                                             Rate Information’’ and placed in a                      floors and ceilings, and allowing them                 ‘‘immediate proximity,’’ the Board is


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                                             32978                   Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules

                                             proposing to provide guidance for                       rates. The GAO also found that                         card issuers apply the increased rate to
                                             creditors that place the word                           consumers had difficulty identifying the               all balances on the account. The Board
                                             ‘‘introductory’’ or ‘‘intro’’ within the                default rate and circumstances that                    believes that this information helps
                                             same phrase as each listing of the                      would trigger rate increases. See GAO                  consumers better understand the
                                             discounted initial rate. This guidance is               Report on Credit Card Rates and Fees,                  consequences of triggering the penalty
                                             set forth in proposed comment 5a(b)(1)–                 at page 49. In the testing conducted for               rate.
                                             3. The Board believes that interpreting                 the Board, when the penalty rate was                      In addition, the Board proposes to
                                             ‘‘immediate proximity’’ to mean                         placed in a separate row in the table,                 specify in new § 226.5a(b)(1)(iv) that in
                                             adjacent to the rate may be too                         participants tended to notice the rate                 disclosing the penalty rate, a card issuer
                                             restrictive. Moreover, the Board has                    more often. Moreover, participants                     must describe how long the increased
                                             proposed the ‘‘within the same phrase’’                 tended to notice the specific events that              rate will apply. Proposed comment
                                             standard as a safe harbor instead of                    result in the penalty rate more often                  5a(b)(1)–4 provides that in describing
                                             requiring this placement, recognizing                   when these events were included with                   how long the increased rate will remain
                                             that even if the term ‘‘introductory’’ is               the penalty rate in a single row in the                in effect, the description should be brief,
                                             not ‘‘within the same phrase’’ as the rate              table. For example, two types of forms                 and refers issuers to Samples G–10(B)
                                             it may still meet the ‘‘immediate                       related to placement of the events that                and G–10(C) for guidance on the level
                                             proximity’’ standard.                                   could trigger the penalty rate were                    of detail that issuer should use to
                                                Penalty rates. Currently, comment                    tested—several versions showed the                     describe how long the increased rate
                                             5a(b)(1)–7 requires that if a rate may                  penalty rate in one row of the table and               will remain in effect. Also, proposed
                                             increase upon the occurrence of one or                  the description of the events that could               comment 5a(b)(1)–4 provides that if a
                                             more specific events, such as a late                    trigger the penalty rate in another row                card issuer reserves the right to apply
                                             payment or an extension of credit that                  of the table. Several other versions                   the increased rate indefinitely, that fact
                                             exceeds the credit limit, the card issuer               showed the penalty rate and the                        should be stated. The Board believes
                                             must disclose the increased penalty rate                triggering events in the same row.                     that this information may help
                                             that may apply and the specific event or                Participants who saw the versions of the               consumers better understand the
                                             events that may result in the increased                 table with the penalty rate in a separate              consequences of triggering the penalty
                                             rate. If a tabular format is required, the              row from the description of the                        rate.
                                             issuer must disclose the penalty rate in                triggering events tended to skip over the                 Also, the Board proposes to add
                                             the table under the heading ‘‘Other                     row that specified the triggering events               language to new § 226.5a(b)(1)(iv) to
                                             APRs,’’ along with any balance transfer                 when reading the table. Nonetheless,                   specify that in disclosing a penalty rate,
                                             or cash advance rates.                                  participants who saw the versions of the               card issuers must include a brief
                                                The specific event or events must be                 table in which the penalty rate and the                description of the circumstances under
                                             described outside the table with an                     triggering events were in the same row                 which any discounted initial rates may
                                             asterisk or other means to direct the                   tended to notice the triggering events                 be revoked and the rate that will apply
                                             consumer to the additional information.                 when they reviewed the table.                          after the discounted initial rate is
                                             At its option, the issuer may include                      As a result, the Board proposes to add              revoked. Section 1303(a) of the
                                             outside the table with the explanation of               § 226.5a(b)(1)(iv) and amend new                       Bankruptcy Act requires that a credit
                                             the penalty rate the period for which the               comment 5a(b)(1)–4 (previously                         card application or solicitation must
                                             increased rate will remain in effect,                   comment 5a(b)(1)–7) to require card                    contain in a prominent location on or
                                             such as ‘‘until you make three timely                   issuers to briefly disclose in the table               with the application or solicitation a
                                             payments.’’ The issuer need not disclose                the specific event or events that may                  clear and conspicuous disclosure of a
                                             an increased rate that is imposed if                    result in the penalty rate. In addition,               general description of the circumstances
                                             credit privileges are permanently                       the Board is proposing that the penalty                that may result in revocation of a
                                             terminated.                                             rate and the specific events that cause                discounted initial rate offered with the
                                                In the December 2004 ANPR, the                       the penalty rate to be imposed must be                 card, and the rate that will apply after
                                             Board solicited comment on whether                      disclosed in the same row of the table.                the discounted initial rate is revoked. 15
                                             the table was effective as currently                    See proposed Model Form G–10(A). In                    U.S.C. 1637(c)(6)(C). The Board is
                                             designed. Q7. In response to this                       describing the specific event or events                proposing that this information be
                                             question, many commenters suggested                     that may result in an increased rate, new              disclosed in the table along with other
                                             that the specific event or events that                  comment 5a(b)(1)–4 provides that the                   penalty rate information. Often, the
                                             may result in the penalty rate should be                descriptions of the triggering events in               same events that trigger a loss of a
                                             disclosed in the table along with the                   the table should be brief. For example,                discounted initial rate and an increase
                                             penalty rate, because this would                        if an issuer may increase a rate to the                to the penalty rate also trigger an
                                             enhance comparison shopping and                         penalty rate if the consumer does not                  increase in other rates on the account.
                                             consumer understanding by                               make the minimum payment by 5 p.m.,                       Rates that depend on consumers’
                                             highlighting penalty pricing and its                    Eastern time, on its payment due date,                 creditworthiness. Credit card issuers
                                             effect on the other rates for the account.              the issuer should describe this                        often engage in risk-based pricing such
                                                In the consumer testing conducted for                circumstance in the table as ‘‘make a                  that the rates offered on a credit card
                                             the Board, when reviewing forms in                      late payment.’’ Proposed Samples G–                    will depend on later determinations of
                                             which the specific events that trigger the              10(B) and G–10(C) provide additional                   a consumer’s creditworthiness. For
                                             penalty rate were disclosed outside the                 guidance on the level of detail that                   example, an issuer may use information
                                             table, many participants did not readily                issuers should use in describing the                   collected in a consumer’s application or
                                             notice the penalty rate triggers when                   specific events that result in the penalty             solicitation reply form (e.g., income
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                                             they initially read through the                         rate.                                                  information) or obtained through a
                                             document or when asked follow-up                           The Board also proposes to specify in               credit report from a consumer reporting
                                             questions. In addition, many                            new § 226.5a(b)(1)(iv) that in disclosing              agency to determine the rate for which
                                             participants did not readily notice the                 a penalty rate, a card issuer also must                a consumer qualifies. For preapproved
                                             penalty rate when it was included in the                specify the balances to which the                      solicitations, issuers that engage in risk-
                                             row ‘‘Other APRs’’ along with other                     increased rate will apply. Typically,                  based pricing typically will disclose the


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                                                                     Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules                                             32979

                                             specific rates offered to the consumer,                 solicits comment on whether card issuer                balance transfers are not grouped
                                             because for these offers, issuers                       should alternatively be permitted to list              together, a cross reference from the cash
                                             typically will have some indication of a                only the highest possible rate that may                advance and balance transfer rates to the
                                             consumer’s creditworthiness based on                    apply instead of a range of rates (e.g., up            applicable fees may help consumers
                                             the prescreening process done through a                 to 17.99 percent).                                     notice both the rate and the fee. In
                                             consumer reporting agency. For                             As discussed above, one industry                    consumer testing conducted for the
                                             applications not involving prescreens,                  commenter suggested that the Board                     Board, some participants were more
                                             however, issuers that use risk-based                    should allow issuers to disclose a recent              aware that an interest rate applies to
                                             pricing may not be able to disclose the                 APR or the median rate within the range                cash advances and balance transfers
                                             specific rate that would apply to a                     of possible rates, with an explanation                 than they were aware of the fee
                                             consumer, because issuers may not have                  that the APR could be higher or lower                  component, so a cross reference
                                             sufficient information about a                          depending on the consumer’s                            between the rate and the fee may help
                                             consumer’s creditworthiness at the time                 creditworthiness. The Board believes                   those consumers notice both the rate
                                             the application is given.                               that requiring card issuers to disclose all            and the fee components. Therefore, the
                                                In response to the December 2004                     the possible rates (as either specific                 Board proposes to add new
                                             ANPR, industry commenters asked for                     rates, or as a range of rates) provides                § 226.5a(b)(1)(vi) to require that if a rate
                                             guidance on how rates should be                         more useful information to consumers                   and fee both apply to a balance transfer
                                             disclosed under § 226.5a when an issuer                 than allowing issuers to disclose a                    or cash advance transaction, a card
                                             does not know the specific rate for                     median APR within the range. If only                   issuer must disclose that a fee also
                                             which the consumer will qualify at the                  one rate is disclosed in the table,                    applies when disclosing the rate, and a
                                             time the disclosures are made because                   consumers may mistake the rate                         cross-reference to the fee. 15 U.S.C.
                                             the specific rate depends on a later                    disclosed as the specific rate offered on              1637(c)(5).
                                             determination of the consumer’s                         the account, and not understand that it                   Typical APR. In response to the
                                             creditworthiness. Some industry                         is a median rate within a certain range,               December 2004 ANPR, several
                                             commenters asked the Board to clarify                   even if there is an explanation that the               consumer groups indicated that the
                                             that issuers may disclose the range of                  rate could be higher or lower. If a                    current disclosure requirements in
                                             possible rates, with an explanation that                consumer sees a range or several                       § 226.5a allow card issuers to promote
                                             the rate obtained by the consumer is                    specific rates, the consumer may be                    low APRs, that include interest but not
                                             based on the consumer’s                                 better able to determine that more than                fees, while charging high penalty fees
                                             creditworthiness. Another industry                      one rate is being disclosed.                           and penalty rates when consumers, for
                                             commenter suggested that the Board                         Transactions with both rate and fee.                example, pay late or exceed the credit
                                             should allow issuers to disclose a recent               When a consumer initiates a balance                    limit. As a result, these consumer
                                             APR or the median rate within the range                 transfer or cash advance, card issuers                 groups suggested that the Board require
                                             of possible rates, with an explanation                  typically charge consumers both interest               credit card issuers to disclose in the
                                             that the rate could be higher or lower                  on the outstanding balance of the                      table a ‘‘typical rate’’ that would include
                                             depending on the consumer’s                             transaction, and a fee to complete the                 fees and charges that consumers pay for
                                             creditworthiness. Several consumer                      transaction. It is important that                      a particular open-end credit products.
                                             group commenters suggested that the                     consumers understand when both a rate                  This rate would be calculated as the
                                             Board should not allow issuers to                       and a fee apply to specific transactions.              average effective rate disclosed on
                                             disclose a range of possible rates.                     In the consumer testing conducted for                  periodic statements over the last three
                                             Instead, issuers should be required to                  the Board, several ways of presenting                  years for customers with the same or
                                             disclose the actual APR that the creditor               rate and fee information were reviewed.                similar credit card product. These
                                             is offering, because otherwise,                         In some tests, the cash advance and                    consumer groups believe that this
                                             consumers do not know the rate for                      balance transfer rates were included in                ‘‘typical rate’’ would reflect the real rate
                                             which they are applying.                                a section with other rates, and cash                   that consumers pay for the credit card
                                                The Board proposes to add                            advance and balance transfer fees were                 product.
                                             § 226.5(b)(1)(v) and comment 5a(b)(1)–5                 included in a section with other fees. In                 The Board is not proposing that card
                                             to clarify that in circumstances in which               other tests, cash advance and balance                  issuers disclose the ‘‘typical rate’’ as
                                             an issuer cannot state a single specific                transfer fees were not included with                   part of the § 226.5a disclosures.
                                             rate being offered at the time disclosures              other fees, but instead were included                  Although a single cost figure (like the
                                             are given because the rate will depend                  with the cash advance and balance                      APR on closed-end credit) is a laudable
                                             on a later determination of the                         transfer rates. Participants in the first              objective, the Board does not believe
                                             consumer’s creditworthiness, issuers                    test (the one where balance transfer and               that the proposed typical APR would be
                                             must disclose the possible rates that                   cash advance fees were grouped with                    helpful to consumers that seek credit
                                             might apply, and a statement that the                   other fees) were more likely to notice                 cards. There are many different ways
                                             rate for which the consumer may qualify                 the balance transfer and cash advance                  consumers may use their credit cards,
                                             at account opening depends on the                       fees than participants in the other tests.             such as the features they use, what fees
                                             consumer’s creditworthiness. A card                     Participants tended to notice rates more               they incur, and whether a balance is
                                             issuer may disclose the possible rates as               easily when they were grouped together,                carried from month to month. For
                                             either specific rates or a range of rates.              and fees more easily when they are                     example, some consumers use their
                                             For example, if there are three possible                grouped together. Thus, the Board is                   cards only for purchases, always pay off
                                             rates that may apply (e.g., 9.99, 12.99 or              proposing to group APRs together in the                the bill in full, and never pay fees. Other
                                             17.99 percent), an issuer may disclose                  table and fees together in the table,                  consumers may use their cards for
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                                             specific rates (9.99, 12.99 or 17.99                    rather than grouping APRs and fees                     purchases, balance transfers or cash
                                             percent) or a range of rates (9.99 to 17.99             related to cash advances together and                  advances, but never pay late-payment
                                             percent). Proposed Samples G–10(B)                      APRs and fees related to balance                       fees, over-the-credit-limit fees or other
                                             and G–10(C) provide guidance for                        transfers together.                                    penalty fees. Still others may pay
                                             issuers on how to meet these                               Nonetheless, because the rates and the              penalty fees and incur penalty rates. A
                                             requirements. In addition, the Board                    fees related to cash advances and                      ‘‘typical rate,’’ however, would be based


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                                             32980                   Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules

                                             on average fees and average balances                    a $10 monthly maintenance fee, and                     because this charge can have a
                                             that may not be typical for many                        that the fee is $120 on an annual basis.               significant effect on the cost of credit.
                                             consumers. Moreover, such a rate may                       In addition, the Board proposes to                     The Board proposes to retain the
                                             confuse consumers about the actual rate                 amend § 226.5a(b)(2) to require                        minimum finance charge disclosure in
                                             that may apply to their account.                        additional information about non-                      the table. Although minimum charges
                                               Nonetheless, the Board believes it is                 periodic fees related to opening the                   currently may be small, card issuers
                                             important that consumers understand                     account. Currently, issuers are required               may increase these charges in the future.
                                             the penalty rates and penalty fees that                 to disclose the amount of the non-                     Also, Board is aware of at least one
                                             apply to a credit card account. Thus, the               periodic fee, but not that it is a one-time            credit card product for which no APR is
                                             Board is proposing to make penalty                      fee. The Board proposes to amend                       charged, but each month a fixed charge
                                             rates more prominent in the table and                   § 226.5a(b)(2) to require card issuers to              is imposed based on the outstanding
                                             require card issuers to describe in the                 disclose the amount of the fee and that                balance (for example, $6 charge per
                                             table the reasons why a penalty rate may                it is a one-time fee. This additional                  $1,000 balance). If the minimum finance
                                             apply and how long the penalty rate                     information will allow consumers to                    charge disclosure was eliminated from
                                             will apply. See proposed                                better understand set-up and                           the table, card issuers that offer this type
                                             § 226.5a(b)(1)(iv). Likewise, the Board is              maintenance fees that are often imposed                of pricing would no longer be required
                                             proposing to highlight penalty fees by                  in connection with subprime credit                     to disclose the fixed charge in the table.
                                             requiring that late payment fees, over-                 cards. For example, the proposed                       The Board is not proposing to require
                                             the-credit-limit fees, and returned-                    changes would provide consumers with                   the minimum finance charge only if it
                                             payment fees be disclosed in the table.                 additional information about when the                  is a significant amount. This approach
                                             See proposed § 226.5a(a)(2)(i).                         fees will be imposed by identifying                    could undercut the uniformity of the
                                                                                                     which fees are one-time fees, which fees               table, and could be misleading to
                                             5a(b)(2) Fees for Issuance or Availability
                                                                                                     are periodic fees (such as monthly fees),              consumers. If consumers do not see a
                                                Section 226.5a(b)(2), which                                                                                 minimum finance charge disclosed in
                                             implements TILA Section                                 and which fees are annual fees.
                                                                                                                                                            the table, the Board is concerned that
                                             127(c)(1)(A)(ii)(I), requires card issuers                 In addition, application fees that are
                                                                                                                                                            most consumers might assume that
                                             to disclose any annual or other periodic                charged regardless of whether the
                                                                                                                                                            there is not a minimum finance charge
                                             fee, expressed as an annualized amount,                 consumer receives credit currently are
                                                                                                                                                            on the card, when the charge was below
                                             that is imposed for the issuance or                     not considered fees as imposed for the                 a certain threshold.
                                             availability of a credit card, including                issuance or availability of a credit card,                Under § 226.5a(b)(3), card issuers are
                                             any fee based on account activity or                    and thus are not disclosed in the table.               only required to disclose the amount of
                                             inactivity. 15 U.S.C. 1637(c)(1)(A)(ii)(I).             See current comment 5a(b)(2)–3 and                     any minimum or fixed finance charge
                                             In 1989, the Board used its authority                   § 226.4(c)(1). The Board proposes to                   that could be imposed during a billing
                                             under TILA Section 127(c)(5) to require                 delete the exception for these                         cycle. Card issuers currently are not
                                             that issuers also disclose non-periodic                 application fees and require that they be              required to provide a description of
                                             fees related to opening the account,                    disclosed in the table as fees imposed                 when this charge may be imposed. In
                                             such as one-time membership or                          for the issuance or availability of a                  consumer testing conducted for the
                                             participation fees. 15 U.S.C. 1637(c)(5);               credit card. The Board believes that                   Board, model forms were tested that
                                             54 FR 13,855, April 6, 1989.                            consumers should be aware of these fees                only included the amount of the
                                                Fees for issuance or availability of                 when they are shopping for a credit                    minimum interest charge in the table. In
                                             credit card products targeted to                        card.                                                  viewing these forms, some participants
                                             subprime borrowers. Often, subprime                     5a(b)(3) Minimum Finance Charge                        misunderstood that they would pay the
                                             credit cards will have substantial fees                                                                        minimum interest charge every month,
                                             related to the issuance and availability                   Currently, § 226.5a(b)(3), which                    not just those months where they
                                             of credit. For example, these cards may                 implements TILA Section                                otherwise would incur interest that was
                                             impose an annual fee, and a monthly                     127(c)(1)(A)(ii)(II), requires that card               less than the minimum charge. Thus,
                                             maintenance fee for the card. In                        issuers must disclose any minimum or                   the Board proposes to amend
                                             addition, these cards may impose                        fixed finance charge that could be                     § 226.5a(b)(3) to require card issuers to
                                             multiple one-time fees when the                         imposed during a billing cycle. Card                   disclose in the table a brief description
                                             consumer opens the card account, such                   issuers typically impose a minimum                     of the minimum finance charge, to give
                                             as an application fee and a program fee.                charge (e.g., $.50) in lieu of interest in             consumers context for when this charge
                                             The Board believes that these fees                      those months where a consumer would                    will be imposed. 15 U.S.C. 1637(c)(5).
                                             should be clearly explained to                          otherwise incur an interest charge that                Proposed Samples G–10(B) and G–10(C)
                                             consumers at the time of the offer so                   is less than the minimum charge (a so-                 provide guidance regarding how to
                                             that consumers better understand when                   called ‘‘minimum interest charge’’). In                disclose a minimum interest charge.
                                             these fees will be imposed.                             response to the December 2004 ANPR,
                                                The Board proposes to amend                          one industry commenter suggested that                  5a(b)(4) Transaction Charges
                                             § 226.5a(b)(2) to require additional                    the Board no longer require that the                      Section 226.5a(b)(4), which
                                             information about periodic fees. 15                     minimum finance charge be disclosed in                 implements TILA Section
                                             U.S.C. 1637(c)(5). Currently, issuers are               the table because these fees are typically             127(c)(1)(A)(ii)(III), requires that card
                                             required to disclose only the annualized                small (e.g., $.50) and consumers do not                issuers disclose any transaction charge
                                             amount of the fee. The Board proposes                   shop on them. Another industry                         imposed on purchases. The current
                                             to amend § 226.5a(b)(2) to require                      commenter suggested that the Board                     commentary to this provision clarifies
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                                             issuers also to disclose the amount of                  only require that the minimum finance                  that only transaction fees on purchases
                                             the periodic fee, and how frequently it                 charge be included in the table if the                 imposed by the issuer must be
                                             will be imposed. For example, if an                     charge is a significant amount. On the                 disclosed. (See comment 5a(b)(4)–1.)
                                             issuer imposes a $10 monthly                            other hand, several consumer groups                    For clarity, the Board would amend
                                             maintenance fee for a card, the issuer                  urged the Board to continue to include                 § 226.5a(b)(4) to incorporate this
                                             must disclose in the table that there is                the minimum finance charge in the table                commentary provision.


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                                                                     Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules                                           32981

                                                In addition, the Board proposes to                   interest. Thus, the Board proposes to                  of any payments made in that billing
                                             amend § 226.5a(b)(4) to specify that fees               amend § 226.5a(b)(5) to require card                   cycle, and when those payments were
                                             charged for transactions in a foreign                   issuers to disclose briefly any                        made.
                                             currency or that take place in a foreign                conditions on the applicability of the                    In consumer testing conducted for the
                                             country may not be disclosed in the                     grace period. 15 U.S.C. 1637(c)(5). The                Board, virtually no participants
                                             table. In an effort to streamline the                   Board also proposes to amend comment                   understood the two balance
                                             contents of the table, the Board proposes               5a(b)(5)–1 to provide guidance for how                 computation methods most used by card
                                             to highlight only those fees that may be                issuers may meet the requirements in                   issuers—the average daily balance
                                             important for a significant number of                   proposed § 226.5a(b)(5).                               method and the two-cycle average daily
                                             consumers. In consumer testing for the                                                                         balance method—when those methods
                                                                                                     5a(b)(6) Balance Computation Method                    were just described by name. The GAO
                                             Board, participants did not tend to
                                             mention foreign transaction fees as                        TILA Section 127(c)(1)(A)(iv) calls for             found similar results in its consumer
                                             important fees they use to shop. There                  the Board to name not more than five of                testing. See GAO Report on Credit Card
                                             are few consumers who may pay these                     the most common balance computation                    Rates and Fees, at pages 50–51. In the
                                             fees with any frequency. Thus, the                      methods used by credit card issuers to                 consumer testing conducted for the
                                             Board proposes to except foreign                        calculate the balance on which finance                 Board, a version of the table was used
                                             transaction fees from disclosure of                     charges are computed. 15 U.S.C.                        which attempted to explain briefly that
                                             transaction fees. The Board proposes to                 1637(c)(1)(A)(iv). If issuers use one of               the ‘‘two-cycle average daily balance
                                             include foreign transaction fees in the                 the balance computation methods                        method’’ would be more expensive than
                                             account-opening summary table that is                   named by the Board, § 226.5a(b)(6)                     the ‘‘average daily balance method’’ for
                                             required under § 226.6(b)(4), so that                   requires that issuers must disclose the                those consumers that sometimes pay
                                             interested consumers can learn of the                   name of that balance computation                       their bill in full and sometimes do not.
                                             fees before using the card.                             method in the table as part of the                     Participants’ answers suggested they did
                                                                                                     disclosures required by § 226.5a, and                  not understand this disclosure. They
                                             5a(b)(5) Grace Period                                   issuers are not required to provide a                  appeared to need more information
                                                Section 226.5a(b)(5), which                          description of the balance computation                 about how balances are calculated.
                                             implements TILA Section                                 method. If the issuer uses a balance                   Nonetheless, the addition of more
                                             127(c)(A)(iii)(I), requires that card                   computation method that is not named                   information would likely add too much
                                             issuers disclose in the table the date by               by the Board, the issuer must disclose                 detail to the disclosures and result in
                                             which or the period within which any                    a detailed explanation of the balance                  ‘‘information overload.’’ In addition, it
                                             credit extended for purchases may be                    computation method. See current                        is unclear whether most consumers
                                             repaid without incurring a finance                      § 226.5a(b)(6); § 226.5a(a)(2)(i).                     would consider the balance
                                             charge. If no grace period is provided,                    In response to the December 2004                    computation method when shopping for
                                             that fact must be disclosed. Comment                    ANPR, several commenters suggested                     a credit card.
                                             5a(b)(5)–1 provides that a card issuer                  that the Board delete the description of                  As a result, the Board proposes to
                                             may, but need not, refer to the beginning               the balance computation method from                    retain a brief reference to the balance
                                             or ending point of any grace period and                 the table. These commenters believed                   computation method, but move the
                                             briefly state any conditions on the                     that the implications of the balance                   disclosure from the table to directly
                                             applicability of the grace period. For                  computation method on the actual cost                  below the table. See § 226.5a(a)(2)(iii).
                                             example, the grace period disclosure                    of credit are simply too complex and too               TILA Section 122(c)(2) states that for
                                             might read ‘‘30 days’’ or ‘‘30 days from                contingent on future purchasing                        certain disclosures set forth in Section
                                             the date of the periodic statement                      patterns to be of any use to consumers                 TILA 127(c)(1)(A), including the balance
                                             (provided you have paid your previous                   in shopping for credit.                                computation method, the Board shall
                                             balance in full by the due date).’’                        The Board agrees that balance                       require that the disclosure of such
                                                The consumer testing conducted for                   computation methods are too complex                    information shall, to the extent the
                                             the Board indicated that some                           to explain in a simple fashion in the                  Board determines to be practicable and
                                             participants misunderstood the word                     table. Most card issuers use one of two                appropriate, be in the form of a table. 15
                                             ‘‘grace period’’ to mean the time after                 methods—either the ‘‘average daily                     U.S.C. 1632(c)(2). The Board believes
                                             the payment due date that an issuer may                 balance method (including new                          that it is no longer appropriate to
                                             give the consumer to pay the bill                       purchases)’’ or the ‘‘two-cycle average                continue to disclose the balance
                                             without charging a late-payment fee.                    daily balance method (including new                    computation method in the table,
                                             The GAO found similar                                   purchases).’’ For consumers that carry a               because the name of the balance
                                             misunderstandings by consumers in its                   balance on their credit card every month               computation method used by issuers
                                             consumer testing. Furthermore, many                     or for consumers that pay off their                    does not appear to be meaningful to
                                             participants in the GAO testing                         balance in full every month, there                     consumers without additional context
                                             incorrectly indicated that the grace                    essentially is no difference between                   and may distract from more important
                                             period was the period of time                           these two methods. There is a difference               information contained in the table. The
                                             promotional interest rates applied. See                 between the two methods only in those                  Board proposes to continue to require
                                             GAO Report on Credit Card Rates and                     months where a consumer paid off their                 that issuers disclose the name of the
                                             Fees, at page 50.                                       previous balance in full, but did not pay              balance computation method beneath
                                                In consumer testing conducted for the                off their current balance in full. In those            the table, so that consumers and others
                                             Board, participants tended to                           months, the consumer will pay more                     will have access to this information if
                                             understand the grace period more                        interest under the ‘‘two-cycle average
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                                                                                                                                                            they find it useful.
                                             clearly when additional context was                     daily balance method’’ than under the
                                             added, such as describing that if the                   ‘‘average daily balance method.’’ How                  5a(b)(8) Cash Advance Fee
                                             consumer paid the bill in full each                     much more interest the consumer pays                     Currently, comment 5a(b)(8)–1
                                             month, the consumer would have some                     depends on the amount of the purchases                 provides that a card issuer must disclose
                                             period of time (e.g., 25 days) to pay the               in the previous billing cycle, when                    only those fees it imposes for a cash
                                             new purchase balance in full to avoid                   those purchases were made, the amount                  advance that are finance charges under


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                                             32982                   Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules

                                             § 226.4. For example, a charge for a cash               5a(b)(14) Required Insurance, Debt                     0 percent for an introductory period)
                                             advance at an automated teller machine                  Cancellation Or Debt Suspension                        with a credit card solicitation, but not
                                             (ATM) would be disclosed under                          Coverage                                               offer the same discounted rate for
                                             § 226.5a(b)(8) if no similar charge is                     Credit card issuers often offer optional            purchases. In addition, the Board is
                                             imposed for ATM transactions not                        insurance or debt cancellation or                      aware of at least one issuer that offers
                                             involving an extension of credit. As                    suspension coverage with the credit                    the same discounted initial rate for
                                             discussed in the section-by-section                     card. Under the current rules, costs                   balance transfers and purchases for a
                                             analysis to § 226.4, the Board proposes                 associated with the insurance or debt                  specified period of time, where the
                                             to provide that all transaction fees on                 cancellation or suspension coverage are                discounted rate for balance transfers
                                             credit cards would be considered                                                                               (but not the discounted rate for
                                                                                                     not considered ‘‘finance charges’’ if the
                                                                                                                                                            purchases) may be extended until the
                                             finance charges. Thus, the Board                        coverage is optional, the issuer provides
                                                                                                                                                            balance transfer is paid off if the
                                             proposes to delete the current guidance                 certain disclosures to the consumer
                                                                                                                                                            consumer makes a certain number of
                                             discussed in comment 5a(b)(8)–1 as                      about the coverage, and the issuer
                                                                                                                                                            purchases each billing cycle. At the
                                             obsolete.                                               obtain an affirmative written request for
                                                                                                                                                            same time, issuers typically offer a grace
                                                                                                     coverage after the consumer has
                                             5a(b)(12) Returned Payment Fee                                                                                 period for purchases if a consumer pays
                                                                                                     received the required disclosures. Card
                                                                                                                                                            his or her bill in full each month. Card
                                                                                                     issuers frequently provide the
                                               Currently, § 226.5a does not require a                                                                       issuers, however, do not typically offer
                                                                                                     disclosures discussed above on the
                                             card issuer to disclose a fee imposed                                                                          a grace period on balance transfers or
                                                                                                     application form and a space to sign or                cash advances. Thus, on the offers
                                             when a payment is returned. The Board
                                                                                                     initial an affirmative written request for             described above, a consumer cannot
                                             proposes to add § 226.5a(b)(12) to                      the coverage. Currently, issuers are not
                                             require issuers to disclose this fee in the                                                                    take advantage of both the grace period
                                                                                                     required to provide any information                    on purchases and the discounted rate on
                                             table. Typically, card issuers will                     about the insurance or debt cancellation
                                             impose a fee and a penalty rate if a                                                                           balance transfers. Because the payments
                                                                                                     or suspension coverage in the table that               will be allocated to the balance transfers
                                             cardholder’s payment is returned. As                    contains the § 226.5a disclosures.
                                             discussed above, the Board proposes to                                                                         first, the only way for a consumer to
                                                                                                        In the event that a card issuer requires            avoid paying interest on purchases—
                                             require card issuers to disclose in the                 the insurance or debt cancellation or                  and thus have the benefit of the grace
                                             table the reasons that a penalty rate may               debt suspension coverage (to the extent                period—is to pay off the entire balance,
                                             be imposed. See proposed                                permitted by state or other applicable                 including the balance transfer subject to
                                             § 226.5a(b)(1)(iv). The Board proposes                  law), the Board proposes new                           the discounted rate.
                                             that the returned payment fee be                        § 226.5a(b)(14) to require that the issuer                The Board believes that it is important
                                             disclosed too, so that consumers are told               disclose any fee for this coverage in the              that consumers understand payment
                                             both consequences of returned                           table. In addition, new § 226.5a(b)(14)                allocation in these circumstances, so
                                             payments.                                               would require that the card issuer also                that they can better understand the offer
                                                                                                     disclose a cross-reference to where the                and decide whether to use this
                                             5a(b)(13) Cross References from Fees to                 consumer may find more information                     particular card for purchases. For
                                             Penalty Rate                                            about the insurance or debt cancellation               example, if consumers knew that they
                                                                                                     or debt suspension coverage, if                        would pay interest on all purchases
                                                Card issuers often impose both a fee
                                                                                                     additional information is included on or               made while paying off the balance
                                             and penalty rate for the same behavior—
                                                                                                     with the application or solicitation.                  transfer at the discounted rate, they
                                             such as a consumer paying late,
                                                                                                     Proposed Sample G–10(B) provides                       might not use that particular card for
                                             exceeding the credit limit, or having a                 guidance on how to provide the fee
                                             payment returned. In consumer testing                                                                          purchases. They might use another card
                                                                                                     information and the cross-reference in                 for purchases and pay that card in full
                                             conducted for the Board, participants                   the table. If insurance or debt                        every month to take advantage of the
                                             tended to associate paying penalty fees                 cancellation or suspension coverage is                 grace period on purchases. Or they
                                             with certain behaviors (such as paying                  required in order to obtain a credit card,             might use another card with a lower
                                             late or going over the credit limit), but               the Board believes that fees required for              purchase rate, if they did not plan to
                                             they did not tend to associate rate                     this coverage should be highlighted in                 pay off the purchases in full each
                                             increases with these same behaviors. By                 the table so that consumers are aware of               month.
                                             linking the penalty fees with the penalty               these fees when considering an offer,                     In the consumer testing conducted for
                                             rate, participants more easily                          because they will be required to pay the               the Board, many participants did not
                                             understood that if they engage in certain               fee for this coverage every month in                   understand that they could not take
                                             behaviors, such as paying late, their                   order to have the credit card.                         advantage of the grace period on
                                             rates may increase in addition to                                                                              purchases and the discounted rate on
                                                                                                     5a(b)(15) Payment Allocation
                                             incurring a fee. Thus, the Board                                                                               balance transfers at the same time.
                                             proposes to add § 226.5a(b)(13) to                         Some credit card issuers will allocate              Model forms were tested that included
                                             provide that if a card issuer may impose                payments first to balances that are                    a disclosure notice attempting to
                                             a penalty rate for any of the reasons that              subject to the lowest APR. For example,                explain this to consumers. Nonetheless,
                                             a penalty fee would be disclosed in the                 if a cardholder made purchases using a                 testing showed that a significant
                                             table (such as late payments, going over                credit card account and then initiated a               percentage of participants still did not
                                                                                                     balance transfer, the card issuer might                fully understand how payment
                                             the credit limit, or returned payments),
                                                                                                     allocate a payment (less than the                      allocation can affect their interest
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                                             the issuer in disclosing the fee also must
                                                                                                     amount of the balances) to the                         charges, even after reading the
                                             disclose that the penalty rate may apply,               transferred balance portion of the                     disclosure tested. The Board plans to
                                             and a cross-reference to the penalty rate.              account if that balance was subject to a               conduct further testing of the disclosure
                                             Proposed Samples G–10(B) and G–10(C)                    lower APR than the purchases. Card                     to determine whether the disclosure can
                                             provide guidance on how to provide                      issuers often will offer a discounted                  be improved to be more effectively
                                             these disclosures.                                      initial rate on balance transfers (such as             communicate to consumers how


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                                                                     Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules                                                32983

                                             payment allocation can affect their                     available credit with which to make                    credit, issuers must consider the first
                                             interest charges. Nonetheless, because                  purchases or other transactions in the                 year’s annual fee and the first month’s
                                             some participants did benefit from the                  first month. In addition, consumers will               maintenance fee (if applicable) if they
                                             disclosure, and in light of further                     pay interest on these fees until they are              are charged to the account immediately
                                             testing, the Board, under its authority                 paid in full.                                          at account opening. Proposed Sample
                                             pursuant to TILA Section 127(c)(5),                        The federal banking agencies have                   G–10(C) provides guidance to issuers on
                                             proposes to add § 226.5a(b)(15) to                      received a number of complaints from                   how to provide this disclosure. (See
                                             require a card issuer to explain payment                consumers with respect to cards of this                proposed comment 5a(b)(16)–2).
                                             allocation to consumers. 15 U.S.C.                      type. Complainants often claim that                       As described above, a card issuer
                                             1637(c)(5). Proposed § 226.5a(b)(15)                    they were not aware of how little                      would consider only required fees for
                                             states that if (1) a card issuer offers a               available credit they would have after                 issuance or availability of credit, or a
                                             discounted initial rate on a balance                    all the fees were assessed. Thus, the                  security deposit, that will be charged
                                             transfers or cash advance that is lower                 Board is proposing to add                              against the card when the account is
                                             than the rate on purchases, (2) the issuer              § 226.5a(b)(16) to inform consumers                    opened in determining whether the 25
                                             offers a grace period on purchases, and                 about the impact of these fees on their                percent threshold test is met. The Board
                                             (3) the issuer may allocate payments to                 initial available credit. Specifically,                requests comment on whether there are
                                             the lower rate balance first, then the                  § 226.5a(b)(16) would provide that if (1)              other fees (other than fees required for
                                             issuer must make certain disclosures in                 a card issuer imposes required fees for                issuance or availability of credit) that
                                             the table. Specifically, issuers would be               the issuance or availability of credit, or             are typically imposed on these types of
                                             required to disclose: (1) that the                      a security deposit, that will be charged               accounts when the account is opened,
                                             discounted initial rate applies only to                 against the card when the account is                   and should be included in determining
                                             balance transfers or cash advances, as                  opened, and (2) the total of those fees                whether the 25 percent threshold test is
                                             applicable, and not to purchases; (2)                   and/or security deposit equal 25 percent               met.
                                             that payments will be allocated to the                  or more of the minimum credit limit
                                                                                                                                                            5a(b)(17) Reference to Board Web Site
                                             balance transfer or cash advance                        applicable to the card, a card issuer
                                                                                                                                                            for Additional Information
                                             balance, as applicable, before being                    must disclose in the table an example of
                                             allocated to any purchase balance                       the amount of the available credit that                  In the December 2004 ANPR, the
                                             during the time the discounted initial                  a consumer would have remaining after                  Board requested comment on
                                             rate is in effect; and (3) that the                     these fees or security deposit are debited             suggestions for non-regulatory
                                             consumer will incur interest on the                     to the account, assuming that the                      approaches that may further the Board’s
                                             purchase balance until the entire                       consumer receives the minimum credit                   goal of improving the effectiveness of
                                             balance is paid, including the                          limit offered on the relevant account. In              TILA’s disclosures and substantive
                                             transferred balance or cash advance                     determining whether the 25 percent                     protections. Q57. In response to the
                                             balance, as applicable. The Board would                 threshold test is met, the issuer must                 ANPR, several commenters encouraged
                                             require these disclosures in the table                  only consider fees for issuance or                     the Board to develop educational
                                             only if the discounted initial rate                     availability of credit, or a security                  materials, such as pamphlets, targeted
                                             applies to balance transfers or cash                    deposit, that are required. If certain fees            media, and interactive Web sites, that
                                             advances that consumers can request as                  for issuance or availability are optional,             could educate consumers on a variety of
                                             part of accepting the offer. If the                     these fees should not be considered in                 topics related to shopping for and using
                                             discounted initial rate only applies to                 determining whether the disclosure                     credit cards. These commenters believe
                                             subsequent balance transfers or checks                  must be given. Nonetheless, if the 25                  that certain topics that are difficult to
                                             that access a credit card account, the                  percent threshold test is met in                       explain to consumers, such as balance
                                             issuer would not need to provide this                   connection with the required fees or                   computation methods, are better
                                             disclosure with the offer. The Board                    security deposit, the issuer must                      provided in educational materials than
                                             proposes to add comment 5a(b)(15)–1 to                  disclose the available credit after                    in the TILA disclosures.
                                             provide examples of when these                          excluding any optional fees from the                     The Board proposes to revise § 226.5a
                                             disclosures must be given. The Board                    amounts debited to the account, and the                to require that credit card issuers must
                                             also proposes to add comment                            available credit after including any                   disclose in the table a reference to a
                                             5a(b)(15)–2 to specify that a card issuer               optional fees in the amounts debited to                Board Web site and a statement that
                                             may comply with the requirements in                     the account. The Board believes that 25                consumers can find on this Web site
                                             new § 226.5a(b)(15) by providing the                    percent is an appropriate threshold                    educational materials on shopping for
                                             applicable disclosures contained in                     because it represents a significant                    and using credit card accounts. See
                                             proposed Samples G–10(B) and G–                         reduction in the initial available credit              proposed § 226.5a(b)(17). Such materials
                                             10(C).                                                  as a result of the imposition of fees or               would expand those already available
                                                                                                     security deposit. The Board solicits                   on choosing a credit card at the Board’s
                                             5a(b)(16) Available Credit                              comment on this threshold amount.                      Web site.12 The Board recognizes that
                                               Subprime credit cards often have                         In addition, the Board proposes                     some consumers may need general
                                             substantial fees assessed when the                      comment 5a(b)(16)–1 to clarify that in                 education about how credit cards work
                                             account is opened. Those fees will be                   calculating the amount of available                    and an explanation of typical account
                                             billed to the consumer as part of the first             credit that must be disclosed in the                   terms that apply to credit cards. In the
                                             statement, and will substantially reduce                table, an issuer must consider all fees                consumer testing conducted for the
                                             the amount of credit that the consumer                  for the issuance or availability of credit             Board, participants showed a wide
                                             initially has available with which to                   described in § 226.5a(b)(2), and any
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                                                                                                                                                            range of knowledge about how credit
                                             make purchases or other transactions on                 security deposit, that will be imposed                 cards work generally, with some
                                             the account. For example, for cards for                 when the account is opened and                         participants showing a firm
                                             which a consumer is given a minimum                     charged to the account, such as one-time               understanding of terms that relate to
                                             credit line of $250, after the start-up fees            issuance and set-up fees that will be
                                             have been billed to the account, the                    imposed when the card is opened. For                    12 The materials can be found at http://

                                             consumer may have less than $100 of                     example, in calculating the available                  www.federalreserve.gov/pubs/shop/default.htm.



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                                             32984                   Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules

                                             credit card accounts, while others had                  provide an example showing the                         by the goods that the consumer
                                             difficulty expressing basic financial                   amount of the minimum payment for a                    purchases, but consumers are often
                                             concepts, such as how the interest rate                 certain balance (for example, $1000),                  unaware of the security interest.
                                             differs from a one-time fee. The Board’s                this example would be of doubtful                         The Board is not proposing to include
                                             current Web site explains some basic                    usefulness for the many consumers who                  a disclosure of any required security
                                             financial concepts—such as what an                      have balances different from the                       interest in the table at this time. Credit
                                             annual percentage rate is—as well as                    example. In addition, the example might                card-issuing merchants may include in
                                             terms that typically apply to credit card               mislead consumers, because one card                    their account agreements a security
                                             accounts. Through the Web site, the                     might yield a lower minimum payment                    interest in the goods that are purchased
                                             Board could expand the explanation of                   amount than another card for one                       with the card. It is not apparent that
                                             other credit card terms, such as balance                balance (for example, $1000), but the                  consumers would shop on whether a
                                             computation methods, that may be                        second card might yield a lower                        retail card has this type of security
                                             difficult to explain concisely in the                   minimum payment than the first card if                 interest. Requiring or allowing this type
                                             disclosures given with applications and                 the minimum payment was calculated                     of security interest to be disclosed in the
                                             solicitations.                                          on a different balance.                                table may distract from important
                                                As part of consumer testing,                            2. Credit limit. Card issuers often                 information in the table, and contribute
                                             participants were asked whether they                    indicate a credit limit in a cover letter              to ‘‘information overload.’’ Thus, in an
                                             would use a Board Web site to obtain                    sent with an application or solicitation.              effort to streamline the information that
                                             additional information about credit                     Frequently, this credit limit is not stated            may appear in the table, the Board is not
                                             cards generally. Some participants                      as a specific amount but, instead, is                  proposing to include this disclosure in
                                             indicated they might use the Web site,                  stated as an ‘‘up to’’ amount, indicating              the table.With respect to security
                                             while others indicated that it was                      the maximum credit limit for which a                   deposits, if a consumer is required to
                                             unlikely they would use such a Web                      consumer may qualify. The actual credit                pay a security deposit prior to obtaining
                                             site. Although it is hard to predict from               limit for which a consumer qualifies                   a credit card and that security deposit
                                             the results of the testing how many                     depends on the consumer’s                              is not charged to the account but is paid
                                             consumers might use the Board’s Web                     creditworthiness, which is evaluated                   by the consumer from separate funds, a
                                             site, and recognizing that not all                      after the application or solicitation is               card issuer must necessarily disclose to
                                             consumers have access to the Internet,                  submitted. Several consumer groups                     the consumer that a security deposit is
                                             the Board believes that this Web site                   suggested that the Board include the                   required, so that the consumer knows to
                                             may be helpful to some consumers as                     credit limit in the table because it is a              submit the deposit in order to obtain the
                                             they shop for a credit card and manage                  key factor for many consumers in                       card. A security deposit in these
                                             their account once they obtain a credit                 shopping for a credit card. These groups               instances may already be sufficiently
                                             card. Thus, the Board is proposing that                 also suggested that the Board require                  highlighted in the materials
                                             a reference to a Board Web site be                      issuers to state a specific credit limit,              accompanying the application or
                                             included in the table because this is a                 and not an ‘‘up to’’ amount.                           solicitation, and may not need to appear
                                             cost-effective way to provide consumers                    The Board is not proposing to include               in the table. Nonetheless, the Board
                                             with supplemental information on                        the credit limit in the table. As                      recognizes that a security deposit may
                                             credit cards. The Board seeks comments                  explained above, in most cases, the                    need to be highlighted when the deposit
                                             on the content for the Web site.                        credit limit for which a consumer                      is not paid from separate funds but is
                                                Additional disclosures. In response to               qualifies depends on the consumer’s                    charged to the account when the
                                             the December 2004 ANPR, several                         creditworthiness, which is fully                       account is opened. In those cases,
                                             consumer groups suggested that the                      evaluated after the application or                     consumers may not realize that the
                                             Board require information about the                     solicitation has been submitted. In                    security deposit may significantly
                                             minimum payment formula, credit                         addition, in consumer testing conducted                decrease their available credit when the
                                             limit, any security interest, and all fees              for the Board, participants were not                   account is opened. Thus, as described
                                             imposed on the account be disclosed in                  generally confused by the ‘‘up to’’ credit             above, the Board proposes to provide
                                             the table. The Board has decided not to                 limit. Most participants understood that               that if (1) a card agreement requires
                                             propose this additional information in                  the ‘‘up to’’ amount on the solicitation               payment of a fee for issuance or
                                             the table for the reasons detailed below.               letter was a maximum amount, rather                    availability of credit, or a security
                                                1. Minimum payment formula. In the                   than the amount the issuer was                         deposit, (2) the fee or security deposit
                                             consumer testing conducted for the                      promising them. Almost all participants                will be charged to the account when it
                                             Board, participants did not tend to                     tested understood that the credit limit                is opened, and (3) the total of those fees
                                             mention the minimum payment formula                     for which they would qualify depended                  and security deposit equal 25 percent or
                                             as one of the terms on which they shop                  on their creditworthiness, such as credit              more of the minimum credit limit
                                             for a card. In addition, minimum                        history.                                               offered with the card, the card issuer
                                             payment formulas used by card issuers                      3. Security interest. Several consumer              must disclose in the table an example of
                                             can be complicated formulas that would                  groups suggested that any required                     the amount of the available credit that
                                             be hard to describe concisely in the                    security interest should be disclosed in               a consumer would have remaining after
                                             table. For example, while some issuers                  the table. These commenters suggest                    these fees or security deposit are debited
                                             still use a percentage to calculate the                 that if a security interest is required, the           to the account, assuming that the
                                             payment, such as 2 percent of the                       disclosure in the table should describe                consumer receives the minimum credit
                                             outstanding balance or $10, whichever                   it briefly, such as ‘‘in items purchased               limit offered on the card.
                                             is less, other issuers use much more                    with card’’ or ‘‘required $200 deposit.’’                 4. Fees. In response to the December
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                                             complicated formulas, such as ‘‘the                     These commenters indicated that a                      2004 ANPR, several consumer groups
                                             greater of (1) $15 or (2) 2 percent of the              security deposit is a very important                   suggested that all fees imposed on an
                                             balance or (3) the applicable finance                   consideration in credit shopping,                      account should be included in the table.
                                             charges, and if the finance charges are                 especially for low-income consumers. In                They believed that by requiring only
                                             largest, add $15 to that amount.’’ Even                 addition, they stated that many credit                 certain fees in the table, card issuers
                                             if the Board were to require issuers to                 cards issued by merchants are secured                  have an incentive to devise new fees


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                                                                     Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules                                            32985

                                             that do not have to be disclosed so                     mail rules to electronic applications and              creditors to comply with a requirement
                                             prominently. They indicate that if the                  solicitations. The Board proposes to                   to disclose the exact variable APR in
                                             Board excludes any fees, the list of such               retain these provisions in § 226.5a(c)(1).             effect at the time the application or
                                             fees should be an exclusive list. They                  (Current § 226.5a(c) would be revised                  solicitation is accessed. The obligation
                                             also suggested that the Board should                    and renumbered as new § 226.5a(c)(1).)                 to update the other terms when they
                                             require card issuers to report                          The same proposal was included in the                  change ensures that consumers receive
                                             periodically on the volume of the                       Board’s 2007 Electronic Disclosure                     information that is accurate and current,
                                             excluded fees collected. If a certain type              Proposal.                                              and should not impose significant
                                             of fee increases in volume, these                         The Bankruptcy Act also requires that                burdens on issuers. These terms
                                             commenters suggested that the Board                     the disclosures for electronic offers must             generally do not fluctuate with the
                                             should delete this fee from the list of                 be ‘‘updated regularly to reflect the                  market like variable rates. In addition,
                                             excluded fees on the grounds that that                  current policies, terms, and fee                       based on discussions with industry
                                             fee has become a more significant                       amounts.’’ In the October 2005 ANPR,                   representatives concerning operational
                                             component of the cost of credit.                        the Board also solicited comment on                    issues, the Board staff understands that
                                                As described above, the Board is                     what guidance the Board should                         issuers typically change other terms
                                             proposing to include certain transaction                provide on how to apply that standard                  infrequently, perhaps once or twice a
                                             fees and penalty fees, such as cash                     for credit card accounts. The Board’s                  year.
                                             advance fees, balance transfer fees, late-              2001 interim final rules provided                         Section 226.5a(c)(2) consists of two
                                             payment fees, and over-the-credit limit                 guidance that disclosures for a variable-              subsections. Section 226.5a(c)(2)(i)
                                             fees, in the table because these fees are               rate credit card plan provided                         would provide that § 226.5a disclosures
                                             frequently paid by consumers, and                       electronically must be based on an APR                 mailed to a consumer must be accurate
                                             consumers have indicated these fees are                 in effect within the last 30 days. The                 as of the time the disclosures are
                                             important for shopping purposes. The                    2001 guidance did not contain specific                 mailed. This section would also provide
                                             Board is not proposing to include other                 guidance on accuracy requirements for                  that an accurate variable APR is one that
                                             fees in the table, such as copying fees                 other disclosures provided                             is in effect within 60 days before
                                             and stop-payment fees, in the table                     electronically, such as disclosure of                  mailing. Section 226.5a(c)(2)(ii) would
                                             because these fees tend to be imposed                   fees. The majority of commenters on the                provide that § 226.5a disclosures
                                             less frequently and are not fees on                     October 2005 ANPR which addressed                      provided in electronic form (except for
                                             which consumers tend to shop. In                        the accuracy of variable rates agreed that             a variable APR) must be accurate as of
                                             consumer testing conducted for the                      a 30-day standard would be appropriate                 the time they are sent to a consumer’s
                                             Board, participants tended to mention                   to implement the ‘‘updated regularly’’                 e-mail address, or as of the time they are
                                             cash advance fees, balance transfer fees,               standard in the Bankruptcy Act. Some                   viewed by the public on a Web site. For
                                             late-payment fees, and over-the-credit-                 commenters advocated longer periods                    the reasons discussed above, this
                                             limit fees as the most important fees                   such as 60 days or shorter periods such                section would provide that a variable
                                             they would want to know when                            as daily or weekly updating, or                        APR is accurate if it is in effect within
                                             shopping for a credit card. In addition,                suggested that the Board should not                    30 days before it is sent, or viewed by
                                             most participants understood that                       provide specific guidance or rules,                    the public. Presently, variable APRs on
                                             issuers were allowed to impose                          instead allowing maximum flexibility in                most credit cards may change on a
                                             additional fees, beyond those disclosed                 this area.                                             monthly basis, so a 30-day accuracy
                                                                                                       The Board proposes to revise
                                             in the table. Thus, the Board believes it                                                                      requirement for variable APRs appears
                                                                                                     § 226.5a(c) to implement the ‘‘updated
                                             is important to highlight in the table the                                                                     appropriate.
                                                                                                     regularly’’ standard in the Bankruptcy
                                             fees that consumers want to know when                                                                             Many of the provisions included in
                                                                                                     Act with regard to the accuracy of
                                             shopping for a card, rather than                                                                               proposed § 226.5a(c)(2) have been
                                                                                                     variable rates. A new § 226.5a(c)(2)
                                             including infrequently-paid fees, to                                                                           incorporated from current § 226.5a(b)(1).
                                                                                                     would be added to address the accuracy
                                             avoid creating ‘‘information overload’’                                                                        To eliminate redundancy, the Board
                                                                                                     of variable rates in direct mail and
                                             such that consumers could not easily                                                                           proposes to revise § 226.5a(b)(1) by
                                                                                                     electronic applications and solicitations.
                                             identify the fees that are most important                                                                      deleting § 226.5a(b)(1)(ii),
                                                                                                     This new section would require issuers
                                             to them. Nonetheless, the Board                                                                                § 226.5a(b)(1)(iii), and comment 5a(c)–1.
                                                                                                     to update variable rates disclosed on
                                             recognizes that fees can change over                    mailed applications and solicitations                  The same revisions were included in the
                                             time, and the Board plans to monitor the                every 60 days and variable rates                       Board’s 2007 Electronic Disclosure
                                             market and update the fees required to                  disclosed on applications and                          Proposal.
                                             be disclosed in the table as necessary.                 solicitations provided in electronic form              5a(d) Telephone Applications and
                                             5a(c) Direct-Mail and Electronic                        every 30 days, and to update other terms               Solicitations
                                             Applications                                            when they change. The Board believes
                                                                                                                                                            5a(d)(2) Alternative Disclosure
                                                                                                     the 30-day and 60-day accuracy
                                             5a(c)(1) General                                        requirements for variable rates strike an                 Section 226.5a(d) specifies rules for
                                               Electronic applications and                           appropriate balance between seeking to                 providing cost disclosures in oral
                                             solicitations. As discussed above, the                  ensure consumers receive updated                       applications and solicitations initiated
                                             Bankruptcy Act amends TILA Section                      information and avoiding imposing                      by a card issuer. Card issuers generally
                                             127(c) to require that solicitations to                 undue burdens on creditors. The Board                  must provide certain cost disclosures
                                             open a card account using the Internet                  believes it is unnecessary for creditors               during the oral conversation in which
                                             or other interactive computer service                   to disclose to consumers the exact                     the application or solicitation is given.
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                                             must contain the same disclosures as                    variable APR in effect on the date the                 Alternatively, an issuer is not required
                                             those made for applications or                          application or solicitation is accessed by             to give the oral disclosures if the card
                                             solicitations sent by direct mail. 15                   the consumer, so long as consumers                     issuer either does not impose a fee for
                                             U.S.C. 1637(c)(7). The interim final                    understand that variable rates are                     the issuance or availability of a credit
                                             rules adopted by the Board in 2001                      subject to change. Moreover, it would be               card (as described in § 226.5a(b)(2)) or
                                             revised § 226.5a(c) to apply the direct                 costly and operationally burdensome for                does not impose such a fee unless the


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                                             consumer uses the card, provided that                   required for direct mail applications and              extending credit are not the same
                                             the card issuer provides the disclosures                solicitations, presented in a table; (2) a             person. (These provisions implement
                                             later in a written form. Specifically, the              narrative that describes how finance                   TILA Section 127(c)(4)(D), 15 U.S.C.
                                             issuer must provide the disclosures                     charges and other charges are assessed;                1637(c)(4)(D).) The Board understands
                                             required by § 226.5a(b) in a tabular                    or (3) a statement that costs are                      that these types of cards are no longer
                                             format in writing within 30 days after                  involved, along with a toll-free                       being offered. Thus, the Board proposes
                                             the consumer requests the card (but in                  telephone number to call for further                   to delete these provisions and the Model
                                             no event later than the delivery of the                 information.                                           Clause G–12 from Regulation Z as
                                             card), and disclose the fact that the                      Narrative that Describes How Finance                obsolete, recognizing that the statutory
                                             consumer need not accept the card or                    Charges and Other Charges Are                          provision in TILA Section 127(c)(4)(D)
                                             pay any fee disclosed unless the                        Assessed. TILA Section 127(c)(3)(D) and                will remain in effect if these products
                                             consumer uses the card. The Board                       § 226.5a(e)(2) allow issuers to meet the               are offered in the future. The Board
                                             proposes to add comment 5a(d)–2 to                      requirements of § 226.5a for take-one                  requests comment on whether these
                                             indicate that an issuer may disclose in                 applications and solicitations by giving               provisions should be retained in the
                                             the table that the consumer is not                      a narrative description of certain                     regulation. A commentary provision
                                             required to accept the card or pay any                  account-opening disclosures (such as                   referencing the statutory provision
                                             fee unless the consumer uses the card.                  information about how finance charges                  would be added to § 226.5(d), which
                                                                                                     and other charges are assessed), a                     addresses disclosure requirements for
                                             5a(d)(3) Accuracy                                       statement that the consumer should                     multiple creditors. See proposed
                                                Proposed § 226.5a(d)(3) would                        contact the card issuer for any change in              comment 5(d)–3.
                                             provide guidance on the accuracy of                     the required information, and a toll-free                 In-person applications and
                                             telephone disclosures. Current comment                  telephone number or a mailing address                  solicitations. The Board is proposing a
                                             5a(b)(1)–3 specifies that for variable-rate             for that purpose. 15 U.S.C.                            new § 226.5a(f) and accompanying
                                             disclosures in telephone applications                   1637(c)(3)(D). Currently, this                         commentary to address in-person
                                             and solicitations, the card issuer must                 information does not need to be in the                 applications and solicitations initiated
                                             provide the rates currently applicable                  form of a table, but may be a narrative                by the card issuer. In in-person
                                             when oral disclosures are provided. For                 description, as is also currently allowed              applications, a card issuer initiates a
                                             the alternative disclosures under                       for account-opening disclosures. The                   conversation with a consumer inviting
                                             § 226.5a(d)(2), an accurate variable APR                Board is proposing, however, to require                the consumer to apply for a card
                                             is one that is (1) in effect at the time the            that certain account-opening                           account, and if the consumer responds
                                             disclosures are mailed or delivered; (2)                information (such as information about                 affirmatively, the issuer takes
                                             in effect as of a specified date (which                 key rates and fees) must be given in the               application information from the
                                             rate is then updated from time to time,                 form of a table. See the section-by-                   consumer. For example, in-person
                                             for example, each calendar month); or                   section analysis to § 226.6(b)(4).                     applications include instances in which
                                             (3) an estimate in accordance with                      Therefore, the Board also is proposing                 a retail employee, in the course of
                                             § 226.5(c). Current comment 5a(b)(1)–3                  that card issuers give this same                       processing a sales transaction using the
                                             would be moved to § 226.5a(d)(3),                       information in a tabular form in take-                 customer’s bank credit card, invites the
                                             except that the option of estimating a                  one applications and solicitations. Thus,              customer to apply for the retailer’s
                                             variable APR would be eliminated as                     the Board proposes to delete                           credit card and the customer submits an
                                             the least meaningful of the three                       § 226.5a(e)(2) and comments 5a(e)(2)–1                 application.
                                             options. Proposed § 226.5a(d)(3) also                   and –2 as obsolete. Card issuers that                     In in-person solicitations, a card
                                             would specify that if an issuer discloses               provide cost disclosures in take-one                   issuer offers a consumer in-person to
                                             a variable APR as of a specified date, the              applications and solicitations would be                open an account that does not require
                                             issuer must update the rate on at least                 required to provide the disclosures in                 an application. For example, in-person
                                             a monthly basis, the frequency with                     the form of a table, for which they could              solicitations include instances where a
                                             which variable rates on most credit card                use the account-opening summary table.                 bank employee offers a preapproved
                                             products are adjusted. The Board also                   See § 226.5a(e)(1) and comment 5a–2.                   credit card to a consumer who came
                                             would amend proposed § 226.5a(d)(3) to                                                                         into the bank to open a checking
                                             specify that oral disclosures under                     5a(e)(4) Accuracy                                      account.
                                             § 226.5a(d)(i) must be accurate when                       For applications or solicitations that                 Currently, in-person applications in
                                             given, consistent with the requirement                  are made available to the general public,              response to an invitation to apply are
                                             in § 226.5(c) that disclosures must                     if a creditor chooses to provide the cost              exempted from § 226.5a because they
                                             reflect the terms of the legal obligation               disclosures, § 226.5a(b)(1)(ii) currently              are considered applications initiated by
                                             between the parties. For the alternative                requires that any variable APR disclosed               consumers. (See current comments
                                             disclosures, terms other than variable                  must be accurate within 30 days before                 5a(a)(3)–2 and 5a(e)–2.) On the other
                                             APRs must be accurate as of the time                    printing. The proposal would move this                 hand, in-person solicitations are not
                                             they are mailed or delivered. See                       provision to § 226.5a(e)(4). Proposed                  specifically addressed in § 226.5a.
                                             proposed § 226.5a(d)(3).                                § 226.5a(e)(4) also would specify that                 Neither in-person applications nor
                                                                                                     other disclosures must be accurate as of               solicitations are specifically addressed
                                             5a(e) Applications and Solicitations                                                                           in TILA.
                                                                                                     the date of printing.
                                             Made Available to General Public                                                                                  The Board proposes to cover in-
                                                TILA Section 127(c)(3) and § 226.5a(e)               5a(f) In-Person Applications and                       person applications and solicitations
                                             specify rules for providing disclosures                 Solicitations                                          under § 226.5a, pursuant to the Board’s
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                                             in applications and solicitations made                    Card issuer and person extending                     authority under TILA Section 105(a).
                                             available to the general public such as                 credit are not the same. Existing                      Requiring in-person applications and
                                             ‘‘take-one’’ applications and catalogs or               § 226.5a(f) and its accompanying                       solicitations to include credit terms
                                             magazines. 15 U.S.C. 1637(c)(3). These                  commentary contain special charge card                 under § 226.5a could help serve TILA’s
                                             applications and solicitations must                     rules that address circumstances in                    purpose to provide meaningful
                                             either contain: (1) The disclosures                     which the card issuer and the person                   disclosure of credit terms so that


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                                             consumers will be able to compare more                  responsibilities in the case of                        substance of footnote 13 is moved to the
                                             readily the various credit terms                        unauthorized use or billing disputes are               commentary. (See redesignation table
                                             available to him or her, and avoid the                  also explained. 15 U.S.C. 1637(a). See                 below.)
                                             uninformed use of credit. 15 U.S.C.                     also Model Forms G–2 and G–3 in                           In technical revisions, comments 6–1
                                             1601(a). Also, the Board understands                    Appendix G.                                            and 6–2 would be deleted. The
                                             that card issuers routinely provide                        Home-equity lines of credit. Account-               substance of comment 6–1, which
                                             § 226.5a disclosures in these                           opening disclosure and format                          requires consistent terminology, is
                                             circumstances; therefore, any additional                requirements for home-equity lines of                  discussed more generally in proposed
                                             compliance burden would be minimal.                     credit (HELOCs) subject to § 226.5b                    § 226.5(a)(2). Comment 6–2 addresses
                                                Card issuers must provide the                        would be unaffected by the proposal,                   certain open-end plans involving more
                                             disclosures required by § 226.5a in the                 consistent with the Board’s plan to                    than one creditor, and is proposed to be
                                             form of a table, and those disclosures                  review Regulation Z’s disclosure rules                 deleted as obsolete. See section-by-
                                             must be accurate when given (consistent                 for home-secured credit in a separate                  section analysis to § 226.5a(f).
                                             with the direct mail rules) or when                     rulemaking. To facilitate compliance,                     Tabular summary. As provided by
                                             printed (consistent with one option for                 the substantively unrevised rules                      Regulation Z, creditors may, and
                                             the take-one rules). See § 226.5a(c),                   applicable only to HELOCs are grouped                  typically do, include account-opening
                                             (e)(1). These two alternatives appear to                together in proposed § 226.6(a),                       disclosures as a part of an account
                                             provide issuers flexibility, while also                 including rules relating to the disclosure             agreement document that also contains
                                             providing consumers with the                            of finance charges, other charges, and                 other contract terms and state-law
                                             information they need to make informed                  specific HELOC-related disclosures.                    disclosures. The agreement is typically
                                             credit decisions. Existing comment                      (See redesignation table below.) For the               lengthy and in small print. In the
                                             5a(a)(3)–2 (which would be moved to                     reasons set forth in the section-by-                   December 2004 ANPR, the Board sought
                                             comment 5a(a)(5)–1) and comment                         section analysis to § 226.6(b)(1), the                 comment on possible approaches to ease
                                             5a(e)–2 would be revised to be                          Board would update references to ‘‘free-               consumers’ ability to navigate account-
                                             consistent with § 226.5a(f).                            ride period’’ as ‘‘grace period’’ in the               opening disclosures, such as a summary
                                                                                                     regulation and commentary, without                     paragraph, a table similar to the one
                                             5a(g) Balance Computation Methods                                                                              required on or with credit and charge
                                                                                                     any intended substantive change.
                                             Defined                                                    Open-end (not home-secured) plans.                  card applications, or a table of contents
                                                TILA Section 127(c)(1)(A)(iv) calls for              The Board proposes two significant                     to highlight key features and terms of
                                             the Board to name not more than five of                 revisions to account-opening                           the account. Q2–Q3.
                                             the most common balance computation                     disclosures for open-end (not home-                       Commenters generally encouraged the
                                             methods used by credit card issuers to                  secured) plans, which are set forth in                 Board to consider format rules that
                                             calculate the balance on which finance                  proposed § 226.6(b). The rule would (1)                focus on providing essential terms in a
                                             charges are computed. 15 U.S.C.                         require a tabular summary of key terms                 simplified way. In general, commenters
                                             1637(c)(1)(A)(iv). If issuers use one of                to be provided before an account is                    suggested that a summary of key terms
                                             the balance computation methods                         opened (see proposed § 226.6(b)(4)), and               would improve the effectiveness of the
                                             named by the Board, the issuer must                     (2) reform how and when cost                           now-lengthy and complex account
                                             disclose that name of the balance                       disclosures must be made (see proposed                 agreement documents. Some industry
                                             computation method as part of the                       § 226.6(b)(1) for content, § 226.5(b) and              commenters, however, opposed a
                                             disclosures required by § 226.5a, and is                § 226.9(c) for timing). The Board                      summary. These commenters noted that
                                             not required to provide a description of                proposes to apply the tabular summary                  the current format rules integrating
                                             the balance computation method. If the                  requirement to all open-end loan                       account terms and TILA disclosures
                                             issuer uses a balance computation                       products, except HELOCs. Such                          allow creditors to explain features
                                             method that is not named by the Board,                  products include credit card accounts,                 coherently, and noted that summarizing
                                             the issuer must disclose a detailed                     traditional overdraft credit plans,                    information and repeating it in detail in
                                             explanation of the balance computation                  personal lines of credit, and revolving                the contract document may result in
                                             method. See current § 226.5a(b)(6).                     plans offered by retailers without a                   information overload. As a part of
                                             Currently, the Board has named four                     credit card. The benefit to consumers                  consumer research conducted for the
                                             balance computation methods: (1)                        from receiving a concise summary of                    Board regarding consumer
                                             Average daily balance (including new                    rates and important fees appears to                    understanding of current TILA
                                             purchases) or (excluding new                            outweigh the costs, such as developing                 disclosures, tests simulated consumers’
                                             purchases); (2) two-cycle average daily                 the new disclosures and revising them                  review of packets of information
                                             balance (including new purchases) or                    as needed.                                             typically received when new accounts
                                             (excluding new purchases); (3) adjusted                    Disclosure requirements in § 226.6                  are opened. Most of the consumers in
                                             balance; and (4) previous balance. The                  that potentially affect all open-end                   the Board’s sample group set aside the
                                             Board proposes to retain these four                     creditors, namely rules relating to                    lengthy multi-fold account agreement
                                             balance computation methods. The                        security interests and billing error                   pamphlets without reading them, saying
                                             Board requests comment on whether the                   disclosure requirements, are grouped                   they were too long, the type was too
                                             list should be revised, along with data                 together in proposed § 226.6(c). The                   small, and the language too legalistic.
                                             indicating why.                                         section also would be retitled ‘‘Account-              Consumers who reviewed packets that
                                                                                                     opening disclosures’’ to more accurately               included a summary of account terms
                                             Section 226.6 Account-Opening                           reflect the timing of the disclosures. In              generally noticed and reviewed the
                                             Disclosures                                             today’s marketplace, there are few open-               summary, even if they set aside the
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                                               TILA Section 127(a), implemented in                   end products for which consumers                       contract document.
                                             § 226.6, requires creditors to provide                  receive the disclosures required under                    Based on public comment, consumer
                                             information about key credit terms                      § 226.6 as their ‘‘initial’’ Truth in                  testing, and its own analysis, the Board
                                             before an open-end plan is opened, such                 Lending disclosure. See § 226.5a,                      is proposing to introduce format
                                             as rates and fees that may be assessed                  § 226.5b. The substance of footnotes 11                requirements for account-opening
                                             on the account. Consumers’ rights and                   and 12 is moved to the regulation; the                 disclosures for open-end (not home-


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                                             32988                   Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules

                                             secured) plans. The Board proposes to                      A 2003 rulemaking concerning                        creditor to disclose all other charges
                                             summarize key information most                          charges for two services—expediting                    imposed as part of the plan (e.g., fees to
                                             important to informed decision-making                   payments and expediting card                           expedite payments or to provide an
                                             in a table similar to that required on or               delivery—illustrates the challenges in                 additional card) at account opening or
                                             with credit and charge card applications                applying current rules. 68 FR 16,185;                  orally at any time before the consumer
                                             and solicitations. The proposal would                   April 3, 2003. Public comments on the                  agrees to or becomes obligated to pay
                                             permit TILA disclosures that are                        proposal reflected a lack of consensus                 the charge. Charges added or increased
                                             typically lengthy or complex and less-                  about the proposed interpretations of                  during the life of the plan would be
                                             often used in determining how to use an                 expedited payment fee as an ‘‘other                    subject to similar rules. See
                                             account, such as how variable rates are                 charge’’ and expedited card delivery fee               § 226.9(c)(2).
                                             determined, to be integrated with the                   as not covered by TILA. More broadly,                     Under the proposal, some charges
                                             account agreement terms. The content                    the comments reflected a lack of                       would be covered by TILA that the
                                             requirements for the proposed summary                   consensus over the basic principles that               current regulation, as interpreted by the
                                             are set forth in new § 226.6(b)(4) and are              should determine whether a charge is a                 staff commentary, excludes from TILA
                                             discussed below; proposed Model Form                    finance charge or an ‘‘other charge.’’                 coverage, such as fees for expedited
                                             G–17(A) and Samples G–17(B) and G–                         In the final rule, staff adopted official           payment and expedited delivery. It may
                                             17(C) in Appendix G illustrate the table.               interpretations indicating that neither                not have been useful to consumers to
                                                Charges imposed as part of the plan.                 charge was a charge covered by TILA. In                cover such charges under TILA when
                                             The Board proposes to reform its rules                  the supplementary information                          such coverage would have meant only
                                             regarding cost disclosures provided at                  accompanying the final rule, Board staff               that the charges were disclosed long
                                             account opening for open-end (not                       recognized that requiring a written                    before they became relevant to the
                                             home-secured) plans. Under TILA and                     disclosure of a charge for a service long              consumer. It may, however, be useful to
                                             current Regulation Z, account-opening                   before the consumer might consider                     cover such charges under TILA as part
                                             disclosures must include charges that                   purchasing the service did not provide                 of a rule that permits their disclosure at
                                             are either a ‘‘finance charge’’ or an                   the consumer with any material benefit.                a (later) more relevant time. Further, as
                                             ‘‘other charge’’ (TILA charges).                        The staff also noted creditors’ current                new services (and associated charges)
                                             According to TILA, a charge is a finance                practice of disclosing the charge when                 are developed, the proposal is intended
                                             charge if it is payable directly or                     the service is requested, and encouraged               to reduce uncertainty of how to disclose
                                             indirectly by the consumer and imposed                  the continuation of that practice.                     such fees and risks of civil liability. The
                                             directly or indirectly by the creditor ‘‘as                Board staff also indicated that a more              list of charges creditors must disclose in
                                             an incident to the extension of credit.’’               comprehensive review of existing rules                 the account-opening table would be
                                             The Board implemented the definition                    was needed. Accordingly, the December                  specific and exclusive, not open-ended
                                             by including as a finance charge under                  2004 ANPR solicited comment on the                     as is the case today. Creditors could
                                             Regulation Z, any charge imposed ‘‘as                   effectiveness of the rules governing                   otherwise comply with the rule by
                                             an incident to or a condition of the                    disclosure of charges covered by TILA,                 disclosing other costs at any other
                                             extension of credit.’’ TILA also requires               and on potential alternatives. The                     relevant time.
                                             a creditor to disclose, before opening an               comments indicated a consensus that
                                                                                                     the current approach should be replaced                6(a) Rules Affecting Home-Equity Plans
                                             account, ‘‘other charges which may be
                                             imposed as part of the plan * * * in                    with a new one. Commenters split,                        For the reasons discussed above and
                                             accordance with regulations of the                      however, on the proper approach. Most                  as illustrated in the redesignation table
                                             Board.’’ The Board implemented the                      focused on the definition of ‘‘finance                 below, the proposal would set forth in
                                             provision virtually verbatim, and the                   charge’’ or ‘‘other charge.’’ Approaches               § 226.6(a) all requirements applying
                                             staff commentary interprets the                         ranged from industry’s suggestions to                  exclusively to home-equity plans
                                             provision to cover ‘‘significant charges                restrict finance charges to interest or to             subject to § 226.5b (HELOCs). Rules
                                             related to the plan.’’ 15 U.S.C. 1605(a),               charges required as a condition to the                 relating to the disclosure of finance
                                             § 226.4; 15 U.S.C. 1637(a)(5), § 226.6(b),              extension of credit, to consumer groups’               charges currently in § 226.6(a)(1)
                                             current comment 6(b)–1.                                 suggestion to include virtually all                    through (4) would be moved to
                                                The terms ‘‘finance charge’’ and                     charges the consumer would pay. While                  proposed § 226.6(a)(1)(i) through (iv);
                                             ‘‘other charge’’ are given broad and                    commenters disagreed over which                        those rules and accompanying official
                                             flexible meanings in the regulation and                 approach would best serve TILA’s                       staff interpretations are substantively
                                             commentary. This ensures that TILA                      purposes, they shared a common                         unchanged. Rules relating to the
                                             adapts to changing conditions, but it                   objective: Provide a clear test.                       disclosure of other charges would be
                                             also creates uncertainty. The                              In light of the comments received,                  moved from current § 226.6(b) to
                                             distinctions among finance charges,                     consumer testing, and the Board’s                      proposed § 226.6(a)(2), and specific
                                             other charges, and charges that do not                  experience and analysis, the Board is                  HELOC-related disclosure requirements
                                             fall into either category are not always                proposing to reform the rules governing                would be moved from current § 226.6(e)
                                             clear. As creditors develop new kinds of                disclosure of charges before they are                  to proposed § 226.6(a)(3). Several
                                             services, some find it difficult to                     imposed, as discussed below. The                       technical revisions to commentary
                                             determine if associated charges for the                 proposed rule is intended to respond                   provisions are proposed for clarity and
                                             new services meet the standard for a                    collectively to these concerns by (1)                  in some cases for consistency with
                                             ‘‘finance charge’’ or ‘‘other charge’’ or               giving full effect to TILA’s requirement               corresponding comments to proposed
                                             are not covered by TILA at all. This                    that all charges imposed as part of an                 § 226.6(b)(2), which addresses rate
                                             uncertainty can pose legal risks for                    open-end (not home-secured) plan be                    disclosures for open-end (not home-
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                                             creditors that act in good faith to                     disclosed before they are imposed, (2)                 secured) plans, but these revisions are
                                             classify fees. Examples of charges that                 specifying precisely important costs that              not intended to be substantive. See, for
                                             are included or excluded charges are in                 must be disclosed in writing at account                example, proposed comments
                                             the regulation and commentary, but                      opening (e.g., interest rates, annual fees,            6(a)(1)(ii)–1 and 6(b)(2)(i)(B)–1, which
                                             they cannot provide definitive guidance                 and late-payment or over-the-credit-                   address disclosing ranges of balances.
                                             in all cases.                                           limit fees), and (3) permitting the                    Also, commentary provisions that


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                                             currently apply to open-end plans                       plan. These charges include finance                    disclose fees at relevant times, such as
                                             generally but are inapplicable to                       charges under § 226.4(a) and (b), penalty              when a consumer orders a service by
                                             HELOCs would not be moved. For                          charges, taxes, and charges for voluntary              telephone, for business reasons and to
                                             example, guidance in current 6(a)(2)–2                  credit insurance, debt cancellation or                 comply with other state and federal
                                             regarding a creditor’s general                          debt suspension coverage.                              laws. Moreover, compared to the
                                             reservation of the right to change terms                   Charges to be disclosed would also                  approach reflected in the current
                                             would not be moved to proposed                          include any charge the payment, or                     regulation, the proposed broad
                                             comment 6(a)(1)(ii)–2, because                          nonpayment, of which affects the                       application of the statutory standard of
                                             § 226.5b(f)(1) prohibits ‘‘rate-                        consumer’s access to the plan, duration                fees ‘‘imposed as part of the plan’’
                                             reservation’’ clauses for HELOCS.                       of the plan, the amount of credit                      should make it easier for a creditor to
                                             Comment 6–1, which addresses the                        extended, the period for which credit is               determine whether a fee is a charge
                                             need for consistent terminology with                    extended, and the timing or method of                  covered by TILA, and reduce litigation
                                             periodic statement disclosures, would                   billing or payment. This proposed                      and liability risks. In addition, this
                                             be deleted as duplicative. See proposed                 provision is intended to be broad but                  approach will help ensure that
                                             § 226.5(a)(2)(i).                                       provide greater clarity than current rules             consumers receive the information they
                                                                                                     and capture charges that relate to the                 need when it would be most helpful to
                                             6(b) Rules Affecting Open-End (Not                      key attributes of a credit plan. The                   them.
                                             Home-Secured) Plans                                     proposed commentary would provide
                                                                                                     examples of charges covered by the                     6(b)(2) Rules Relating to Rates for Open-
                                             6(b)(1) Charges Imposed as Part of                                                                             End (Not Home-Secured) Plans
                                             Open-End (Not Home-Secured) Plans                       provision, such as application fees and
                                                                                                     participation fees (which affect access to               Rules for disclosing rates that affect
                                                Proposed § 226.6(b)(1) would apply to                                                                       the amount of interest that will be
                                                                                                     the plan), fees to expedite card delivery
                                             all open-end plans except HELOCs                                                                               imposed would be reorganized and
                                                                                                     (which also affect access to the plan),
                                             subject to § 226.5b. It retains TILA’s                  and fees to expedite payment (which                    consolidated in proposed § 226.6(b)(2).
                                             general requirements for disclosing                     affect the timing and method of                        (See redesignation table below.)
                                             costs for open-end plans: Creditors                     payment). See proposed comment
                                             would be required to continue to                                                                               6(b)(2)(i)
                                                                                                     6(b)(1)(i)–2.
                                             disclose the circumstances under which                     Three examples of types of charges                     Finance charges attributable to
                                             charges are imposed as part of the plan,                that are not imposed as part of the plan               periodic rates. Currently, creditors must
                                             including the amount of the charge (e.g.,               are listed in proposed § 226.6(b)(1)(ii).              disclose finance charges attributable to
                                             $3.00) or an explanation of how the                     These examples include charges                         periodic rates. These costs are typically
                                             charge is determined (e.g., 3 percent of                imposed on a cardholder by an                          interest but may include other costs
                                             the transaction amount). For finance                    institution other than the card issuer for             such as premiums for required credit
                                             charges, creditors must include a                       the use of the other institution’s ATM;                insurance. As discussed earlier, in
                                             statement of when the finance charge                    and charges for a package of services                  consumer testing for the Board,
                                             begins to accrue and an explanation of                  that includes an open-end credit feature,              participants understood credit costs in
                                             whether or not a ‘‘grace period’’ or                    if the fee is required whether or not the              terms of interest and fees. The text of
                                             ‘‘free-ride period’’ exists (a period                   open-end credit feature is included and                proposed § 226.6(b)(2)(i) reflects the
                                             within which any credit that has been                   the non-credit services are not merely                 Board’s intention to make the
                                             extended may be repaid without                          incidental to the credit feature.                      distinction between interest and fees
                                             incurring the charge). Regulation Z                     Comment 6(b)(1)(ii)–1 provides                         clear.
                                             generally refers to this period as a ‘‘free-            examples of fees for packages of services                 Balance computation methods.
                                             ride period.’’ Since 1989, creditors have               that are considered to be imposed as                   Proposed § 226.6(b)(2)(i) sets forth rules
                                             been required to use the term ‘‘grace                   part of the plan and fees for packages of              relating to the disclosure of rates.
                                             period’’ in complying with disclosure                   services that are not. This comment is                 Proposed § 226.6(b)(2)(i)(D) (currently
                                             requirements for credit and charge card                 substantively identical to current                     § 226.6(a)(3)) requires creditors to
                                             applications and solicitations in                       comment 6(b)–1.v.                                      explain the method used to determine
                                             § 226.5a. 15 U.S.C. 1632(c)(2)(C); current                 The proposal would not completely                   the balance to which rates apply. 15
                                             § 226.5a(a)(2)(iii); 54 FR 13,856; April 6,             eliminate ambiguity about what are                     U.S.C. 1637(a)(2). Model Clauses that
                                             1989. For consistency and the reasons                   TILA charges. To mitigate ambiguity,                   explain commonly used methods, such
                                             set forth in the section-by-section                     however, the proposal provides a                       as the average daily balance method, are
                                             analysis to § 226.6(b)(1), the Board                    complete list in new § 226.6(b)(4) of                  at Appendix G–1. The Board requests
                                             would update references to ‘‘free-ride                  which charges identified under                         comment on whether model clauses for
                                             period’’ as ‘‘grace period’’ in the                     § 226.6(b)(1) must be disclosed in                     methods such as ‘‘adjusted balance’’ and
                                             regulation and commentary, without                      writing at account opening (or before                  ‘‘previous balance’’ should be deleted as
                                             any intended substantive change.                        they are increased or newly introduced).               obsolete, and more broadly, whether G–
                                                Currently, the rules for disclosing                  See proposed § 226.5(b)(1) and                         1 should be eliminated entirely because
                                             costs related to open-end plans create                  § 226.9(c)(2) for timing rules. Any fees               creditors no longer use the model
                                             two categories of charges covered by                    aside from those identified in proposed                clauses.
                                             TILA: finance charges (§ 226.6(a)) and                  § 226.6(b)(4) would not be required to be                 In the December 2004 ANPR, the
                                             ‘‘other charges’’ (§ 226.6(b)). Under the               disclosed in writing at account opening.               Board sought comment on how
                                             proposal, the rules would create a single               However, other charges imposed as part                 significantly the choice of a balance
                                             category of ‘‘charges imposed as part of                of an open-end (not home-secured) plan                 computation method might affect
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                                             an open-end (not home-secured) plan’’                   may be disclosed at account opening, or                consumers’ cost of credit, and on
                                             as identified in proposed                               orally at any relevant time before the                 possible ways to enhance the
                                             § 226.6(b)(1)(i). This new section would                consumer agrees to or becomes                          effectiveness of any required disclosure.
                                             identify a complete description of the                  obligated to pay the charge. This                      Q28–Q30. Commenters acknowledged
                                             types of charges that would be                          approach is intended in part to reduce                 that balance computation methods can
                                             considered to be imposed as part of a                   creditor burden. Creditors presumably                  affect consumers’ cost of credit but in


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                                             32990                   Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules

                                             general would favor an approach that                    substantively unchanged from current                   6(b)(4) Tabular Format Requirements for
                                             emphasizes other key cost terms instead                 comment 6(a)(2)–10, contains technical                 Open-End (Not Home-Secured) Plans
                                             of the details of balance computation                   revisions.                                                Proposed § 226.6(b)(4) would
                                             methods. The Board concurs with these                     The Board also proposes to require                   introduce format requirements for
                                             views.                                                  that, in describing how a variable rate is
                                                                                                                                                            account-opening disclosures for open-
                                                Calculating balances on open-end                     determined, creditors must disclose the
                                                                                                                                                            end (not home-secured) plans. The
                                             plans can be complex, and requires an                   applicable margin, if any. See proposed
                                                                                                                                                            proposed summary of account-opening
                                             understanding of how creditors allocate                 § 226.6(b)(2)(ii)(B). Creditors state the
                                                                                                                                                            disclosures is based on the format and
                                             payments, assess fees, and record                       margin for purposes of contract or other
                                                                                                                                                            content requirements for the tabular
                                             transactions as they occur during a                     law and are currently required to
                                                                                                                                                            disclosures provided with direct mail
                                             billing cycle. Currently, neither TILA                  disclose margins related to penalty
                                                                                                                                                            applications for credit and charge cards
                                             nor Regulation Z requires creditors to                  rates, if applicable. No particular format
                                                                                                                                                            under § 226.5a, as it would be revised
                                             disclose all the information necessary to               requirements would apply. Thus, the
                                                                                                                                                            under the proposal. Proposed forms
                                             compute balances to which periodic                      Board does not expect the revision
                                             rates are applied, and requiring that                   would add burden.                                      under G–17 in Appendix G illustrate the
                                             level of detail would not appear to                                                                            account-opening tables. As proposed,
                                                                                                     6(b)(2)(iii)                                           comment 6(b)(4)–1 would refer
                                             benefit consumers because consumers
                                             are unlikely to review such detailed                       New § 226.6(b)(2)(iii) would                        generally to guidance in § 226.5a
                                             information. Although the Board’s                       consolidate existing rules for rate                    regarding format and disclosure
                                             model clauses are intended to assist                    changes that are specifically set forth in             requirements for the application and
                                             creditors in explaining common                          the account agreement but are not due                  solicitation table. For clarity, rules
                                             methods, consumers continue to find                     to changes in an index or formula, such                under § 226.5a that do not apply to
                                             explanations in account agreements to                   as rules for disclosing introductory and               account-opening disclosures are
                                             be lengthy and complex, and are not                     penalty rates. In addition to identifying              specifically noted. Comment is
                                             understood. The proposal would require                  the circumstances under which a rate                   requested on this approach, or whether
                                             creditors to continue to explain the                    may change (such as the end of an                      importing essentially identical guidance
                                             balance computation methods in the                      introductory period or a late payment),                from § 226.5a to § 226.6 would ease
                                             account-opening agreement, but the                      creditors would be required to disclose                compliance.
                                             explanation would not be permitted in                   how existing balances would be affected                   Rates. Proposed § 226.6(b)(4)(ii) sets
                                             the account-opening summary. As                         by the new rate. The proposed change                   forth disclosure requirements for rates
                                             discussed below, along with the                         is intended to improve consumer                        that would apply to accounts. Periodic
                                             account-opening summary proposed in                     understanding as to whether a penalty                  rates and index and margin values
                                             § 226.6(b)(4), creditors would name the                 rate triggered by, for example, a late                 would not be permitted to be disclosed
                                             balance computation method and refer                    payment would apply not only to                        in the table, for the same reasons
                                             consumers to the account-opening                        outstanding balances for purchases but                 underlying, and consistent with, the
                                             disclosures for an explanation of the                   to existing balances that were                         proposed requirements for the table
                                             balance computation method.                             transferred at a low promotional rate. If              provided with credit card applications
                                                                                                     the increase in rate is due to an                      and solicitations. See comment
                                             6(b)(2)(ii)                                             increased margin, creditors must                       6(b)(4)(ii)–1. Creditors would continue
                                                New § 226.6(b)(2)(ii) would set forth                disclose the increase; the highest margin              to disclose periodic rates, and index and
                                             the rules for variable-rate disclosures                 can be stated if more than one might                   margin values as part of the account
                                             now contained in footnote 12. In                        apply. See proposed comment                            opening disclosures, and these could be
                                             addition, guidance on the accuracy of                   6(b)(2)(iii)–2.                                        provided in the credit agreement, as is
                                             variable rates provided at account                                                                             likely currently the case.
                                             opening would be moved from the                         6(b)(3) Voluntary Credit Insurance; Debt                  The rate disclosures required for the
                                             commentary to the regulation, and                       Cancellation or Suspension                             account-opening table differ from those
                                             revised. Currently, comment 6(a)(2)–3                      As discussed in the section-by-section              required for the table provided with
                                             provides that creditors may provide the                 analysis to § 226.4, the Board is                      credit card applications and
                                             current rate, a rate as of a specified date             proposing revisions to the requirements                solicitations. For applications and
                                             if the rate is updated from time to time,               to exclude charges for voluntary credit                solicitations, creditors may provide a
                                             or an estimated rate under § 226.5(c).                  insurance or debt cancellation or debt                 range of APRs or specific APRs that may
                                             The Board proposes an accuracy                          suspension coverage from the finance                   apply, where the APR is based on a later
                                             standard that is consistent with the                    charge. See proposed § 226.4(d).                       determination of the consumer’s
                                             Board’s 2007 Electronic Disclosure                      Creditors must provide information                     creditworthiness. At account opening,
                                             Proposal; that is, the rate disclosed is                about the voluntary nature and cost of                 creditors must disclose the specific
                                             accurate if it was in effect as of a                    the credit insurance or debt cancellation              APRs that will apply to the account.
                                             specified date within 30 days before the                or suspension product, and about the                      Fees. Fees that would be highlighted
                                             disclosures are provided. See 72 FR                     nature of coverage for debt suspension                 in the account-opening summary are
                                             21,1141; April, 30, 2007. The proposal                  products. Because creditors must obtain                identified in § 226.6(b)(4)(iii). The Board
                                             would eliminate creditors’ option to                    the consumer’s affirmative request for                 believes that these fees, among the
                                             provide an estimate as the rate in effect               the product as a part of the disclosure                charges that TILA covers, are the most
                                             for a variable-rate account. The Board                  requirements, the Board expects the                    important fees, at least in the current
                                             believes creditors are provided with                    disclosures proposed under § 226.4(d)                  marketplace, for consumers to know
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                                             sufficient flexibility under the proposal               will be provided at the time the product               about before they start to use an
                                             to provide a rate as of a specified date,               is offered to the consumer. Thus,                      account. They include charges that the
                                             so the use of an estimate would not be                  consumers may receive the disclosures                  consumer could incur without creditors
                                             appropriate. New proposed comment                       at the time they open an open-end                      otherwise being able to disclose the cost
                                             6(b)(2)(ii)–5, which addresses                          account, or earlier in time, such as at                in advance of the consumers’ act that
                                             discounted variable-rate plans and is                   application.                                           triggers the cost, such as fees triggered


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                                                                     Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules                                            32991

                                             by a consumer’s use of a cash advance                   comment on whether there are any                       for the table given with an application
                                             check or by a consumers’ late payment.                  operational issues presented by the                    or solicitation, the Board proposes also
                                             Transaction fees imposed for                            proposed rule to disclose fees applicable              to include the payment allocation
                                             transactions in a feign currency or that                to the consumer’s account in the                       disclosure in the account-opening
                                             take place in a foreign country would be                account-opening summary table, and if                  summary, to ensure that consumers
                                             among the fees disclosed at account                     so, suggested solutions.                               receive this information, if applicable, at
                                             opening, though the Board is not                           Grace period. Under TILA, creditors                 the time of application or solicitation.
                                             proposing to require that foreign                       providing disclosures with applications                   Available credit. For the reasons
                                             transaction fees be disclosed in the table              and solicitations must discuss grace                   discussed under § 226.5a(b)(16), the
                                             provided with credit card applications                  periods on purchases; at account                       Board proposes a disclosure targeted at
                                             and solicitations. See section-by-section               opening, creditor must explain grace                   subprime card accounts that assess
                                             analysis to § 226.5a(b)(4). Although                    periods more generally. 15 U.S.C.                      substantial fees at account opening and
                                             consumer testing for the Board                          1637(c)(1)(A)(iii); 15 U.S.C. 1637(a)(1).              leave consumers with a limited amount
                                             indicated that consumers do not choose                  Under proposed § 226.6(b)(4)(iv),                      of available credit. Proposed
                                             to apply for a card based on foreign                    creditors would state for all balances on              § 226.6(b)(4)(vii) would require creditors
                                             transaction fees, the Board believes                    the account, whether or not a period                   to disclose in the account-opening table
                                             highlighting the fee may be useful for                  exists in which consumers may avoid                    the disclosures required under
                                             some consumers before they obtain                       the imposition of finance charges, and if              § 226.5a(b)(16). The proposed
                                             credit on the account.                                  so, the length of the period.                          requirements would apply to creditors
                                                The Board intends this list of fees to                  Required insurance, debt cancellation               that require fees for the availability or
                                             be exclusive, for two reasons. An                       or debt suspension. For the reasons                    issuance of credit, or a security deposit,
                                             exclusive list eases compliance and                     discussed in the section-by-section                    that equals 25 percent or more of the
                                             reduces the risk of litigation; creditors               analysis to § 226.5a(b)(14), as permitted              minimum credit limit offered on the
                                             have the certainty of knowing that as                   by applicable law, creditors that require              account. If that threshold is met, card
                                             new services (and associated fees)                      credit insurance, or debt cancellation or              issuers must disclose in the table an
                                             develop, the new fees need not be                       debt suspension coverage, as part of the               example of the amount of available
                                             highlighted in the account-opening                      plan would be required to disclose the                 credit the consumer would have after
                                             summary unless and until the Board                      cost of the product and a reference to                 the fees or security deposit are debited
                                             requires their disclosure after notice and              the location where more information                    to the account, assuming the consumer
                                             public comment. And as discussed in                     about the product can be found with the                receives the minimum credit limit.
                                             the section-by-section analysis to                      account-opening materials, as                             Web site reference. For the reasons
                                             § 226.5(a)(1) and § 226.5(b)(1), charges                applicable. See proposed                               stated under § 226.5a(b)(17), credit card
                                             required to be highlighted under new                    § 226.6(b)(4)(v).                                      issuers would be required under
                                             § 226.6(b)(4) would have to be provided                    Payment allocation. In the December                 proposed § 226.6(b)(4)(viii) to provide a
                                             in a written and retainable form before                 2004 ANPR, the Board asked about                       reference to the Board’s Web site for
                                             the first transaction and before being                  creditors’ payment allocation methods,                 additional information about shopping
                                             increased or newly introduced.                          how the methods are typically                          for and using credit card accounts.
                                             Creditors would have more flexibility                   disclosed, and whether additional                         Balance computation methods. TILA
                                             regarding disclosure of other charges                   disclosures about payment allocation                   requires creditors to explain as part of
                                             imposed as part of an open-end (not                     should be required. Q34–Q36.                           the account-opening disclosures the
                                             home-secured) plan.                                     Responses suggest that in general,                     method used to determine the balance
                                                The exclusive list of fees also benefits             creditors tend to apply consumers’                     to which rates are applied. 15 U.S.C.
                                             consumers. The list focuses on fees                     payments to satisfy low-rate balances                  1637(a)(2). Explaining balance
                                             consumer testing conducted for the                      first, but that payment allocation                     computation methods in the account-
                                             Board showed to be most important to                    methods vary. The timing and detail of                 opening table may not benefit
                                             consumers. The list is manageable and                   disclosures also vary. Some card issuers               consumers, because the explanations
                                             focuses on key information rather than                  disclose their payment allocation                      can be lengthy and complex, and
                                             attempting to be comprehensive. Since                   policies in materials accompanying                     consumer testing indicates the
                                             all fees imposed as part of the plan must               credit card applications, while others                 explanations are not understood.
                                             be disclosed before the cost is incurred,               provide information as part of the                     Including an explanation in the table
                                             not all fees need to be included in the                 account agreement. Descriptions of                     also may undermine the goal of
                                             table.                                                  payment allocation are typically                       presenting essential information in a
                                                The Board notes that if the amount of                general.                                               simplified way. Nonetheless, some
                                             a fee such as a late-payment fee or                        The Board proposes in                               balance computation methods are more
                                             balance transfer fee varies from state to               § 226.6(b)(4)(vi) to require creditors to              favorable to consumers than others, and
                                             state, for disclosures required to be                   disclose, if applicable, the information               the Board believes it is appropriate to
                                             provided with credit card applications                  proposed to be required with credit card               highlight the method used, if not the
                                             and solicitations, card issuers may                     applications and solicitations regarding               technical computation details. For those
                                             disclose a range of fees and a statement                how payments will be allocated if the                  reasons, the Board proposes that the
                                             that the amount of the fee varies from                  consumer transfers balances at a low                   name of balance computation methods
                                             state to state. See existing § 226.5a(a)(5),            rate and then makes purchases on the                   used be disclosed beneath the table,
                                             renumbered as new § 226.5a(a)(4). A                     account. The Board believes the                        along with a statement that an
                                             goal of the proposed account-opening                    information is useful to the consumer,                 explanation of the method is provided
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                                             summary table is to provide to a                        although perhaps more so at the time of                in the account agreement or disclosure
                                             consumer with key information about                     application when consumers may                         statement. See proposed
                                             the terms of the account. Permitting                    establish an account to take advantage                 § 226.6(b)(4)(ix). To determine the name
                                             creditors to disclose a range of fees                   of a promotional balance transfer rate.                of the balance computation method to
                                             seems not to meet that standard.                        Because the Board is proposing to allow                be disclosed, creditors would refer to
                                             Nonetheless, the Board solicits                         the account-opening table to substitute                § 226.5a(g) for a list of commonly-used


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                                             32992                   Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules

                                             methods; if the method used is not                      significant revisions to periodic                      helpful, but cautioned against a total of
                                             among those identified, creditors would                 statement disclosures for open-end (not                fees that would not differentiate interest
                                             provide a brief explanation in place of                 home-secured) plans. These rules are                   from other charges such as penalty fees
                                             the name.                                               grouped together in proposed § 226.7(b).               (late or over-the-credit-limit, for
                                                Billing error rights reference. All                  First, interest and fees imposed as part               example). Some consumer group
                                             creditors offering open-end plans must                  of the plan during the statement period                commenters suggested importing format
                                             provide notices of billing rights at                    would be disclosed in a simpler manner                 requirements similar to the tabular
                                             account opening. See current § 226.6(d);                and in a consistent location. Second, the              disclosures for credit card applications
                                             proposed § 226.6(c)(2). This information                Board is proposing for comment two                     and solicitations.
                                             is important, but lengthy. The Board                    alternative approaches to disclose the                    Consumer testing conducted for the
                                             proposes to draw consumers’ attention                   effective APR: The first approach would                Board has shown that targeted
                                             to the notices by requiring a statement                 try to improve consumer understanding                  proximity requirements on periodic
                                             that information about billing rights and               of this rate and reduce creditor                       statements tend to improve the
                                             how to exercise them is provided in the                 uncertainty about its computation. The                 effectiveness of cost disclosures for
                                             account-opening disclosures. See                        second approach would eliminate the                    consumers. For the reasons discussed
                                             proposed § 226.6(b)(4)(x). The                          requirement to disclose the effective                  below, the Board proposes several
                                             statement, along with the name of the                   APR. Third, if an advance notice of                    proximity requirements. For example,
                                             balance computation method, would be                    changed rates or terms is provided on or               the proposal would link by proximity
                                             located directly below the table.                       with a periodic statement, a summary of                the payment due date with the late
                                                                                                     the change would be required on the                    payment fee and penalty rate that could
                                             6(c) Rules of General Applicability
                                                                                                     front of the periodic statement. Model                 be triggered by an untimely payment.
                                             6(c)(1) Security Interests                              clauses would illustrate the proposed                  The minimum payment amount also
                                               Comments to proposed § 226.6(c)(1)                    revisions, to facilitate compliance. In                would be linked by proximity with the
                                             (current § 226.6(c)) are revised for                    addition, the Board proposes to add new                new warning required by the
                                             clarity, without any substantive change.                paragraphs § 226.7(b)(11) and (12) to                  Bankruptcy Act about the effects of
                                             &                                                       implement disclosures regarding late-                  making such payments on the account.
                                                                                                     payment fees and the effects of making                 The Board believes grouping these
                                             6(c)(2) Statement of Billing Rights                     minimum payments in Section 1305(a)                    disclosures together would enhance
                                                Creditors offering open-end plans                    and 1301(a) of the Bankruptcy Act                      consumers’ informed use of credit.
                                             must provide information to consumers                   (further discussed below). TILA Section                   To ensure consumers are alerted to
                                             at account opening about consumers’                     127(b)(11) and (12); 15 U.S.C.                         rate increases and other changes that
                                             billing rights under TILA, in the form                  1637(b)(11) and (12).                                  increase the cost of using their account,
                                             prescribed by the Board. 15 U.S.C.                         A number of technical revisions are                 a summary of key rate and term changes
                                             1637(a)(7). This requirement is                         made for clarity. For the reasons set                  would precede the transactions when an
                                             implemented in the Board’s Model                        forth in the section-by-section analysis               advance notice of a change in term or
                                             Form G–3. The Board is proposing                        to § 226.6(b)(1), the Board would update               rate accompanies a periodic statement.
                                             revisions to Model Form G–3, proposed                   references to ‘‘free-ride period’’ as                  Transactions would be grouped by type,
                                             as G–3(A). The proposed revisions are                   ‘‘grace period’’ in the regulation and                 and fee and interest charge totals would
                                             not based on consumer testing, although                 commentary, without any intended                       be located with the transactions.
                                             design techniques and changes in                        substantive change. Current comment                    Participants in the consumer testing
                                             terminology are proposed to improve                     7–2, which addresses open-end plans                    conducted for the Board tended to
                                             consumer understanding of TILA’s                        involving more than one creditor, would                review their transactions and to notice
                                             billing rights. Creditors offering HELOCs               be deleted as obsolete and unnecessary.                fees and interest charges when placed
                                             subject to § 226.5b could continue to use                  Format requirements for periodic                    there. The Board notes that some
                                             current Model Form G–3, or proposed                     statements. TILA and Regulation Z                      financial institutions presently group
                                             G–3(A), at the creditor’s option.                       contain few formatting requirements for                transactions by type. Form G–18(A)
                                                                                                     periodic statement disclosures. In the                 would illustrate these requirements.
                                             Section 226.7 Periodic Statement                        December 2004 ANPR, the Board noted                       The Board is publishing for the first
                                               TILA Section 127(b), implemented in                   that some information about past                       time forms illustrating front sides of a
                                             § 226.7, identifies information about an                account activity also may be useful to                 periodic statement. The Board is
                                             open-end account that must be                           consumers in making future decisions                   publishing forms G–18(G) and G–18(H)
                                             disclosed when a creditor is required to                concerning the plan. The Board sought                  to illustrate how a periodic statement
                                             provide periodic statements. 15 U.S.C.                  comment on possible ways to format                     might be designed to comply with the
                                             1637(b).                                                information to improve the effectiveness               requirements of § 226.7. Forms G–18(G)
                                               Home-equity lines of credit. Periodic                 of periodic statement disclosures,                     and G–18(H) contain some additional
                                             statement disclosure and format                         including proximity requirements or                    disclosures that are not required by
                                             requirements for home-equity lines of                   grouping of terms or fees. Q4–Q6.                      Regulation Z. The forms also present
                                             credit (HELOCs) subject to § 226.5b                        Commenters’ views were mixed.                       information in some additional formats
                                             would be unaffected by the proposal,                    Industry commenters generally opposed                  that are not required by Regulation Z.
                                             consistent with the Board’s plan to                     mandating specific format requirements.                The Board is publishing the front side
                                             review Regulation Z’s disclosure rules                  They suggested that consumers are not                  of a statement form as a compliance aid.
                                             for home-secured credit in a separate                   confused by basic information conveyed                    Consumer testing for the Board
                                             rulemaking. To facilitate compliance,                   on periodic statements, and that                       indicates that the effectiveness of
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                                             the substantively unrevised rules                       mandated format requirements would                     periodic statement disclosures is
                                             applicable only to HELOCs are grouped                   be expensive to implement and could                    improved when certain information is
                                             together in proposed § 226.7(a). (See                   stifle creditors’ ability to tailor                    grouped together. The Board seeks
                                             redesignation table below.)                             statements to specific products. Some of               comment on any alternative approaches
                                               Open-end (not home-secured) plans.                    these commenters suggested that                        that would provide creditors more
                                             The Board proposes a number of                          grouping of terms or fees might be                     flexibility in grouping related


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                                             information together on the periodic                    7(b)(2) Identification of Transactions                 periods in the years. 15 U.S.C.
                                             statement.                                                 Proposed § 226.7(b)(2) requires                     1637(b)(5); § 226.14(b). The Board is
                                                                                                     creditors to identify transactions in                  proposing to eliminate, for open-end
                                             7(a) Rules Affecting Home-Equity Plans
                                                                                                     accordance with rules set forth in                     (not home-secured) plans, the
                                               For HELOCs, creditors are required to                                                                        requirement to disclose periodic rates
                                             comply with the disclosure                              § 226.8. The Board proposes to revise
                                                                                                                                                            on periodic statements.
                                             requirements under proposed                             and significantly simplify those rules, as
                                                                                                                                                               The Board proposes this approach
                                             § 226.7(a)(1) through (10), including                   discussed in the section-by-section
                                                                                                                                                            pursuant to its exception and exemption
                                             existing rules and guidance regarding                   analysis relating to § 226.8 below.                    authorities under TILA Section 105.
                                             the disclosure of finance charges and                      The Board would introduce a format                  Section 105(a) authorizes the Board to
                                             other charges, which would be                           requirement to group transactions by                   make exceptions to TILA to effectuate
                                             combined in a new § 226.7(a)(6). These                  type, such as purchases and cash                       the statute’s purposes, which include
                                             rules and accompanying commentary                       advances. In consumer testing                          facilitating consumers’ ability to
                                             are substantively unchanged from                        conducted for the Board, participants                  compare credit terms and helping
                                             current § 226.7(a) through (k). Proposed                found such groupings helpful.                          consumers avoid the uniformed use of
                                             § 226.7(a) also provides that at their                  Moreover, consumers noticed fees and                   credit. 15 U.S.C. 1601(a), 1604(a).
                                             option, creditors offering HELOCs may                   interest charges more readily when                     Section 105(f) authorizes the Board to
                                             comply with the requirements of                         transactions were grouped together, the                exempt any class of transactions (with
                                             § 226.7(b). The Board understands that                  fees imposed for the statement period                  an exception not relevant here) from
                                             some creditors may use a single                         were not interspersed among the                        coverage under any part of TILA if the
                                             processing system to generate periodic                  transactions, and the interest and fees                Board determines that coverage under
                                             statements for all open-end products                    were disclosed in proximity to the                     that part does not provide a meaningful
                                             they offer, including HELOCs. These                     transactions. Comment 7(b)(2)–1 would                  benefit to consumers in the form of
                                             creditors would have the option to                      reflect the new requirement. Sample G–                 useful information or protection. 15
                                             generate statements according to a                      18(A) would illustrate the proposal.                   U.S.C. 1604(f)(1). Section 105(f) directs
                                             single set of rules.                                    7(b)(3) Credits                                        the Board to make this determination in
                                               In technical revisions, the substance                                                                        light of specific factors. 15 U.S.C.
                                             of footnotes referenced in § 226.7(d) is                   Creditors are required to disclose any              1604(f)(2). These factors are (1) the
                                             moved to proposed § 226.7(a)(4) and                     credits to the account during the billing              amount of the loan and whether the
                                             comment 7(a)(4)-6.                                      cycle. Creditors typically disclose                    disclosure provides a benefit to
                                                                                                     credits among other transactions. The                  consumers who are parties to the
                                             7(a)(7) Annual Percentage Rate                          Board proposes no substantive changes                  transaction involving a loan of such
                                                The Board is proposing two                           to the disclosure requirements for                     amount; (2) the extent to which the
                                             alternative approaches to address                       credits. However, consistent with the                  requirement complicates, hinders, or
                                             concerns about the effective APR. These                 format requirements proposed in                        makes more expensive the credit
                                             approaches are discussed in detail in                   § 226.7(b)(2), the proposal would                      process; (3) the status of the borrower,
                                             the section-by-section analysis to                      require credits and payments to be                     including any related financial
                                             proposed § 226.7(b)(7). The first                       grouped together. Consumers who                        arrangements of the borrower, the
                                             approach seeks to improve the effective                 participated in testing conducted for the              financial sophistication of the borrower
                                             APR. For HELOCs subject to § 226.5b,                    Board consistently identified credits as               relative to the type of transaction, and
                                             creditors would have an option to                       statement information they review each                 the importance to the borrower of the
                                             comply with the new rules or continue                   month, and favored a separation of                     credit, related supporting property, and
                                             to comply with the current rules                        credits and payments among the                         coverage under TILA; (4) whether the
                                             applicable to the effective APR. This is                transactions.                                          loan is secured by the principal
                                             intended as a temporary measure until                      Current comment 7(c)–2, which                       residence of the borrower; and (5)
                                             the Board reviews comprehensively the                   permits creditors to commingle credits                 whether the exemption would
                                             rules for HELOCs subject to § 226.5b.                   related to extensions of credit and                    undermine the goal of consumer
                                             The second approach would eliminate                     credits related to non-credit accounts,                protection.
                                             the requirement to disclose the effective               such as a deposit account, is not                         The Board has considered each of
                                             APR; thus, under this approach, the                     proposed under new § 226.7(b)(3). The                  these factors carefully, and based on
                                             effective APR would be optional for                     Board solicits comment on the need for                 that review, believes that proposing the
                                             HELOC creditors pending the Board’s                     alternatives to the proposed format                    exemption is appropriate. In consumer
                                             review of home-secured disclosure                       requirements to segregate transactions                 testing conducted for the Board,
                                             rules.                                                  and credit, such as when a depository                  consumers indicated they do not use
                                                                                                     institution provides on a single periodic              periodic rates to verify interest charges.
                                             7(b) Rules Affecting Open-End (Not                      statement account activity for a                       Consistent with the Board’s proposal to
                                             Home-Secured) Plans                                     consumer’s checking account and an                     not allow periodic rates to be disclosed
                                                Current comment 7–3 provides                         overdraft line of credit. Sample G–18(A)               in the tabular summary on or with
                                             guidance on various periodic statement                  would illustrate the proposal. Comment                 credit card applications and disclosures,
                                             disclosures for deferred-payment                        7(b)(3)–3, as renumbered, is revised for               the Board believes that requiring
                                             transactions, such as when a consumer                   clarity.                                               periodic rates to be disclosed on
                                             may avoid interest charges if a purchase                                                                       periodic statements may distract from
                                             balance is paid in full by a certain date.              7(b)(4) Periodic Rates                                 more important information on the
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                                             Under the proposal, the substance of                      Periodic rates. TILA Section 127(b)(5)               statement, and contribute to information
                                             comment 7–3, revised to conform to                      and current § 226.7(d) require creditors               overload. The proposal to eliminate
                                             other proposed revisions in § 226.7(b), is              to disclose all periodic rates that may be             periodic rates from the periodic
                                             proposed as comment 7(b)–1. The Board                   used to compute the finance charge, and                statement therefore has the potential to
                                             believes the guidance is unnecessary for                an APR that corresponds to the periodic                better inform consumers and further the
                                             HELOCs.                                                 rate multiplied by the number of                       goals of consumer protection and the


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                                             32994                   Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules

                                             informed use of credit for open-end (not                required to disclose the 1.99 percent                  commentary to current § 226.7(e)
                                             home-secured) credit. The Board                         promotional APR unless the consumer                    interprets how creditors may comply
                                             welcomes comment on this matter.                        used the check during the statement                    with TILA in disclosing the ‘‘balance,’’
                                                Labeling APRs. Currently creditors are               period. The Board believes that                        which typically changes in amount
                                             provided with considerable flexibility in               interpreting TILA to require the                       throughout the cycle, on periodic
                                             identifying the APR that corresponds to                 disclosure of all promotional rates                    statements.
                                             the periodic rate. Current comment                      would be operationally burdensome for                     Amount of balance. The proposal
                                             7(d)–4 permits labels such as                           creditors and result in information                    does not change how creditors are
                                             ‘‘corresponding annual percentage rate,’’               overload for consumers. The proposed                   required to disclose the amount of the
                                             ‘‘nominal annual percentage rate,’’ or                  exception would not apply to HELOCs                    balance on which finance charges are
                                             ‘‘corresponding nominal annual                          covered by § 226.5b. The Board requests                computed. It would, however, permit
                                             percentage rate.’’ To promote                           comment on whether the class of                        creditors, at their option, not to include
                                             uniformity, creditors offering open-end                 transactions under the proposed                        an explanation of how the finance
                                             (not home-secured) plans would be                       exceptions should be tailored more                     charge may be verified for creditors that
                                             required to label the annual percentage                 broadly to include HELOCs subject to                   use a daily balance method. Currently,
                                             rate disclosed under proposed                           § 226.5b, and if so, why.                              creditors that use a daily balance
                                             § 226.7(b)(4) as ‘‘annual percentage                       Combining interest and other charges.               method are permitted to disclose an
                                             rate.’’ In combination with the Board’s                 Currently, creditors must disclose                     average daily balance for the period,
                                             proposed approach to improve                            finance charges attributable to periodic               provided they explain that the amount
                                             consumers’ understanding of the                         rates. These costs are typically interest              of the finance charge can be verified by
                                             effective APR discussed in the section-                 but may include other costs such as                    multiplying the average daily balance by
                                             by-section analysis to proposed                         premiums for required credit insurance.                the number of days in the statement
                                             § 226.7(b)(7), it is important that the                 If applied to the same balance, creditors              period, and then applying the periodic
                                             ‘‘interest only’’ APR be uniformly                      may disclose each rate, or a combined                  rate. The Board would retain the rule
                                             distinguishable from the effective APR                  rate. See current comment 7(d)–3. As                   permitting creditors to disclose an
                                             that includes interest and fees. Forms                  discussed earlier, consumer testing for                average daily balance but would
                                             G–18(G) and G–18(H) illustrate periodic                 the Board indicates that participants                  eliminate the requirement to provide the
                                             statements that disclose an APR but no                  appeared to understand credit costs in                 explanation. Consumer testing
                                             periodic rates.                                         terms of ‘‘interest’’ and ‘‘fees,’’ and the            conducted for the Board suggests that
                                                Rates that ‘‘may be used.’’ Currently,               proposal would require disclosures to                  the explanation may not be used by
                                             comment 7(d)–1 interprets the                           distinguish between interest and fees.                 consumers as an aid to calculate their
                                             requirement to disclose all periodic                    To the extent consumers associate                      interest charges. Participants suggested
                                             rates that ‘‘may be used’’ to mean                      periodic rates with ‘‘interest,’’ it seems             that if they attempted without
                                             ‘‘whether or not [the rate] is applied                  unhelpful to consumers’ understanding                  satisfaction to calculate balances and
                                             during the cycle.’’ For example, rates on               to permit creditors to include periodic                verify interest charges based on
                                             cash advances must be disclosed on all                  rate charges other than interest into the              information on the periodic statement,
                                             periodic statements, even for billing                   dollar cost disclosed. Thus, guidance                  they would call the creditor for
                                             periods with no cash advance activity or                about combining periodic rates                         assistance.
                                             balances. The regulation and                            attributable to interest and other finance                The section-by-section analysis to
                                             commentary do not clearly state                         charges would be retained for HELOCs                   § 226.7(b)(6) discusses proposed
                                             whether promotional rates, such as                      in proposed comment 7(a)(4)–3, but                     revisions intended to further consumers’
                                             those offered for using checks accessing                would be eliminated for open-end (not                  understanding of interest charges, as
                                             credit card accounts, that ‘‘may be                     home-secured) plans.                                   distinguished from fees. To complement
                                             used’’ should be disclosed under                           A new comment 7(b)(4)–7 would be                    those proposed revisions, the Board
                                             current § 226.7(d) regardless of whether                added to provide guidance to creditors                 would require creditors to refer to the
                                             they are imposed during the period. See                 when a fee is imposed, remains unpaid,                 balance as ‘‘balances subject to interest
                                             current comment 7(d)–2. The Board is                    and accrues interest on the unpaid                     rate,’’ for consistency. Forms G–18(G)
                                             proposing a limited exception to TILA                   balance. The comment provides that                     and 18(H) illustrate this format
                                             Section 127(b)(5) to effectuate the                     creditors disclosing fees in accordance                requirement. For the reasons discussed
                                             purposes of TILA to require disclosures                 with the format requirements of                        regarding guidance on disclosing
                                             that are meaningful and to facilitate                   § 226.7(b)(6) need not separately                      periodic rates, guidance about
                                             compliance.                                             disclose which periodic rate applies to                disclosing balances to which periodic
                                                Under the proposal, creditors would                  the unpaid fee balance.                                rates attributable to interest and other
                                             be required to disclose promotional                        In technical revisions, the substance               finance charges are applied would be
                                             rates only if the rate actually applied                 of footnotes referenced in § 226.7(d) is               retained for HELOCs in proposed
                                             during the billing period. See proposed                 moved to the regulation and comment                    comment 7(a)(5)–1, but would be
                                             § 226.7(b)(4)(ii). For example, a card                  7(b)(4)–5.                                             eliminated for open-end (not home-
                                             issuer may impose a 22 percent APR for                                                                         secured) plans.
                                             cash advances but offer for a limited                   7(b)(5) Balance on which Finance                          Explanation of balance computation
                                             time a 1.99 percent promotional APR for                 Charge is Computed                                     method. The Board is proposing an
                                             advances obtained through the use of a                    Creditors must disclose the amount of                alternative to providing an explanation
                                             check accessing a credit card account.                  the balance to which a periodic rate was               of how the balance was determined.
                                             Creditors are currently required to                     applied and an explanation of how the                  Under the proposal, a creditor that uses
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                                             disclose, in this example, the 22 percent               balance was determined. The Board                      a balance computation method
                                             cash advance APR on periodic                            provides model clauses creditors may                   identified in § 226.5a(g) has two
                                             statements whether or not the consumer                  use to explain common balance                          options. The creditor may: (1) Provide
                                             obtains a cash advance during the                       computation methods. 15 U.S.C.                         an explanation, as the rule currently
                                             previous statement period. The proposal                 1637(b)(7); current § 226.7(e); Model                  requires, or (2) identify the name of the
                                             would make clear that creditors are not                 Clauses G–1, Appendix G. The staff                     balance computation method and


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                                                                     Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules                                            32995

                                             provide a toll-free telephone number                    charges imposed during the statement                   statements the amount of any finance
                                             where consumers may obtain more                         period.                                                charge added to the account during the
                                             information from the creditor about how                    Consumer testing conducted for the                  period, itemized to show amounts due
                                             the balance is computed and resulting                   Board indicates that most participants                 to the application of periodic rates and
                                             finance charges are determined. If the                  reviewing mock periodic statements                     the amount imposed as a fixed or
                                             creditor uses a balance computation                     could not correctly explain the term                   minimum charge. 15 U.S.C. 1637(b)(4).
                                             method that is not identified in                        ‘‘finance charge.’’ The proposed                       This requirement is currently
                                             § 226.5a(g), the creditor would provide                 revisions are intended to conform labels               implemented in § 226.7(f), and creditors
                                             a brief explanation of the method. The                  of charges more closely to common                      are given considerable flexibility
                                             Board’s proposal is guided by the                       understanding, ‘‘interest’’ and ‘‘fees.’’              regarding totaling or subtotaling finance
                                             following factors.                                      Format requirements would also help                    charges attributable to periodic rates
                                                Calculating balances on open-end                     ensure that consumers notice charges                   and other fees. See current § 226.7(f)
                                             plans can be complex, and requires an                   imposed during the statement period.                   and comments 7(f)–1, –2, and –3. To
                                             understanding of how creditors allocate                    Two alternatives are proposed: One                  improve uniformity and promote the
                                             payments, assess fees, and record                       addresses interest and fees in the                     informed use of credit, creditors would
                                             transactions as they occur during the                   context of an effective APR disclosure,                be required under proposed
                                             cycle. Currently, neither TILA nor                      the second assumes no effective APR is                 § 226.7(b)(6)(ii) to itemize finance
                                             Regulation Z requires creditors to                      disclosed.                                             charges attributable to interest, by type
                                             disclose on periodic statements all the                    Charges imposed as part of the plan.                of transaction labeled as such, and
                                             information necessary to compute a                      Proposed § 226.7(b)(6) would require                   would be required to disclose, for the
                                             balance, and requiring that level of                    creditors to disclose the amount of any                statement period, a total interest charge,
                                             detail appears not to be warranted.                     charge imposed as part of an open-end                  labeled as such. Although creditors are
                                             Although the Board’s model clauses are                  (not home-secured) plan, as stated in                  not currently required to itemize
                                             intended to assist creditors in                         § 226.6(b)(1). Guidance on which                       interest charges by transaction type,
                                             explaining common methods,                              charges are deemed to be imposed as                    creditors often do so. For example,
                                             consumers continue to find these                        part of the plan is in proposed
                                                                                                                                                            creditors may disclose the dollar
                                             explanations lengthy and complex. As                    § 226.6(b)(1) and accompanying
                                                                                                                                                            interest costs associated with cash
                                             stated earlier, consumer testing                        commentary. Although coverage of
                                                                                                                                                            advance and purchase balances. Based
                                             indicates that consumers call the                       charges would be broader under the
                                                                                                                                                            on consumer testing, the Board believes
                                             creditor for assistance when they                       proposed standard of ‘‘charges imposed
                                                                                                                                                            consumers’ ability to make informed
                                             attempt without satisfaction to calculate               as part of the plan’’ than under current
                                                                                                                                                            decisions about the future use of their
                                             balances and verify interest charges.                   standards for finance charges and other
                                                                                                                                                            open-end plans—primarily credit card
                                                The Board believes that providing the                charges, the Board understands that
                                                                                                                                                            accounts—may be promoted by a
                                             name of the balance computation                         creditors have been disclosing on the
                                                                                                                                                            simply-labeled breakdown of the
                                             method (or a brief explanation, if the                  statement all charges debited to the
                                                                                                     account regardless of whether they are                 current interest cost of carrying a
                                             name is not identified in § 226.5a(g)),
                                                                                                     now defined as ‘‘finance charges,’’                    purchase or cash advance balance. The
                                             along with a reference to where
                                                                                                     ‘‘other charges,’’ or charges that do not              breakdown would enable consumers to
                                             additional information may be obtained
                                                                                                     fall into either category. Accordingly,                better understand the cost for using each
                                             provides essential information in a
                                                                                                     the Board understands that creditors                   type of transaction, and uniformity
                                             simplified way, and in a manner
                                                                                                     already disclose all charges that would                among periodic statements would allow
                                             consistent with how consumers obtain
                                                                                                     be considered ‘‘imposed as part of the                 consumers to compare one account with
                                             further balance computation
                                             information. The proposal is consistent                 plan,’’ and it does not expect this                    other open-end plans the consumer may
                                             with the views of some commenters                       proposed change to affect significantly                have. Under the proposal, finance
                                             who responded to the December 2004                      the disclosure of charges on the periodic              charges attributable to periodic rates
                                             ANPR and suggested that the Board                       statement.                                             other than interest charges, such as
                                             simplify some of the more complex                          Interest charges and fees. For                      required credit insurance premiums,
                                             disclosures not used by most                            creditors complying with the new                       would be identified as fees and would
                                             consumers. Current comment 7(e)–6,                      proposed cost disclosure requirements,                 no longer be permitted to be combined
                                             which refers creditors to guidance in                   the current requirement in § 226.7(f) to               with interest costs. See proposed
                                             § 226.6 about disclosing balance                        label finance charges as such would be                 comment 7(b)(4)–3.
                                             computation methods would be deleted                    eliminated. See current § 226.7(f).                       Current § 226.7(h) requires the
                                             as unnecessary.                                         Testing of this term with consumers                    disclosure of ‘‘other charges’’ parallel to
                                                                                                     found that it did not help them to                     the requirement in TILA Section
                                             7(b)(6) Charges Imposed                                 understand charges. Instead, charges                   127(a)(5) and current § 226.6(b) to
                                                As discussed in the section-by-section               imposed as part of an open-end (not                    disclose such charges at account
                                             analysis to § 226.6, the Board proposes                 home-secured) plan would be disclosed                  opening. 15 U.S.C. 1637(a)(5).
                                             to reform cost disclosure rules for open-               under the labels of ‘‘interest charges’’               Consistent with current rules to disclose
                                             end (not home-secured) plans, in part,                  and ‘‘fees.’’ Consumer testing supplies                ‘‘other charges,’’ revised
                                             to ensure that all charges assessed as                  evidence that consumers may generally                  § 226.7(b)(6)(iii) would require that
                                             part of an open-end (not home-secured)                  understand interest as the cost of                     other costs be identified consistent with
                                             plan are disclosed before they are                      borrowing money over time and                          the feature or type, and itemized. The
                                             imposed and to simplify the rules for                   characterize other costs—regardless of                 proposal differs from current
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                                             creditors to identify such charges.                     their characterization under TILA and                  requirements in the following respect:
                                             Consistent with the proposed revisions                  Regulation Z—as fees (other than                       fees would be required to be grouped
                                             at account opening, the proposed                        interest). The Board’s proposal is                     together and a total of all fees for the
                                             revisions to cost disclosures on periodic               consistent with this evidence.                         statement period would be required.
                                             statements are intended to simplify how                    TILA Section 127(b)(4) requires                     Currently, creditors typically include
                                             creditors identify the dollar amount of                 creditors to disclose on periodic                      fees among other transactions identified


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                                             32996                   Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules

                                             under § 226.7(b). In consumer testing,                  compare costs among their open-end                     50 cents. When they diverge, Regulation
                                             consumers were able to more accurately                  plans. The Board proposes that charges                 Z requires that both be stated.
                                             and easily determine the total cost of                  required to be disclosed under                            The following example illustrates the
                                             non-interest charges when fees were                     § 226.7(b)(6)(i) would be grouped                      relationship between the effective APR
                                             grouped together and a total of fees was                together with the transactions identified              and the corresponding APR in a simple
                                             given than when fees were scattered                     under § 226.7(b)(2), substantially similar             case. A credit cardholder with no
                                             among the transactions without a total.                 to Sample G–18(A) in Appendix G.                       balance in the previous cycle takes a
                                             (Section 226.7(b)(6)(iii) also would                    Proposed § 226.7(b)(6)(iii) would require              cash advance of $100 on the first day of
                                             require that certain fees that are                      non-interest fees to be itemized and                   the cycle. A cash advance fee of 3
                                             included in the computation of the                      grouped together, and a total of fees                  percent applies (a finance charge of $3),
                                             effective APR pursuant to § 226.14 must                 would be disclosed for the statement                   as does a periodic rate of 11⁄2 percent
                                             be labeled either as ‘‘transaction fees’’ or            period and calendar year to date.                      per month on the average daily balance
                                             ‘‘fixed fees.’’ This proposed requirement               Interest charges would be itemized by                  of $100 (a finance charge of $1.50). No
                                             is discussed in further detail in the                   type of transaction, grouped together,                 other transactions, and no payments,
                                             section-by-section analysis to                          and a total of interest charges would be               occur during the cycle, which is 30
                                             § 226.7(b)(7).)                                         disclosed for the statement period and                 days. The corresponding APR is 18
                                                To highlight the overall cost of the                 year to date. Sample G–18(A) in                        percent (11⁄2 percent times 12). To
                                             credit account to consumers, creditors                  Appendix G illustrates the proposal.                   determine the effective APR, first the
                                             would disclose the total amount of                                                                             total finance charge of $4.50 is divided
                                             interest charges and fees for the                       7(b)(7) Effective Annual Percentage Rate               by the balance of $100. This quotient,
                                             statement period and calendar year to                      TILA Section 127(b)(6) requires                     41⁄2 percent, is the rate of the total
                                             date. Participants in consumer testing                  disclosure of an APR calculated as the                 finance charge on a monthly basis. The
                                             conducted for the Board noticed the                     quotient of the total finance charge for               monthly rate is annualized, or
                                             year-to-date cost figures and indicated                 the period to which the charge relates                 multiplied by 12, to yield an effective
                                             they would find the numbers helpful in                  divided by the amount on which the                     APR of 54 percent. Under Regulation Z,
                                             making future financial decisions. The                  finance charge is based, multiplied by                 the creditor would disclose on the
                                             Board believes that disclosure of year-                 the number of periods in the year. 15                  periodic statement both the
                                             to-date totals would better inform                      U.S.C. 1637(b)(6). This rate has come to               corresponding APR of 18 percent and
                                             consumers about the cumulative cost of                  be known as the ‘‘historical APR’’ or                  the effective APR of 54 percent.
                                             their credit plans over a significant                   ‘‘effective APR.’’ (This APR will be                      The controversy over the effective
                                             period of time. Comment 7(b)(6)–3                       referred to as the ‘‘effective APR’’ in this           APR. The statutory requirement of an
                                             would provide guidance on how                           section-by-section analysis, and in the                effective APR is intended to provide the
                                             creditors may disclose the year to date                 regulation and accompanying                            consumer with an annual rate that
                                             totals at the end of a calendar year.                   commentary.) Section 127(b)(6) exempts                 reflects the total finance charge,
                                                Proposed § 226.7(b)(6)(iv) in                        a creditor from disclosing an effective                including both the finance charge due to
                                             Alternative 1 contains requirements for                 APR when the total finance charge does                 application of a periodic rate (interest)
                                             calculating and disclosing totals for                   not exceed 50 cents for a monthly or                   and finance charges that take the form
                                             interest and certain fees in connection                 longer billing cycle, or the pro rata                  of fees. This rate, like other APRs
                                             with the disclosure of the effective APR                share of 50 cents for a shorter cycle. In              required by TILA, presumably was
                                             pursuant to § 226.7(b)(7). These                        such a case, TILA Section 127(b)(5)                    intended to provide consumers
                                             requirements are in addition to the total               requires the creditor to disclose only the             information about the cost of credit that
                                             interest and fee disclosures disclosed in               periodic rate and the annualized rate                  would help consumers compare credit
                                             proximity to transactions, and are                      that corresponds to the periodic rate. 15              costs and make informed credit
                                             discussed in further detail in the                      U.S.C. 1637(b)(5). When the finance                    decisions and, more broadly, strengthen
                                             section-by-section analysis to                          charge exceeds 50 cents, the act requires              competition in the market for consumer
                                             § 226.7(b)(7).                                          creditors to disclose the periodic rate                credit. 15 U.S.C. 1601(a). There is,
                                                Format requirements. In consumer                     but not the corresponding APR. Since                   however, a longstanding controversy
                                             testing, consumers consistently                         1970, however, Regulation Z has                        about the extent to which the
                                             reviewed transactions identified on                     required disclosure of the corresponding               requirement to disclose an effective APR
                                             their periodic statements and noticed                   APR in all cases. See current § 226.7(d).              advances TILA’s purposes or, as some
                                             fees and interest charges, itemized and                 Current § 226.7(g) implements TILA                     argue, undermines them. This
                                             totaled, when they were grouped                         Section 127(b)(6)’s requirement to                     controversy has been reflected in such
                                             together with transactions. Some                        disclose an effective APR.                             forums as discussions by the Board’s
                                             creditors also disclose these costs in                     The effective APR and corresponding                 Consumer Advisory Council and
                                             account summaries or in a progression                   APR for any given plan feature are the                 comments on the ANPR. Q23–Q25. The
                                             of figures associated with disclosing                   same when the finance charge in a                      following discussion seeks to place the
                                             finance charges attributable to periodic                period arises only from application of                 controversy over the effective APR in
                                             rates. The proposal would not affect                    the periodic rate to the applicable                    the context of certain objective
                                             creditors’ flexibility to provide this                  balance (the balance calculated                        characteristics of the disclosure.
                                             information in such summaries. See                      according to the creditor’s chosen                        The effective APR is essentially
                                             Forms G–18(G) and G–18(H), which                        method, such as average daily balance                  retrospective, or ‘‘historical.’’ An
                                             illustrate, but do not require, such                    method). When the two APRs are the                     effective APR on a particular periodic
                                             summaries. However, the Board believes                  same, Regulation Z requires that the                   statement represents the cost of
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                                             TILA’s purpose to promote the informed                  APR be stated just once. The effective                 transactions in which the consumer
                                             use of credit would be furthered                        and corresponding APRs diverge when                    engaged during the cycle to which that
                                             significantly if consumers are uniformly                the finance charge in a period arises (at              statement pertains. It is not likely,
                                             provided, in a location they routinely                  least in part) from a charge not                       however, that the effective APR for a
                                             review, basic cost information—interest                 determined by application of a periodic                transaction in a given cycle will predict
                                             and fees—that enables consumers to                      rate and the total finance charge exceeds              accurately the cost of a transaction in a


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                                                                     Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules                                           32997

                                             future cycle. If any one of several factors             yield a lower, and less volatile, effective            cause a consumer to discontinue using
                                             is different in the future cycle than it                APR. A lower APR based on available                    the account in favor of another account
                                             was in the past cycle, such as the                      information about the consumer’s                       that appears less expensive based on its
                                             balance at the beginning of the cycle or                expected time to repay might seem more                 corresponding APR but is in fact more
                                             the amount and timing of each                           realistic. But its disclosure would                    expensive, because of fixed or minimum
                                             transaction and payment during the                      require making assumptions about                       charges or other factors.
                                             cycle, then the effective APRs in the two               activity in future cycles, such as the                    Supporters of the effective APR also
                                             cycles will be different, too.13 In short,              timing and amount of future                            argue that high effective APRs typical
                                             the effective APR is by nature                          transactions and payments—or it would                  for cash advances and balance transfers
                                             retrospective and idiosyncratic and,                    require assuming that there is to be no                benefit consumers by discouraging them
                                             therefore, provides limited information                 activity on the account until the balance              from engaging in these transactions.
                                             about the cost of future transactions.                  is repaid. Such assumptions would                      Industry commenters respond that
                                                Consumer groups argue that the                       often appear arbitrary and unrealistic.                consumers do not necessarily benefit if
                                             information the rate provides about the                 Accordingly, Regulation Z has always                   they refrain categorically from a
                                             cost of future transactions, even if                    required that the effective APR be                     particular kind of credit transaction;
                                             limited, is meaningful. The effective                   calculated on the premise that payment                 depending on the alternatives
                                             APR for a specific transaction or set of                was made at the end of the cycle. The                  consumers choose, they may be worse-
                                             transactions in a given cycle may                       likelihood that the premise is often                   off rather than better-off. Some of these
                                             provide the consumer a rough                            wrong accounts, at least in part, for the              commenters also argue that
                                             indication that the cost of repeating                   controversy as to whether the effective                discouraging particular kinds of credit
                                             such transactions is high in some sense                 APR can supply meaningful information                  transactions is not a valid objective of
                                             or, at least, higher than the                           about credit costs.                                    Regulation Z.
                                             corresponding APR alone conveys.                           Consumer advocates and industry                        Industry and community group
                                             Industry commenters respond that the                    representatives also disagree as to                    commenters find some common ground
                                             cost of a transaction is not usually as                 whether the effective APR promotes                     in their observations that consumers do
                                             high as the effective APR makes it                      credit shopping. The dependence of the                 not understand the effective APR well.
                                             appear, and that this tendency of the                   effective APR on the particular activity               Industry commenters argue from their
                                             rate to exaggerate the cost makes this                  in a given cycle means that any given                  experience with their customers that
                                             APR misleading. Commenters generally                    effective APR in any given cycle is not                consumers do not understand how this
                                             agree that the effective APR can be                     typically a practical shopping tool.                   APR differs from the corresponding
                                             ‘‘shocking,’’ but they disagree as to                   Comparing two particular effective                     APR, why it is ‘‘so high,’’ or which fees
                                             whether it conveys meaningful                           APRs for any two cycles on two                         it reflects. Creditor commenters say that
                                             information.                                            different accounts is not usually a                    when their customers call them and
                                                One reason that effective APRs appear                reliable basis to determine which                      express alarm or confusion over the
                                             high is the assumption built into the                   account costs the consumer more.                       effective APR, the creditors find it
                                             disclosure that the borrower paid the                   Moreover, an effective APR for a given                 difficult, if not impossible, to make the
                                             balance at the end of the cycle. This                   month on an existing account cannot be                 caller understand the disclosure. Nor,
                                             assumption tends to make the APR                        compared reliably to the corresponding                 they argue, does a consumer find the
                                             higher, and more volatile, than if a                    APR advertised on a different account,                 disclosure any more useful than
                                             longer repayment period were used. In                   which by definition does not reflect any               disclosure of interest and fees in dollars
                                             the example given above, the effective                  finance charges imposed in the form of                 and cents, even if the consumer
                                             APR on cash advances, 54 percent, is                    fees. There may be cases in which                      understands the disclosure. Consumer
                                             three times the corresponding APR, 18                   repeated disclosure of effective APRs in               groups concede that, as implemented
                                             percent. Moreover, the effective APR                    consecutive cycles, as opposed to one                  today, the effective APR is difficult for
                                             would have been 18 percent (the same                    effective APR for one cycle, would                     consumers to understand, and they
                                             as the corresponding APR) in the                        facilitate shopping. For example, if an                support efforts to make it more
                                                                                                     account had a periodic rate and a                      understandable, such as improved
                                             previous cycle if no cash advances had
                                                                                                     corresponding APR of zero, the effective               presentation on the periodic statement.
                                             been taken then, and it will fall back to
                                                                                                     APRs disclosed on the account might                    Industry commenters expressed doubt
                                             18 percent in the next cycle if no cash
                                                                                                     provide the most practical basis for                   that such efforts would be worthwhile.
                                             advance is taken then (assuming the rate                                                                          Industry commenters also claim the
                                             is fixed). Use of a longer repayment                    assessing the cost of the account in
                                                                                                     relationship to other advertised                       effective APR imposes direct costs on
                                             period would, other things being equal,                                                                        creditors that consumers pay indirectly.
                                                                                                     accounts. This example, though, does
                                                13 An example demonstrates how the effective         not appear to be common in today’s                     They represent that the effective APR
                                             APR depends critically on the timing of                 market.                                                raises compliance costs when they
                                             transactions during two different cycles. Assume for       Although the effective APR is not                   introduce new services, including legal
                                             the sake of simplicity that the transaction amount      commonly usable as a shopping tool in                  analysis of Regulation Z to determine
                                             and beginning balance remain the same in both           itself, consumer group commenters                      whether the fee for the new service must
                                             cycles. In the example discussed above, a cash
                                             advance of $100 on the first day of a 30-day cycle      argue that the effective APR promotes                  be included in the effective APR and
                                             yielded an effective APR of 54 percent, three times     credit shopping by encouraging                         software programming if it is included;
                                             the corresponding APR of 18 percent. If in a later      consumers to seek out other sources of                 they are also concerned about litigation
                                             cycle the consumer were to take the cash advance        credit, especially when the rate reaches               risks. Also, responding to telephone
                                             on the last day of the 30-day cycle, the effective
                                                                                                     levels that ‘‘shock’’ consumers. Industry              inquiries from confused customers and
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                                             APR would be 36.6 percent, about twice the
                                             corresponding APR. (The finance charge produced         commenters respond, however, that the                  accommodating them (e.g., with fee
                                             by the periodic rate would be $.05 (11⁄2 percent        tendency of the effective APR to                       waivers or rebates) increases operational
                                             times the average daily balance of $3.33). The total    exaggerate the cost of credit may lead                 costs. Costs associated with adverse
                                             finance charge of $3.05 divided by the transaction
                                             amount of $100 yields a quotient of 3.05 percent,
                                                                                                     consumers to make invalid                              consumer reactions to the effective APR
                                             which is multiplied by 12 to yield an effective APR     comparisons. They say that disclosure                  may influence creditors to take steps to
                                             of 36.6 percent.)                                       of a high effective APR in a cycle may                 minimize the frequency with which


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                                             32998                   Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules

                                             they must disclose it. One such step                       In most of the rounds, a minority of                the research conducted to date, and
                                             would be to price credit mostly through                 participants correctly explained that the              with other information, including
                                             a periodic rate rather than fees.                       effective APR for cash advances in the                 comments received on this proposal,
                                             Although this effect is difficult to                    last cycle was higher than the                         and determine whether the effective
                                             measure, a trade association commenter                  corresponding APR for cash advances                    APR should be retained with
                                             concedes a policy argument for                          because a cash advance fee had been                    modifications as proposed, eliminated,
                                             retaining the effective APR as a hedge                  imposed. A smaller minority correctly                  or addressed in some other way.
                                             against creditors shifting their pricing                explained that the effective APR for                      1. First alternative proposal. Under
                                             from periodic rates to transaction-                     purchases was the same as the                          the first alternative, the Board proposes
                                             triggered fees and charges.                             corresponding APR for purchases                        to impose uniform terminology and
                                                Like most other industry commenters,                 because no transaction fee had been                    formatting on disclosure of the effective
                                             however, this same commenter                            imposed on purchases. A majority                       APR and the fees included in its
                                             concludes that the effective APR should                 offered incorrect explanations or did not              computation. See proposed
                                             be eliminated because, for the reasons                  offer any explanation. Results changed                 §§ 226.7(b)(7)(i), 226.7(b)(6)(iv). This
                                             discussed above, its costs outweigh its                 at the final testing site, however, when               proposal is based largely on a form
                                             benefits. Some industry commenters                      a majority of participants evidenced an                developed through several rounds of
                                             support replacing the effective APR                     understanding that the effective APR for               one-on-one interviews with consumers.
                                             with enhanced fee disclosures (for                      cash advances would be elevated for the                The Board also proposes under this
                                             example, grouping fees on the statement                 statement period when a cash advance                   alternative to revise § 226.14, which
                                             or summing them for each period or for                  fee was imposed during that period, that               governs computation of the effective
                                             the year), but many do not. Consumer                    the effective APR would not be as                      APR, in an effort to increase certainty
                                                                                                     elevated for periods where a cash                      about which fees the rate must include.
                                             groups urge the Board not only to retain
                                                                                                     advance balance remained outstanding                   See proposed § 226.14(d). See section-
                                             the effective APR, but to expand it in
                                                                                                     but no fee had been imposed, and that                  by-section analysis to § 226.7(a)(7)
                                             two respects: (1) Include in the rate all
                                                                                                     the effective APR for purchases was the                regarding how the proposal affects
                                             charges, including charges not currently
                                                                                                     same as the corresponding APR for                      HELOCs subject to § 226.5b.
                                             defined as finance charges in Regulation                                                                          Under proposed § 226.7(b)(7)(i) and
                                             Z; and (2) require creditors to disclose                purchases because no transaction fee
                                                                                                     had been imposed on purchases.                         Sample Form G–18(B), creditors would
                                             a ‘‘typical effective APR’’ (an average of                                                                     label the effective APR ‘‘Fee-Inclusive
                                                                                                        The form in the final round labeled
                                             effective APRs) on solicitations and                                                                           APR’’ and indicate that the Fee-
                                                                                                     the rate ‘‘Fee-Inclusive APR’’ and placed
                                             account-opening disclosures.14                                                                                 inclusive APRs are the ‘‘APRs that you
                                                                                                     it in a table separate from the
                                                Consumer research conducted for the                  corresponding APR. The ‘‘Fee-Inclusive                 paid this period when transactions or
                                             Board. It is difficult to measure directly              APR’’ table included the amount of                     fixed fees are taken into account as well
                                             how the effective APR ultimately affects                interest and the amount of transaction                 as interest.’’ Creditors would disclose an
                                             consumers, creditors, and the credit                    fees. An adjacent sentence stated that                 effective APR for each feature, such as
                                             market generally. It is feasible, however,              the ‘‘Fee-Inclusive APR’’ represented                  purchases and cash advances, in a
                                             at a minimum, to assess to some degree                  the cost of transaction fees as well as                tabular format. A composite effective
                                             consumers’ awareness and                                interest. Similar approaches had been                  APR for two or more features would no
                                             understanding of the disclosure. Such                   tried in some of the earlier rounds,                   longer be permitted, as it is more
                                             assessments may support inferences                      except that the effective APR had been                 difficult to explain to consumers. The
                                             about the disclosure’s effectiveness.                   labeled ‘‘Effective APR.’’                             effective APR(s) would appear in a
                                                Accordingly, the Board undertook                        The Board’s two alternative                         table, by feature, with the total of
                                             research, through a consultant, to shed                 proposals. The considerations and data                 interest, labeled as ‘‘interest charges,’’
                                             light on consumer awareness and                         discussed above lead the Board to                      and the total of the fees included in the
                                             understanding of the effective APR; and                 propose two alternative approaches for                 effective APR, labeled as ‘‘transaction
                                             on whether changes to the presentation                  disclosing the effective APR: The first                and fixed charges.’’ To facilitate
                                             of the disclosure could increase                        approach would try to improve                          understanding, proposed
                                             awareness and understanding. A Board                    consumer understanding of this rate and                § 226.7(b)(6)(iii) would require creditors
                                             consultant used a qualitative testing                   reduce creditor uncertainty about its                  to label the specific fees used to
                                             method, one-on-one cognitive                            computation. The second approach                       calculate the effective APR either as
                                             interviews with consumers. Consumers                    would eliminate the requirement to                     ‘‘transaction’’ or ‘‘fixed’’ fees, depending
                                             were provided mock disclosures of                       disclose the effective APR. The evidence               whether the fee relates to a specific
                                             periodic statements that included                       of consumer understanding of the                       transaction; such fees would be
                                             effective APRs and asked questions                      effective APR supplied by the                          disclosed in the list of transactions. If
                                             about the disclosure designed to elicit                 qualitative research conducted for the                 the only finance charges in a billing
                                             their understanding of the rate. In the                 Board is mixed, but it suggests that it                cycle are interest charges, the
                                             first round the statements were copied                  may be possible to increase current                    corresponding and effective APRs are
                                             from examples in the market. For                        levels of understanding by modifying                   identical. In those cases, creditors
                                             subsequent testing rounds, however,                     the presentation of the rate on the                    would disclose only the corresponding
                                             statements were modified in language                    periodic statement. The Board’s                        APRs and would not be required to label
                                             and design to better convey how the                     experience with Regulation Z also                      fees as ‘‘transaction’’ or ‘‘fixed’’ fees.
                                             effective APR differs from the                          suggests that it may be possible to                    These requirements would be illustrated
                                                                                                     reduce burdens by simplifying                          in forms under G–18 in Appendix G,
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                                             corresponding APR. Several different
                                             approaches and many variations on                       computation of the effective APR.                      and creditors would be required to use
                                             those approaches were tested.                              The Board plans to conduct further                  the model or a substantially similar
                                                                                                     research into consumer understanding                   presentation.
                                               14 Consumer group comments about a ‘‘typical          of the effective APR after the comment                    To facilitate compliance, the proposed
                                             APR’’ disclosure are summarized in the section-by-      period has ended. The Board will                       regulation would give specific guidance
                                             section analysis to § 226.5a.                           evaluate this additional research with                 about how to attribute fees to account


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                                                                      Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules                                           32999

                                             features. For convenience and                            benefit to consumers in the form of                   creditor will not preserve consumers’
                                             uniformity, two kinds of charges, when                   useful information or protection. 15                  billing error rights. The Board would
                                             used to calculate the effective APR,                     U.S.C. 1604(f)(1). Section 105(f) directs             update comment 7(k)–2, renumbered as
                                             would be grouped under the purchase                      the Board to make this determination in               comment 7(b)(9)–2, to address
                                             feature of the account: (1) Charges that                 light of specific factors. 15 U.S.C.                  notification by e-mail or via a Web site.
                                             relate to specific purchase transactions;                1604(f)(2). These factors are (1) the                 The comment would provide that the
                                             and (2) minimum, fixed and other non-                    amount of the loan and whether the                    address is deemed to be clear and
                                             interest charges not related to a specific               disclosure provides a benefit to                      conspicuous if a precautionary
                                             transaction. See proposed                                consumers who are parties to the                      instruction is included that telephoning
                                             § 226.7(b)(6)(iv)(B). If there are purchase              transaction involving a loan of such                  or notifying the creditor by e-mail or
                                             features other than the standard                         amount; (2) the extent to which the                   Web site will not preserve the
                                             purchase feature—such as a                               requirement complicates, hinders, or                  consumer’s billing rights, unless the
                                             promotional purchase feature—then the                    makes more expensive the credit                       creditor has agreed to treat billing error
                                             minimum, fixed or other non-interest                     process; (3) the status of the borrower,              notices provided by electronic means as
                                             charges would be grouped with other                      including any related financial                       written notices, in which case the
                                             charges relating to the balance on the                   arrangements of the borrower, the                     precautionary instruction is required
                                             standard purchase feature. See proposed                  financial sophistication of the borrower              only for telephoning.
                                             comment 7(b)(6)–5. In addition, a                        relative to the type of transaction, and
                                                                                                                                                            7(b)(10) Closing Date of Billing Cycle;
                                             minimum charge would be disclosed as                     the importance to the borrower of the
                                                                                                                                                            New Balance
                                             a fee, rather than as interest, and it                   credit, related supporting property, and
                                             would be grouped together with other                     coverage under TILA; (4) whether the                     Creditors must disclose the closing
                                             fees related to standard purchases and                   loan is secured by the principal                      date of the billing cycle and the account
                                             used to calculate the effective APR with                 residence of the borrower; and (5)                    balance outstanding on that date. As a
                                             respect to the standard purchase feature.                whether the exemption would                           part of its proposal to implement TILA
                                             See proposed comment 7(b)(6)–4.                          undermine the goal of consumer                        amendments in the Bankruptcy Act
                                                The proposal also seeks to simplify                   protection.                                           regarding late payment and the effect of
                                             computation of the effective APR, both                      The Board has considered each of                   making minimum payments, the Board
                                             to increase consumer understanding of                    these factors carefully, and based on                 is proposing to require creditors to
                                             the disclosure and facilitate creditor                   that review, believes that proposing the              group together, as applicable,
                                             compliance. New § 226.14(e) would                        exemption is appropriate. Consumer                    disclosures of related information about
                                             provide a specific and exclusive list of                 testing suggests that consumers find the              due dates and payment amounts,
                                             finance charges that would be included                   current requirement of disclosing an                  including the new balance. This is
                                             in calculating the effective APR.15 This                 APR that combines rates and fees to be                discussed in the section-by-section
                                             proposed change is discussed further in                  confusing. The proposal would require                 analysis to §§ 226.7(b)(11) and (b)(13)
                                             the section-by-section analysis to                       disclosure of the nominal interest rate               below, and illustrated in Forms G–18(G)
                                             § 226.14.                                                and fees in a manner that is more                     and G–18(H) in Appendix G.
                                                The Board seeks comment on the                        readily understandable and comparable
                                                                                                                                                            7(b)(11) Due Date; Late Payment Costs
                                             potential benefits and costs of the first                across institutions. It therefore has the
                                             alternative proposal.                                    potential to better inform consumers                     TILA Section 127(b)(12), added by
                                                2. Second alternative proposal. Under                 and further the goals of consumer                     Section 1305(a) of the Bankruptcy Act,
                                             the second alternative proposal, for the                 protection and the informed use of                    requires creditors that charge a late-
                                             reasons discussed in the introduction to                 credit for all types of open-end credit.              payment fee to disclose on the periodic
                                             the discussion of the effective APR, the                 A potentially competing consideration                 statement (1) the payment due date or,
                                             effective APR would no longer be                         is the extent to which ‘‘sticker shock’’              if different, the earliest date on which
                                             disclosed. The Board proposes this                       from the effective APR benefits                       the late-payment fee may be charged,
                                             approach pursuant to its exception and                   consumers, even if the disclosure is                  and (2) the amount of the late-payment
                                             exemption authorities under TILA                         somewhat arbitrary. A second                          fee. 15 U.S.C. 1637(b)(12). The October
                                             Section 105. Section 105(a) authorizes                   consideration is whether the effective                2005 ANPR solicited comment on the
                                             the Board to make exceptions to TILA                     APR is a hedge against fee-intensive                  need for additional guidance on the date
                                             to effectuate the statute’s purposes,                    pricing by creditors, and if so, the extent           to be disclosed under the new rule, and
                                             which include facilitating consumers’                    to which it promotes transparency. On                 whether the Board should consider any
                                             ability to compare credit terms and                      balance, however, the Board believes                  format requirements, such as proximity
                                             helping consumers avoid the uniformed                    that the benefits of the proposal would               rules, or the publication of model
                                             use of credit. 15 U.S.C. 1601(a), 1604(a).               outweigh these considerations.                        disclosures. Q97–Q99.
                                             Section 105(f) authorizes the Board to                      The Board welcomes comment on this                    Home-equity plans. The Board
                                             exempt any class of transactions (with                   matter.                                               intends to implement the late payment
                                             an exception not relevant here) from                                                                           disclosure for HELOCs as a part of its
                                             coverage under any part of TILA if the                   7(b)(9) Address for Notice of Billing                 review of rules affecting home-secured
                                             Board determines that coverage under                     Errors                                                credit. Creditors offering HELOCs may
                                             that part does not provide a meaningful                     Consumers who allege billing errors                comply with proposed § 226.7(b)(11), at
                                                                                                      must do so in writing. 15 U.S.C. 1666;                their option.
                                                15 Under the statute, the numerator of the quotient
                                                                                                      § 226.13(b). Creditors must provide on                   Charge card issuers. TILA Section
                                             used to determine the historical APR is the total        or with periodic statements an address                127(b)(12) applies to ‘‘creditors.’’ TILA’s
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                                             finance charge. See Section 107(a)(2), 15 U.S.C.
                                             1606(a)(2). The Board has authority to make              for this purpose. See current § 226.7(k).             definition of ‘‘creditor’’ includes card
                                             exceptions and adjustments to this calculation           Currently, comment 7(k)–2 provides                    issuers and other persons that offer
                                             method to serve TILA’s purposes and facilitate           that creditors may also provide a                     consumer open-end credit. Issuers of
                                             compliance. See Section 105(a), 15 U.S.C. 1604(a).
                                             The Board has used this authority before to exclude
                                                                                                      telephone number along with the                       ‘‘charge cards’’ (which are typically
                                             certain kinds of finance charges from the historical     mailing address as long as the creditor               products where outstanding balances
                                             APR. See current § 226.14(c)(2), fn. 33.                 makes clear a telephone call to the                   cannot be carried over from one billing


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                                             33000                   Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules

                                             period to the next and are payable when                 law provides that a late payment fee                   (including on the reverse side of
                                             a periodic statement is received) are                   cannot be assessed before March 21. The                periodic statements).
                                             ‘‘creditors’’ for purposes of specifically              Board is concerned that highlighting                      Amount of late payment fee; penalty
                                             enumerated TILA disclosure                              March 20 as the last date to avoid a late              APR. Creditors must disclose the
                                             requirements. 15 U.S.C. 1602(f);                        payment fee may mislead consumers                      amount of the late-payment fee and the
                                             § 226.2(a)(17). The new disclosure                      into thinking that a payment made any                  payment due date on periodic
                                             requirement in TILA Section 127(b)(12)                  time on or before March 20 would have                  statements, under TILA amendments
                                             is not among those specifically                         no adverse financial consequences.                     contained in the Bankruptcy Act. The
                                             enumerated.                                             However, failure to make a payment                     purpose of the new late payment
                                                The Board proposes that charge card                  when due is considered an act of default               disclosure requirement is to ensure
                                             issuers are not subject to the late                     under most credit contracts, and can                   consumers know the consequences of
                                             payment disclosure requirements                         trigger higher costs due to interest                   paying late. To fulfill that purpose, the
                                             contained in the Bankruptcy Act and to                  accrual and perhaps penalty APRs.                      Board proposes that the amount of the
                                             be implemented in new § 226.7(b)(11);                   Particularly in the case of an increased               late-payment fee must be disclosed in
                                             the new requirement is not specifically                 rate that applies to all account balances,             close proximity to the due date. If the
                                             enumerated to apply to charge card                      the cost of paying late may be                         amount of the late-payment fee is based
                                             issuers. In addition, the Board                         significant.                                           on outstanding balances, the proposal
                                             understands that for some charge card                      The Board considered additional                     would permit the creditor to disclose
                                             issuers, payments are not considered                    disclosures on the periodic statement                  either the fee that would apply to that
                                             ‘‘late’’ for purposes of imposing a fee                 that would more fully explain the                      specific balance, or the highest fee in
                                             until a second statement is received                    consequences of paying after the due                   the range (e.g., ‘‘up to’’ a stated dollar
                                             without a payment. The Board believes                   date and before the date triggering the                amount).
                                             it would be undesirable to encourage                                                                              In addition, the Board believes that an
                                                                                                     late-payment fee, but such an approach
                                             consumers who in January receive a                                                                             equally (or more) important
                                                                                                     appears cumbersome and overly
                                             statement with the balance due upon                                                                            consequence of paying late is the
                                                                                                     complicated. For those reasons, the
                                             receipt, for example, to avoid paying the                                                                      potential increase in APRs. The extent
                                                                                                     Board proposes that creditors must
                                             balance when due because a late-                                                                               of rate increases may be substantial,
                                                                                                     disclose the due date under the terms of
                                             payment fee may not be assessed until                                                                          particularly where the increased APR
                                                                                                     the legal obligation, and not a date
                                             mid-February; such a disclosure could                                                                          applies to all existing balances,
                                                                                                     different than the due date, such as
                                             cause issuers to change such a practice.                                                                       including balances at low promotional
                                                                                                     when creditors are required by state or
                                                Payment due date. Under the                                                                                 rates. Further, the increased APR may
                                                                                                     other law to delay for a specified period
                                             proposal, creditors must disclose the                                                                          apply for a lengthy period of time
                                             due date for a payment if a late-payment                imposing a late-payment fee when a                     (although if the creditor imposes a
                                             fee could be imposed under the credit                   payment is received after the due date.                penalty rate, the increase would not
                                             agreement. The Board interprets this to                 Consumers’ rights under state laws to                  become effective for at least 45 days,
                                             be a date that is required by the legal                 avoid the imposition of late-payment                   under the Board’s proposal). See
                                             obligation and not to encompass                         fees during a specified period following               proposed § 226.9(g). The Board is
                                             informal ‘‘courtesy periods’’ that are not              a due date are unaffected by the                       concerned that if the disclosure refers to
                                             part of the legal obligation and that                   proposal; that is, in the above example,               only the late payment fee, consumers
                                             creditors may observe for a short period                the creditor would disclose March 10 as                may overlook the more costly
                                             after the stated due date before a late-                the due date for purposes of                           consequence of penalty rates. Therefore,
                                             payment fee is imposed, to account for                  § 226.7(b)(11), but could not, under state             the Board proposes to require creditors
                                             minor delays in payments such as mail                   law, assess a late-payment fee before                  to disclose any increased rate that may
                                             delays. Several commenters asked the                    March 21. However, the proposal would                  apply if consumers’ payments are
                                             Board to clarify that in complying with                 provide additional protections to                      received after the due date. If, under the
                                             the new late-payment fee disclosure,                    consumers by not requiring a disclosure                terms of the account agreement, a late
                                             creditors need not disclose informal                    that a late-payment fee will be imposed                payment could result in the loss of a
                                             ‘‘courtesy periods’’ not part of the legal              only after a specified period after the                promotional rate, the imposition of a
                                             obligation. The Board proposes a                        due date, which, if followed, may result               penalty rate, or both, the creditor must
                                             comment to this effect. See proposed                    in even more costly consequence of an                  disclose the highest rate that could
                                             comment 7(b)(11)–1.                                     increased penalty rate.                                apply, to avoid information overload.
                                                Under the statute, creditors must                       Cut-off time for making payments. As                Under the proposal, the increased APR
                                             disclose on periodic statements the                     discussed in the section-by-section                    would be disclosed closely proximate to
                                             payment due date or, if different, the                  analysis to § 226.10(b), the Board                     the fee and due date, as set forth in
                                             earliest date on which the late-payment                 proposes to require that creditors                     proposed § 226.7(b)(13). The Board
                                             fee may be charged. Some state laws                     disclose any cut-off time for receiving                believes this fulfills Congress’s intent to
                                             require that a certain number of days                   payments closely proximate to each                     warn consumers about the effects of
                                             must elapse following a due date before                 reference of the due date, if the cut-off              paying late.
                                             a late-payment fee may be imposed.                      time is before 5 p.m. on the due date.
                                             Under such a state law, the later date                  If cut-off times prior to 5 p.m. differ                7(b)(12) Minimum Payment
                                             arguably would be required to be                        depending on the method of payment                        The Bankruptcy Act amends TILA
                                             disclosed on periodic statements. The                   (such as by check or via the Internet),                Section 127(b) to require creditors that
                                             Board is concerned, however, that such                  the creditor must state the earliest time              extend open-end credit to provide a
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                                             a disclosure would not provide a                        without specifying the method to which                 disclosure on the front of each periodic
                                             meaningful benefit to consumers in the                  it applies. This avoids information                    statement in a prominent location about
                                             form of useful information or protection                overload by potentially identifying                    the effects of making only minimum
                                             and would result in consumer                            several cut-off times. Cut-off hours of 5              payments. 15 U.S.C. § 1637(b)(11). This
                                             confusion. For example, assume a                        p.m. or later may continue to be                       disclosure must include: (1) A
                                             payment is due on March 10 and state                    disclosed under the existing rule                      ‘‘warning’’ statement indicating that


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                                             making only the minimum payment will                    and the toll-free telephone number on                  understanding of what their financial
                                             increase the interest the consumer pays                 its periodic statements. 15 U.S.C.                     situation is.
                                             and the time it takes to repay the                      1637(b)(11)(J)–(K).                                    Remarks of Senator Grassley (2005),
                                             consumer’s balance; (2) a hypothetical                     For ease of reference, the Board will               Congressional Record (daily edition),
                                             example of how long it would take to                    refer to the above disclosures about the               vol. 151, March 1, p. S 1856.
                                             pay off a specified balance if only                     effects of making only the minimum                        Thus, it appears the principal concern
                                             minimum payments are made; and (3) a                    payment as ‘‘the minimum payment                       of Congress was that consumers may not
                                             toll-free telephone number that the                     disclosures.’’                                         be fully aware of the length of time it
                                             consumer may call to obtain an estimate                    Proposal to limit the minimum                       takes to pay off their credit card
                                             of the time it would take to repay their                payment disclosure requirements to                     accounts if only minimum monthly
                                             actual account balance.                                 credit card accounts. Under the                        payments are made. The concern
                                                Under the Bankruptcy Act, depository                 Bankruptcy Act, the minimum payment                    expressed by Congress for credit card
                                             institutions may establish and maintain                 disclosures apply to all open-end                      accounts does not necessarily apply to
                                             their own toll-free telephone numbers or                accounts (such as credit card accounts,                other types of open-end credit accounts.
                                             use a third party. In order to standardize              HELOCs, and general-purpose credit                     These other types of open-end accounts
                                             the information provided to consumers                   lines). The Act expressly states that                  are discussed below.
                                             through the toll-free telephone numbers,                these disclosure requirements do not                      1. HELOCs. Many industry
                                             the Bankruptcy Act directs the Board to                 apply, however, to any ‘‘charge card’’                 commenters requested that HELOCs be
                                             prepare a ‘‘table’’ illustrating the                    account, the primary aspect of which is                exempted from the minimum payment
                                             approximate number of months it would                   to require payment of charges in full                  disclosure requirements. These
                                             take to repay an outstanding balance if                 each month.                                            commenters indicated that most
                                             the consumer pays only the required                        In the October 2005 ANPR, the Board                 HELOCs have a fixed repayment period
                                             minimum monthly payments and if no                      requested comment on whether certain                   specified in the account agreement, so
                                             other advances are made. The Board is                   open-end accounts should be exempted                   that consumers know from the account
                                             directed to create the table by assuming                from some or all of the minimum                        agreement the length of the draw period
                                             a significant number of different APRs,                 payment disclosure requirements. Q59.                  and the length of the repayment period.
                                             account balances, and minimum                           Many industry commenters urged the                     Nonetheless, several consumer groups
                                             payment amounts; instructional
                                                                                                     Board to limit the minimum payment                     urged that HELOCs should not be
                                             guidance must be provided on how the
                                                                                                     disclosure requirements to credit card                 exempted entirely. They advocated a
                                             information contained in the table
                                                                                                     accounts because they believed that                    warning to HELOC consumers that they
                                             should be used to respond to
                                                                                                     Congress intended the minimum                          can pay down the balance faster and
                                             consumers’ requests. The Board is also
                                                                                                     payment disclosures only for such                      save on finance charges if they pay more
                                             required to establish and maintain, for
                                                                                                     accounts. On the other hand, several                   than the minimum monthly payment
                                             two years, a toll-free telephone number
                                                                                                     consumer groups urged the Board to                     required.
                                             for use by customers of creditors that are
                                                                                                     apply the minimum payment                                 Based on the comments received in
                                             depository institutions having assets of
                                                                                                     disclosures to all open-end plans                      response to the October 2005 ANPR as
                                             $250 million or less. The Federal Trade
                                             Commission (FTC) must maintain a toll-                  because they believed that these                       well as other information, the Board
                                             free telephone number for creditors that                disclosures could be useful to                         understands that most HELOCs have a
                                             are not depository institutions. 15                     consumers for all open-end products,                   fixed repayment period. Thus, for those
                                             U.S.C. 1637(b)(11)(A)–(C).                              including HELOCs.                                      HELOCs, consumers could learn from
                                                The Bankruptcy Act provides that                        The Board is proposing to exempt                    the current disclosures the length of the
                                             consumers who call the toll-free                        open-end credit plans other than credit                draw period and the repayment period.
                                             telephone number may be connected to                    card accounts from the minimum                         See current § 226.6(e)(2). The minimum
                                             an automated device through which                       payment disclosure requirements. This                  payment disclosures would not appear
                                             they can obtain repayment information                   exemption would cover, for example,                    to provide useful information to
                                             by providing information using a touch-                 HELOCs (including open-end reverse                     consumers that is not already disclosed
                                             tone telephone or similar device, but                   mortgages), overdraft lines of credit and              to them. The cost of providing this
                                             consumers who are unable to use the                     other general-purpose personal lines of                information a second time, including
                                             automated device must have the                          credit.                                                the costs to reprogram periodic
                                             opportunity to be connected to an                          The debate in Congress about the                    statement systems and to establish and
                                             individual from whom the repayment                      minimum payment disclosures focused                    maintain a toll-free telephone number,
                                             information may be obtained. Creditors,                 on credit card accounts. For example,                  may not be justified by the limited
                                             the Board and the FTC may not use the                   Senator Grassley, a primary sponsor of                 benefit to consumers. Thus, the Board
                                             toll-free telephone number to provide                   the Bankruptcy Act, in discussing the                  proposes to exempt HELOCs from the
                                             consumers with repayment information                    minimum payment disclosures, stated:                   minimum payment disclosures
                                             other than the repayment information                      [The Bankruptcy Act] contains significant            requirements at this time, but will
                                             set forth in the ‘‘table’’ issued by the                new disclosures for consumers, mandating               consider changes to HELOC disclosures
                                             Board. 15 U.S.C. 1637(b)(11)(F)–(H).                    that credit card companies provide key                 as part of the HELOC review.
                                                Alternatively, a creditor may use a                  information about how much [consumers]                    2. Open-end reverse mortgages. An
                                             toll-free telephone number to provide                   owe and how long it will take to pay off their         open-end reverse mortgage is a HELOC
                                             the actual number of months that it will                credit card debts by only making the                   that is designed to allow consumers to
                                             take consumers to repay their                           minimum payment. That is very important                convert the equity in their homes into
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                                             outstanding balance instead of                          consumer education for every one of us.                cash. During an extended ‘‘draw’’ period
                                                                                                       Consumers will also be given a toll-free
                                             providing an estimate based on the                      number to call where they can get
                                                                                                                                                            consumers continue living in their
                                             Board-created table. A creditor that does               information about how long it will take to             homes, can draw on the line of credit to
                                             so also need not include a hypothetical                 pay off their own credit card balances if they         the extent they repay any outstanding
                                             example on its periodic statements, but                 only pay the minimum payment. This will                balance. The principal and interest
                                             must disclose the warning statement                     educate consumers and improve consumers’               become due when the homeowner


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                                             moves, sells the home, or dies.                         accommodations to consumers, to the                    Board believes that disclosing the payoff
                                             Consumers with open-end reverse                         detriment of consumers who currently                   period in years allows consumers to
                                             mortgages would not likely benefit from                 use these products. For these reasons,                 better comprehend the repayment
                                             the minimum payment disclosures,                        the Board is proposing to exempt                       period without having to convert it
                                             because these disclosures would be                      overdraft lines of credit and other                    themselves from months to years.
                                             based on assumptions about events                       general-purpose credit lines from the                  Participants in the consumer testing
                                             difficult to predict, such as when the                  minimum payment disclosure                             conducted for the Board reviewed
                                             homeowner will move, sell the house or                  requirements.                                          disclosures with the estimated payoff
                                             die.                                                                                                           period in years, and they indicated they
                                                                                                     7(b)(12)(i) General Disclosure
                                                3. Overdraft lines of credit and other                                                                      understood the length of time it would
                                                                                                     Requirements
                                             general-purpose personal lines of credit.                                                                      take to repay the balance if only
                                             In response to the October 2005 ANPR,                      Under the Bankruptcy Act, the                       minimum payments were made.
                                             several industry commenters suggested                   hypothetical example that creditors                    Consumers may also appreciate more
                                             that the Board exempt overdraft lines of                must disclose on periodic statements                   that the repayment periods are merely
                                             credit from the minimum payment                         varies depending on the creditor’s                     estimates.
                                             disclosure requirements. For example,                   minimum payment requirement.                              Second, the statute requires that
                                             one industry trade group indicated that                 Generally, creditors that require                      issuers disclose in the examples the
                                             overdraft lines of credit have relatively               minimum payments equal to 4 percent                    minimum payment formula used to
                                             low credit limits and are not intended                  or less of the account balance must                    calculate the payoff period. In the
                                             as a long term credit option. The                       disclose on each statement that it takes               $1,000 example above, the statute
                                             commenter also indicated that features                  88 months to pay off a $1,000 balance                  would require issuers to indicate that a
                                             and terms of overdraft lines of credit                  at an interest rate of 17 percent if the               ‘‘typical’’ 2 percent minimum monthly
                                             vary widely from institution to                         consumer makes a ‘‘typical’’ 2 percent                 payment was used to calculate the
                                             institution. Some banks require that an                 minimum monthly payment. Creditors                     repayment period. In the $300 example
                                             overdraft line of credit be paid in full                that require minimum payments                          above, the statute would require issuers
                                             within a short period after the consumer                exceeding 4 percent of the account                     to indicate that a 5 percent minimum
                                             receives notice that the overdraft line                 balance must disclose that it takes 24                 monthly payment was used to calculate
                                             has been used. Other banks permit                       months to pay off a balance of $300 at                 the repayment period. The Board
                                             longer periods of time to repay, but                    an interest rate of 17 percent if the                  proposes to eliminate the specific
                                             those periods and the size of any                       consumer makes a ‘‘typical’’ 5 percent                 minimum payment formulas from the
                                             minimum payment vary significantly                      minimum monthly payment (but a                         examples. The references to the 2
                                             from bank to bank. This commenter                       creditor may opt instead to disclose the               percent minimum payment in the
                                             indicated that the cost to small                        statutory example for 2 percent                        $1,000 example, and a 5 percent
                                             institutions of providing the minimum                   minimum payments). The 5 percent                       minimum payment in the $300
                                             payment disclosures might cause them                    minimum payment example must be                        example, are incomplete descriptions of
                                             to stop providing overdraft products.                   disclosed by creditors for which the                   the minimum payment requirement. In
                                                The Board is proposing to exempt                     FTC has the authority under the Truth                  the $1,000 example, the minimum
                                             overdraft lines of credit and other                     in Lending Act to enforce the act and                  payment formula used to calculate the
                                             general-purpose credit lines from the                   this regulation. Creditors also have the               repayment period is the greater of 2
                                             minimum payment disclosure                              option to substitute an example based                  percent of the outstanding balance or
                                             requirements for several reasons. First,                on an APR that is greater than 17                      $20. In the $300 example, the minimum
                                             these lines of credit are not in wide use.              percent. The Bankruptcy Act authorizes                 payment formula used to calculate the
                                             The 2004 Survey of Consumer Finances                    the Board to periodically adjust the APR               repayment period is the greater of 5
                                             data indicates that few families—1.6                    used in the hypothetical example and to                percent of the outstanding balance or
                                                                                                     recalculate the repayment period                       $15. In fact, in each example, the
                                             percent—had a balance on lines of
                                                                                                     accordingly. 15 U.S.C. 1637(b)(11)(A)–                 hypothetical consumer always pays the
                                             credit other than a home-equity line or
                                                                                                     (E).                                                   absolute minimum ($20 or $15,
                                             credit card at the time of the interview.                  Wording of the examples. The
                                             (In terms of comparison, 74.9 percent of                                                                       depending on the example).
                                                                                                     Bankruptcy Act sets forth specific                        The Board believes that including the
                                             families had a credit card, and 58                      language for issuers to use in disclosing              entire minimum payment formula,
                                             percent of these families had a credit                  the applicable hypothetical example on                 including the floor amount, in the
                                             card balance at the time of the                         the periodic statement. The Board                      disclosure could make the example too
                                             interview.) 16 Second, these lines of                   proposes to amend the statutory                        complicated and have the unintended
                                             credit typically are neither promoted,                  language to facilitate consumers’ use                  consequence of misleading a consumer
                                             nor used, as long-term credit options of                and understanding of the disclosures,                  who reads the language set out in the
                                             the kind for which the minimum                          pursuant to its authority under TILA                   statute into concluding that the payment
                                             payment disclosures are intended.                       Section 105(a) to make adjustments that                is smaller than it actually is. While the
                                             Third, the Board is concerned that the                  are necessary to effectuate the purposes               disclosures could be revised to indicate
                                             operational costs of requiring creditors                of TILA. 15 U.S.C. 1604(a). First, the                 that the repayment period in the $1,000
                                             to comply with the minimum payment                      Board proposes to require that issuers                 balance was calculated based on a $20
                                             disclosure requirements with respect to                 disclose the payoff periods in the                     payment, and repayment period in the
                                             overdraft lines of credit and other                     hypothetical examples in years,                        $300 balance was calculated based on a
                                             general-purpose lines of credit may                     rounding fractional years to the nearest               $15 payment, the Board believes that
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                                             cause some institutions to no longer                    whole year, rather than in months as                   revising the statutory language in this
                                             provide these products as                               provided in the statute. Thus, issuers                 way changes the disclosure to focus
                                               16 Brian Bucks, et al., Recent Changes in U.S.
                                                                                                     would disclose that it would take over                 consumers on the effects of making a
                                             Family Finances: Evidence from the 2001 and 2004
                                                                                                     7 years to pay off the $1,000                          fixed payment each month as opposed
                                             Survey of Consumer Finances, Federal Reserve            hypothetical balance, and about 2 years                to the effects of making minimum
                                             Bulletin (March 2006).                                  for the $300 hypothetical balance. The                 payments. Moreover, disclosing the


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                                             minimum payment formula is not                          number of months that it will take                     billing statements. Specifically, 57
                                             necessary for consumers to understand                   consumers to repay their outstanding                   percent of the revolvers preferred the
                                             the essential point of the examples—                    balance instead of providing an estimate               customized disclosures, 30 percent
                                             that it can take a significant amount of                based on the Board-created table.                      preferred the generic disclosures, and 14
                                             time to pay off a balance if only                       Creditors that choose to give the actual               percent preferred no disclosure. In
                                             minimum payments are made. In testing                   number via the telephone number need                   addition, 68 percent of the revolvers
                                             conducted for the Board, the $1,000                     not include a hypothetical example on                  found the customized disclosure
                                             balance example was tested without                      their periodic statements. Instead, they               extremely useful or very useful, 9
                                             including the 2 percent minimum                         must disclose on periodic statements a                 percent found the disclosure moderately
                                             payment disclosure required by the                      warning statement that making the                      useful, and 23 percent found the
                                             statute. Consumers appeared to                          minimum payment will increase the                      disclosure slightly useful or not useful.
                                             understand the purpose of the                           interest the consumer pays and the time                According to the GAO, the consumers
                                             disclosure—that it would take a                         it takes to repay the consumer’s balance               that preferred the customized
                                             significant amount of time to repay a                   and a toll-free telephone number that                  disclosures liked that such disclosures
                                             $1,000 balance if only minimum                          consumers may use to obtain the actual                 would be specific to their accounts,
                                             payments were made. For these reasons,                  repayment disclosure. 15 U.S.C.                        would change based on their
                                             the Board is proposing to require the                   1637(b)(11)(I) and (K). The Board                      transactions, and would provide more
                                             hypothetical examples without a                         proposes to implement this statutory                   information than generic disclosures.
                                             minimum payment formula.                                provision in new § 226.7(b)(12)(ii)(A).                GAO Report on Minimum Payments,
                                                The proposed regulatory language for                    In addition, the Board proposes to                  pages 25, 27.
                                             the examples is set forth in new                        provide that if card issuers provide the                  In addition, the Board believes that
                                             § 226.7(b)(12)(i). In addition to the                   actual repayment disclosure on the                     disclosing the actual repayment
                                             revisions mentioned above, the Board                    periodic statement, they need not                      disclosure on the periodic statement
                                             also proposes several stylistic revisions               disclose the warning, the hypothetical                 would simplify the process for
                                             to the statutory language, based on plain               example and a toll-free telephone                      consumers and creditors. Consumers
                                             language principles, in an attempt to                   number on the periodic statement, nor                  would not need to take the extra step to
                                             make the language of the examples more                  need they maintain a toll-free telephone               call the toll-free telephone number to
                                             understandable to consumers.                            number to provide the actual repayment                 receive the actual repayment disclosure,
                                                Adjustments to the APR used in the                   disclosure. See proposed                               but instead would have that disclosure
                                             examples. The Bankruptcy Act                            § 226.7(b)(12)(ii)(B).                                 each month on their periodic
                                             specifically authorizes the Board to                       The Board strongly encourages card                  statements. Card issuers (other than
                                             periodically adjust the APR used in the                 issuers to provide the actual repayment                issuers that may use the Board or the
                                             hypothetical example and to recalculate                 disclosure on periodic statements, and                 FTC toll-free telephone number) would
                                             the repayment period accordingly. In                    solicits comments on whether the Board                 not have the operational burden of
                                             the October 2005 ANPR, the Board                        can take other steps to provide                        establishing a toll-free telephone
                                             requested comment on whether the                        incentives to card issuers to use this                 number to receive requests for the actual
                                             Board should adjust the APR used in the                 approach. A recent study conducted by                  repayment disclosure and the
                                             hypothetical examples, because current                  the GAO on minimum payments                            operational burden of linking the toll-
                                             APRs on credit cards may be less than                   suggests that certain cardholders would                free telephone number to consumer
                                             the 17 percent APR in the examples.                     find the actual repayment disclosure                   account data in order to calculate the
                                             Q62. Commenters were split on whether                   more helpful than the generic                          actual repayment disclosure.
                                             the Board should adjust the APR in the                  disclosures required by the Bankruptcy                    The Board proposes this approach
                                             examples.                                               Act. For this study, the GAO                           pursuant to its exception and exemption
                                                The Board is not proposing to adjust                 interviewed 112 consumers and                          authorities under TILA Section 105.
                                             the APR used in the hypothetical                        collected data on whether these                        Section 105(a) authorizes the Board to
                                             examples. The Board recognizes that the                 consumers preferred to receive on the                  make exceptions to TILA to effectuate
                                             examples are intended to provide                        periodic statement (1) customized                      the statute’s purposes, which include
                                             consumers with an indication that it can                                                                       facilitating consumers’ ability to
                                                                                                     minimum payment disclosures that are
                                             take a long time to pay off a balance if                                                                       compare credit terms and helping
                                                                                                     based on the consumers’ actual account
                                             only minimum payments are made.                                                                                consumers avoid the uniformed use of
                                                                                                     terms (such as the actual repayment
                                             Revising the APR used in the example                                                                           credit. 15 U.S.C. 1601(a), 1604(a).
                                                                                                     disclosure), (2) generic disclosures such
                                             to reflect the average APR paid by                                                                             Section 105(f) authorizes the Board to
                                                                                                     as the warning statement and the
                                             consumers would not significantly                                                                              exempt any class of transactions (with
                                                                                                     hypothetical example required by the
                                             improve the disclosure, because for                                                                            an exception not relevant here) from
                                                                                                     Bankruptcy Act; or (3) no disclosure.17
                                             many consumers an average APR would                                                                            coverage under any part of TILA if the
                                                                                                     According to the GAO’s report, in the
                                             not be the APR that applies to the                                                                             Board determines that coverage under
                                                                                                     interviews with the 112 consumers,                     that part does not provide a meaningful
                                             consumer’s account. Moreover,
                                                                                                     most consumers who typically carry                     benefit to consumers in the form of
                                             consumers will be able to obtain a more
                                                                                                     credit card balances (revolvers) found                 useful information or protection. 15
                                             tailored disclosure of a repayment
                                                                                                     customized disclosures very useful and                 U.S.C. 1604(f)(1). Section 105(f) directs
                                             period based on the APR applicable to
                                                                                                     would prefer to receive them in their                  the Board to make this determination in
                                             their accounts by calling the toll-free
                                             telephone number provided as part of                      17 United States Government Accountability
                                                                                                                                                            light of specific factors. 15 U.S.C.
                                                                                                                                                            1604(f)(2). These factors are (1) the
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                                             the minimum payment disclosure.                         Office, Customized Minimum Payment Disclosures
                                                                                                     Would Provide More Information to Consumers, but       amount of the loan and whether the
                                             7(b)(12)(ii) Estimate of Actual                         Impact Could Vary, 06–434 (April 2006). (The GAO       disclosure provides a benefit to
                                             Repayment Period                                        indicated that the sample of 112 consumers was not     consumers who are parties to the
                                                                                                     designed to be statistically representative of all
                                               Under the Bankruptcy Act, a creditor                  cardholders, and thus the results cannot be
                                                                                                                                                            transaction involving a loan of such
                                             may use a toll-free telephone number to                 generalized to the population of all U.S.              amount; (2) the extent to which the
                                             provide consumers with the actual                       cardholders.)                                          requirement complicates, hinders, or


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                                             33004                   Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules

                                             makes more expensive the credit                         Board also proposes to exempt charge                   or other large purchases), and the
                                             process; (3) the status of the borrower,                cards from the minimum payment                         minimum payments for that feature will
                                             including any related financial                         disclosure requirements, to implement                  pay off the purchase within a fixed
                                             arrangements of the borrower, the                       TILA Section 127(b)(11)(I). 15 U.S.C.                  period of time, such as one year. New
                                             financial sophistication of the borrower                1637(b)(11)(I); See proposed                           comment 7(b)(12)(iii)–1 makes clear that
                                             relative to the type of transaction, and                § 226.7(b)(12)(iii)(D).                                the exemption relating to a fixed
                                             the importance to the borrower of the                      Exemption for credit card accounts                  repayment period does not apply to the
                                             credit, related supporting property, and                with a specific repayment period. In the               above situation, because the retail card
                                             coverage under TILA; (4) whether the                    October 2005 ANPR, the Board                           account as a whole does not have a
                                             loan is secured by the principal                        requested comment on whether certain                   fixed repayment period.
                                             residence of the borrower; and (5)                      open-end accounts should be exempted                      Exemption where cardholders have
                                             whether the exemption would                             from some or all of the minimum                        paid their accounts in full for two
                                             undermine the goal of consumer                          payment disclosure requirements, such                  consecutive months. In the October
                                             protection.                                             as open-end plans that have a fixed                    2005 ANPR, the Board requested
                                                The Board has considered each of                     repayment period. Q59. Industry                        comment on whether the Board should
                                             these factors carefully, and based on                   commenters generally supported an                      exempt credit card accounts of
                                             that review, believes it is appropriate to              exemption for open-end plans that have                 consumers who typically do not revolve
                                             provide an exemption from the                           a fixed repayment period. These                        balances or make monthly payments
                                             requirement to provide on periodic                      commenters indicated that the                          that regularly exceed the minimum.
                                             statements a warning about the effects of               minimum payment disclosures are not                    Q60. In response to the October 2005
                                             making minimum payments, a                              necessary in this context, because the                 ANPR, several industry commenters
                                             hypothetical example, and a toll-free                   consumer will already know from the                    urged the Board to exempt card issuers
                                             telephone number consumers may call                     account agreement how long it will take                from providing minimum payment
                                             to obtain repayment periods, and to                     to repay the balance.                                  disclosures to consumers who do not
                                             maintain a toll-free telephone number                      The Board proposes to exempt credit                 regularly make minimum payments.
                                             for responding to consumers’ requests, if               card accounts where a fixed repayment                  These commenters indicated that
                                             the creditor instead provides the actual                period for the account is specified in the             excluding non-minimum payers is
                                             repayment period on the periodic                        account agreement and the required                     appropriate because the minimum
                                             statement. As noted above, consumer                     minimum payments will amortize the                     payment disclosures are less meaningful
                                             testing indicated that actual repayment                 outstanding balance within the fixed                   to those consumers. On the other hand,
                                             period information is more useful to                    repayment period. See proposed                         several consumer groups indicated that
                                             consumers than estimated information.                   § 226.7(b)(12)(iii)(E). The minimum                    the Board should not provide an
                                             Providing that disclosure on a statement                payment disclosures would not appear                   exemption based on the characteristics
                                             rather than over the telephone provides                 to provide useful information to                       or habits of the accountholder, such as
                                             consumers with easier access to the                     consumers that they do not already have                whether they typically pay in full.
                                             information. Thus, the proposal has the                 in their account agreements. The cost of               These commenters indicated that the
                                             potential to better inform consumers                    providing this information a second                    typical behavior of a particular
                                             and further the goals of consumer                       time, including the costs to reprogram                 consumer can change quickly, due
                                             protection and the informed use of                      periodic statement systems and to                      either to a temporary change in
                                             credit for credit card accounts. The                    establish and maintain a toll-free                     circumstances (a move, a layoff, or a
                                             Board welcomes comment on this                          telephone number, may not be justified                 major medical expense) or a permanent
                                             matter.                                                 by the limited benefit to consumers.                   change (the death of a spouse or a
                                                                                                        In order for this proposed exemption                disability). The consumer groups
                                             7(b)(12)(iii) Exemptions                                to apply, a fixed repayment period must                believed that in these circumstances, it
                                                As explained above, the Board                        be specified in the account agreement.                 is important that consumers have
                                             proposes to require the minimum                         As proposed, this exemption would                      disclosure about the effects of paying
                                             payment disclosures only for credit card                include, for example, accounts where                   the minimum payments in a timely
                                             accounts. See proposed § 226.7(b)(12)(i).               the account has been closed due to                     fashion, before an outstanding balance
                                             Thus, creditors would not need to                       delinquency and the required monthly                   grows unmanageable.
                                             provide the minimum payment                             payment has been reduced or the                           The Board proposes to provide that
                                             disclosures for HELOCs (including                       balance decreased to accommodate a                     card issuers are not required to comply
                                             open-end reverse mortgages), overdraft                  fixed payment for a fixed period of time               with minimum payment disclosure
                                             lines of credit or other general-purpose                designed to pay off the outstanding                    requirements for a particular billing
                                             personal lines of credit. For the same                  balance. See proposed comment                          cycle if a consumer has paid the entire
                                             reasons, the Board proposes to exempt                   7(b)(12)(iii)–1. This exemption would                  balance in full for the previous two
                                             these products regardless of whether                    not apply where the credit card may                    billing cycles. See proposed
                                             they can be accessed by a credit card                   have a fixed repayment period for one                  § 226.7(b)(12)(iii)(F). The GAO found in
                                             device. Specifically, proposed                          credit feature, but an indefinite                      its study on minimum payment
                                             § 226.7(b)(12)(iii) would exempt the                    repayment period on another feature.                   disclosures that cardholders who pay
                                             following types of credit card accounts:                For example, some retail credit cards                  their balances in full each month (non-
                                             (1) HELOCs accessible by credit cards                   have several credit features associated                revolvers) were generally satisfied with
                                             that are subject to § 226.5b; (2) overdraft             with the account. One of the features                  receiving generic disclosures or none at
                                             lines of credit tied to asset accounts                  may be a general revolving feature,                    all, and did not prefer customized
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                                             accessed by check-guarantee cards or by                 where the minimum payment for this                     disclosures such as actual repayment
                                             debit cards; and (3) lines of credit                    feature does not pay off the balance in                disclosures. Thirty-seven percent of
                                             accessed by check-guarantee cards or by                 a specific period of time. The card also               non-revolvers found the customized
                                             debit cards that can be used only at                    may have another feature that allows                   disclosure extremely or very useful.
                                             automated teller machines. See                          consumers to make specific types of                    Eight percent of non-revolvers found the
                                             proposed § 226.7(b)(12)(iii)(A)–(C). The                purchases (such as furniture purchases,                customized disclosure moderately


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                                             useful and 55 percent found it slightly                 advantage of this exemption from                       by the limited benefit to consumers. See
                                             or not useful. The GAO indicated that                   providing the minimum payment                          proposed comment 7(b)(12)(iii)–2.
                                             many of the non-revolvers it                            disclosures for a particular billing cycle                Other exemptions. In response to the
                                             interviewed who preferred not to                        if a consumer has paid the entire                      October 2005 ANPR, several
                                             receive a customized disclosure                         balance in full for the previous two                   commenters suggested other exemptions
                                             explained that they paid their balance in               billing cycles. Card issuers may provide               to the minimum payment requirements,
                                             full each month, already understood the                 the minimum payment disclosures to all                 as discussed below. For the reasons
                                             consequences of making only minimum                     of its cardholders, even to those                      discussed below, the Board is not
                                             payments, and did not need the                          cardholders that fall within this                      proposing to include these exemptions.
                                             additional reminder. See GAO Report                     exemption. If issuers choose to provide                   1. Exemption for discontinued credit
                                             on Minimum Payments, pages 26, 30–                      voluntarily the minimum payment                        card products. In response to the
                                             31.                                                     disclosures to those cardholders that fall             October 2005 ANPR, one commenter
                                                Thus, because non-revolvers may not                  within this exemption, issuers should                  urged the Board to provide a partial
                                             find the minimum payment disclosures                    follow the disclosures rules set forth in              exemption for credit card products for
                                             very useful or meaningful, the Board                    § 226.7(b)(12), the accompanying                       which no new accounts are being
                                             proposes to exempt card issuers from                    commentary, and Appendices M1–M3                       opened and for which existing accounts
                                             the requirement to provide the                          (as appropriate) for those cardholders.                are closed to new transactions. With
                                             minimum payment disclosures in a                           Exemption where balance has fixed                   respect to these products, the
                                             particular billing cycle if a consumer                  repayment period. In response to the                   commenter urged the Board to exempt
                                             has paid the entire balance in full for                 October 2005 ANPR, several industry                    issuers of these products from having to
                                             the two previous billing cycles. For                    commenters urged the Board to exempt                   place the minimum payment
                                             example, if a consumer paid the entire                                                                         disclosures on the periodic statement,
                                                                                                     credit cards with fixed payment features
                                             balance in full for account activity in                                                                        but instead allow issuers to provide
                                                                                                     from the minimum payment
                                             March and April, the creditor would not                                                                        these notices in freestanding inserts to
                                                                                                     disclosures. As described above, some
                                             be required to provide the minimum                                                                             the periodic statements. The commenter
                                                                                                     retail credit cards may have several
                                             payment disclosure for the statement                                                                           indicates that the number of accounts
                                                                                                     features on the card. One of those
                                             representing account activity in May.                                                                          that are discontinued are usually very
                                                                                                     features may allow consumers to make
                                             The Board believes this approach strikes                                                                       small and the computer systems used to
                                                                                                     certain types of purchases with the
                                             an appropriate balance between benefits                                                                        produce the statements for the closed
                                                                                                     feature (such as furniture purchases, or
                                             to consumers from the disclosures, and                                                                         accounts are being phased out.
                                                                                                     other large purchases), and the                           The Board solicits further comment
                                             compliance burdens on issuers in
                                                                                                     minimum payments for that feature will                 on why this exemption is needed. What
                                             providing the disclosures. Consumers
                                                                                                     pay off the purchase within a specific                 are the costs of redesigning the old
                                             who might benefit from the disclosures
                                                                                                     period of time, such as one year. Some                 computer systems to provide the
                                             will receive them. Consumers who carry
                                                                                                     commenters indicated that these types                  minimum payment disclosures (that is,
                                             a balance each month will always
                                                                                                     of accounts should be exempted from                    the warning statement, the hypothetical
                                             receive the disclosure, and consumers
                                                                                                     the minimum payment disclosure                         example, and the toll-free telephone
                                             who pay in full each month will not.
                                                                                                     requirements because consumers would                   number) on the periodic statements?
                                             Consumers who sometimes pay their
                                                                                                     know the repayment period from the                        2. Exemption for credit card accounts
                                             bill in full and sometimes do not will
                                             receive the minimum payment                             account agreement.                                     purchased within the last 18 months. In
                                             disclosures if they do not pay in full the                 The Board proposes to exempt credit                 response to the October 2005 ANPR, one
                                             prior two consecutive months (cycles).                  card issuers from providing the                        commenter urged the Board to provide
                                             Also, if a consumer’s typical payment                   minimum payment disclosures on                         an exemption for accounts purchased by
                                             behavior changes from paying in full to                 periodic statements in a billing cycle                 a credit card issuer. With respect to
                                             revolving, the consumer will begin                      where the entire outstanding balance                   these purchased accounts, the
                                             receiving the minimum payment                           held by consumers in that billing cycle                commenter urged the Board to exempt
                                             disclosures after not paying in full one                is subject to a fixed repayment period                 issuers from placing the minimum
                                             billing cycle, when the disclosures                     specified in the account agreement and                 payment disclosures on the periodic
                                             would appear to be timely. In addition,                 the required minimum payments                          statement during a transitional period
                                             creditors already typically track whether               applicable to this feature will amortize               (up to 18 months) while the purchasing
                                             a consumer has paid their balance in                    the outstanding balance within the fixed               issuer converts the new accounts to its
                                             full for two consecutive months.                        repayment period. This exemption is                    statement system. In this situation, the
                                             Typically, creditors provide a grace                    meant to cover the retail cards described              commenter indicated that issuers
                                             period on new purchases to consumers                    above in those cases where the entire                  should be allowed to provide these
                                             (that is, creditors do not charge interest              outstanding balance held by a consumer                 notices in freestanding inserts to the
                                             to consumers on new purchases) if                       in a particular billing cycle is subject to            periodic statements.
                                             consumers paid both the current                         a fixed repayment period specified in                     The Board solicits further comment
                                             balance and the previous balance in full.               the account agreement. The minimum                     on why this exemption is needed. Why
                                             Thus, creditors currently capture                       payment disclosures would not appear                   could the purchasing issuer not
                                             payment history for consumers for two                   to provide useful information to                       continue to use the periodic statement
                                             billing cycles.                                         consumers in this context because                      system and toll-free telephone numbers
                                                In response to the October 2005                      consumers would be able to learn from                  used by the selling issuer to meet the
                                             ANPR, one industry commenter                            their account agreements how long it                   requirements of the minimum payment
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                                             indicated that many creditors do not                    would take to repay the balance. The                   disclosures, until the purchased
                                             have the processing systems that are                    cost of providing this information a                   accounts are converted to the
                                             capable of selectively pricing the                      second time, including the costs to                    purchaser’s systems?
                                             disclosures from month-to-month based                   reprogram periodic statement systems                      3. Credit card products that do not
                                             on customers’ prior payment patterns.                   and to establish and maintain a toll-free              use declining balance amortization. One
                                             Card issuers are not required to take                   telephone number, may not be justified                 commenter suggested that the Board


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                                             exempt from the minimum payment                         the issuer may disclose the actual                     related information is grouped together.
                                             disclosure requirements credit card                     repayment disclosure through the toll-                 Under the proposal, creditors would
                                             products that do not use declining                      free telephone number. The Board also                  group together when a payment is due
                                             balance amortization to calculate the                   is required to establish and maintain, for             (due date and cut-off time if before 5
                                             minimum payment. For example, some                      two years, a toll-free telephone number                p.m.), how much is owed (minimum
                                             retail credit cards base their minimum                  for use by customers of depository                     payment and ending balance), and what
                                             payment formula on the original                         institutions having assets of $250                     the potential costs are for paying late
                                             purchase price or similar amount, rather                million or less. 15 U.S.C.                             (late-payment fee, and penalty APR if
                                             than on the declining balance. The                      1637(b)(11)(F)(ii). The FTC must                       triggered by a late payment). See
                                             commenter indicates that these products                 maintain a toll-free telephone number                  proposed Samples G–18(E) and G–18(F)
                                             should be exempt because amortization                   for creditors other than depository                    in Appendix G. The proposed format
                                             schedules for these products result in                  institutions. 15 U.S.C. 1637(b)(11)(F).                requirements are intended to fulfill
                                             far shorter repayment periods. The                         The Bankruptcy Act also provides                    Congress’s intent to have the new late
                                             Board is proposing not to adopt this                    that consumers who call the toll-free                  payment and minimum payment
                                             exemption because even though the                       telephone number may be connected to                   disclosures ensure consumers’ ability to
                                             amortization schedules for these                        an automated device through which                      understand the consequences of paying
                                             products may be shorter than for cards                  they can obtain repayment information                  late or making only minimum
                                             where the minimum payment is                            by providing information using a touch-                payments.
                                             calculated on the declining balance, the                tone telephone or similar device, but
                                                                                                     consumers who are unable to use the                    7(b)(14) Change-in-Terms and Increased
                                             payoff time may not be so short as to
                                                                                                     automated device must have the                         Penalty Rate Summary for Open-End
                                             justify an exemption. For example,
                                                                                                     opportunity to be connected to an                      (Not Home-Secured) Plans
                                             assume the minimum payment formula
                                             is 3.33 percent of the highest balance or               individual from whom the repayment                        A major goal of its review of
                                             $10, whichever is greater. It could still               information may be obtained. Unless the                Regulation Z’s open-end credit rules is
                                             take around 4 years to pay off a $500                   issuer is providing an actual repayment                to address consumers’ surprise at
                                             balance at a 21.9 percent APR if a                      disclosure, the issuer may not provide                 increased rates (and/or fees). In part, the
                                             consumer only made minimum                              through the toll-free telephone number                 Board is addressing the issue in
                                             payments. (For contrast, the repayment                  a repayment estimate other than                        § 226.9(c) and § 226.9(g) to give more
                                             period would be around 7 years if the                   estimates based on the ‘‘table’’ issued by             time before new rates and changes to
                                             minimum payment was calculated                          the Board. 15 U.S.C. 1637(b)(11)(F).                   significant costs become effective. See
                                             based on the outstanding balance,                       These same provisions apply to the                     proposed § 226.9(c)(2) and § 226.9(g).
                                             instead of the highest balance.)                        FTC’s and the Board’s toll-free                        The proposed new § 226.7(b)(14) is
                                                4. Credit cards with balances of less                telephone numbers as well.                             intended to enable consumers to notice
                                             than $500. One commenter suggested                         The Board proposes to add new                       more easily changes in their account
                                             that the Board exempt credit card                       § 226.7(b)(12)(iv) and accompanying                    terms. Increasing the time period to act
                                             accounts from the minimum payment                       commentary to implement the above                      is ineffective if consumers do not see
                                             disclosure requirements in cases where                  statutory provisions related to the toll-              the change-in-term notice. Consumers
                                             the balance on the card is less than                    free telephone numbers. In addition,                   who participated in testing conducted
                                             $500. This commenter indicated in                       new comment 7(b)(12)(iv)–3 would                       for the Board consistently set aside
                                             cases of low balances, the repayment                    provide that once a consumer has                       change of term notices that
                                             period is fairly short and so the                       indicated that he or she is requesting the             accompanied periodic statements.
                                             minimum payment disclosure is less                      generic repayment estimate or the actual               Research conducted for the Board
                                             needed. The Board is not proposing to                   repayment disclosure, as applicable,                   indicates that consumers do look at the
                                             exempt these credit card accounts.                      card issuers may not provide                           front side of periodic statements and do
                                             Depending on how the minimum                            advertisements or marketing                            look at transactions. Therefore, when a
                                             payment is calculated, it can still take                information to the consumer prior to                   change-in-terms notice is provided on or
                                             a significant amount of time to pay off                 providing the repayment information                    with a periodic statement the proposal
                                             a $500 balance if only minimum                          required or permitted by Appendix M1                   would require a summary of key
                                             payments are made. For example,                         or M2, as applicable.                                  changes to precede transactions. In
                                             assume the minimum payment is                                                                                  addition, when a notice of a rate
                                             calculated based on the following                       7(b)(12)(v) Definitions                                increase due to delinquency or default
                                             formula: the greater of (1) 1 percent of                   As discussed above, Section 1301(a)                 or as a penalty is provided on or with
                                             the outstanding balance plus interest                   of the Bankruptcy Act requires the                     a periodic statement, the proposal
                                             charges that accrued in the past month;                 Board to establish and maintain, for two               would require this notice to precede
                                             or (2) $10. It could still take around 5                years, a toll-free telephone number for                transactions. Samples G–20 and G–21 in
                                             years to repay a $500 balance at a 7.99                 use by customers of depository                         Appendix G illustrate the proposed
                                             percent APR if only minimum payments                    institutions having assets of $250                     format requirement under § 226.7(b)(14)
                                             are made.                                               million or less. 15 U.S.C.                             and the level of detail required for the
                                                                                                     1637(b)(11)(F)(ii). For ease of reference              notice under § 226.9(c)(2)(iii) and
                                             7(b)(12)(iv) Toll-free Telephone
                                                                                                     in the regulation, the Board proposes to               § 226.9(g)(3). Forms G–18(G) and G–
                                             Numbers
                                                                                                     define the above depository institutions               18(H) illustrate the placement of these
                                                Under Section 1301(a) of the                         as ‘‘small depository institution                      notices on a periodic statement.
                                             Bankruptcy Act, depository institutions
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                                                                                                     issuers.’’ See proposed § 226.7(b)(12)(v).
                                             generally must establish and maintain                                                                          Section 226.8 Identifying Transactions
                                             their own toll-free telephone numbers or                7(b)(13) Format Requirements                           on Periodic Statements
                                             use a third party to disclose the                         As discussed throughout this section-                  TILA Section 127(b)(2) requires
                                             repayment estimates based on the                        by-section analysis to § 226.7, consumer               creditors to identify on periodic
                                             ‘‘table’’ issued by the Board. 15 U.S.C.                testing conducted for the Board                        statements credit extensions that
                                             1637(b)(11)(F)(i). At the issuer’s option,              indicates improved understanding when                  occurred during a billing cycle. 15


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                                             U.S.C. 1637(b)(2). The statute calls for                identification of goods or services,                   sales receipts and periodic statements.
                                             the Board to implement requirements                     which they are currently required to do                In these cases, purchases listed on
                                             that are sufficient to identify the                     in all cases, or they could provide the                periodic statements may be described
                                             transaction or to relate the credit                     seller’s name and location for each                    item by item, for example, to indicate
                                             extension to sales vouchers or similar                  transaction. Guidance on the level of                  brand name such as ‘‘XYZ Sweater.’’
                                             instruments previously furnished. The                   detail required to describe amounts,                   This item-by-item description, while not
                                             rules for identifying transactions are                  dates, the identification of goods, or the             required under current or proposed
                                             implemented in § 226.8, and vary                        seller’s name and location remains                     rules, would remain permissible under
                                             depending on whether: (1) The sales                     unchanged.                                             the proposal; thus, no operational
                                             receipt or similar credit document is                      The Board’s proposal is guided by                   changes would be required for these
                                             included with the periodic statement,                   several factors. The standard set forth by             retailers.
                                             (2) the transaction is sale credit                      TILA for identifying transactions on                      To implement the approach described
                                             (purchases) or nonsale credit (cash                     periodic statements is quite broad. 15                 above, § 226.8 would be revised as
                                             advances, for example), and (3) the                     U.S.C. 1637(b)(2). Whether a general                   follows. Section 226.8(a)(1) would set
                                             creditor and seller are the ‘‘same or                   description such as ‘‘sporting goods’’ or              forth the proposed rule providing
                                             related.’’ TILA’s billing error protections             the store name and location would be                   flexibility in identifying sales
                                             include consumers’ requests for                         more helpful to a consumer can depend                  transactions, as discussed above.
                                             additional clarification about                          on the situation. Many retailers permit                Section 226.8(a)(2) would contain the
                                             transactions listed on a periodic                       consumers to purchase in a single                      existing rules for identifying
                                             statement. 15 U.S.C. 1666(b)(2);                        transaction items from a number of                     transactions when sales receipts or
                                             § 226.13(a)(6).                                         departments; in that case, the seller’s                similar documents accompany the
                                                The Board proposes to update and                     name and location may be as helpful as                 periodic statement. Section 226.8(b) is
                                             simplify the rules for identifying sales                the description of a single department                 revised for clarity. A new § 226.8(c)
                                             transactions when the sales receipt or                  from which several dissimilar items                    would be added to set forth rules now
                                             similar document is not provided with                   were purchased. Also, the seller’s name                contained in footnotes 16 and 19; and,
                                             the periodic statement (so called                       and location has become the more                       without references to ‘‘same or related’’
                                             ‘‘descriptive billing’’), which is typical              common means of identifying                            parties, footnotes 17 and 20. The
                                             today. The rules for identifying                        transactions, as the use of general                    substance of footnote 18, based on a
                                             transactions where such receipts                        purpose cards increases and the number                 statutory exception where the creditor
                                             accompany the periodic statement are                    of store-only cards decreases. Under the               and seller are the same person, would
                                             not affected by the proposal. The                       proposed rule, retailers that commonly                 be deleted as unnecessary. The title of
                                             proposed changes reflect current                        accept general purpose credit cards but                the section would be revised for clarity.
                                             business practices and consumer                         also offer a credit card account or other                 The commentary to § 226.8 would be
                                             experience, and are intended to ease                    open-end plan for use only at their store              reorganized and consolidated but would
                                             compliance. Currently, creditors that                   would not be required to maintain                      not be substantively changed.
                                             use descriptive billing are required to                 separate systems that enable different                 Comments 8–1, 8(a)–1, and 8(a)(2)–4
                                             include on periodic statements an                       descriptions to be provided, depending                 would be deleted as duplicative.
                                             amount and date as a means to identify                  on the type of card used. Finally, it                  Similarly, comments 8–6 through 8–8,
                                             transactions, and the proposal would                    appears that any consumer benefits                     which provide creditors with flexibility
                                             not affect those requirements. As an                    would be minimally affected by the                     in describing certain specific classes of
                                             additional means to identify                            proposed change because many retailers                 transactions regardless of whether they
                                             transactions, current rules contain                     permit purchases from different                        are ‘‘related’’ or ‘‘nonrelated’’ sellers or
                                             description requirements that differ                    departments to be charged in a single                  creditors, would be deleted as
                                             depending on whether the seller and                     transaction. Moreover, consumers are                   unnecessary. Existing comments 8–4
                                             creditor are ‘‘same or related.’’ For                   likely to carefully review transactions                and 8(a)(2)–3, which provide guidance
                                             example, a retail department store with                 on periodic statements and inquire                     when copies of credit or sales slips
                                             its own credit plan (seller and creditor                about transactions they do not                         accompany the statement, also would be
                                             are same or related) sufficiently                       recognize, such as when a retailer is                  deleted. The Board believes this practice
                                             identifies purchases on periodic                        identified by its parent company on                    is no longer common, and to the extent
                                             statements by providing the department                  sales slips which the consumer may not                 sales or similar credit documents
                                             such as ‘‘jewelry’’ or ‘‘sporting goods;’’              have noticed at the time of the                        accompany billing statements,
                                             item-by-item descriptions are not                       transaction. Moreover, consumers are                   additional guidance seems unnecessary.
                                             required. Periodic statements provided                  protected under TILA with the ability to               Proposed § 226.8(a)(1)(ii) and comments
                                             by issuers of general purpose credit                    assert a billing error to seek clarification           8(a)–3 and 8(a)–7, which provide
                                             cards, where the seller and creditor are                about transactions listed on periodic                  guidance for identifying mail or
                                             not the same or related, identify                       statements, and are not required to pay                telephone transactions, also would refer
                                             transactions by the seller’s name and                   the disputed amount while the creditor                 to Internet transactions. Proposed
                                             location.                                               obtains the necessary clarification.                   comment 8(a)–1 would provide an
                                                The Board proposes to provide                        Maintaining rules that require more                    example of new services that are now
                                             additional flexibility to creditors that do             standardization and detail would be                    commonly purchased from creditors as
                                             not provide sales slips or similar                      costly, and likely without significant                 well as third party service providers
                                             documents with the periodic statement.                  corresponding consumer benefit. Thus,                  (sale credit).
                                             Under the proposal, all creditors would                 the proposal is intended to provide
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                                             be permitted to identify sales                          flexibility for creditors without reducing             Section 226.9 Subsequent Disclosure
                                             transactions (in addition to the amount                 consumer protection.                                   Requirements
                                             and date) by the seller’s name and                         The Board notes, however, that some                   Section 226.9 sets forth a number of
                                             location. Thus, creditors and sellers that              retailers offering their own open-end                  disclosure requirements that apply after
                                             are the same or related could, at their                 credit plans tie their inventory control               an account is opened, including a
                                             option, identify transactions by a brief                systems to their systems for generating                requirement to provide billing rights


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                                             33008                   Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules

                                             statements annually, a requirement to                   HELOCs subject to the requirements of                  credit features except checks that access
                                             provide at least 15 days advance notice                 § 226.5b, creditors may use the current                a credit card account. With respect to
                                             whenever a term required to be                          Model Forms G–3 and G–4, or the                        such checks, the Board is concerned
                                             disclosed in the account-opening                        revised forms.                                         that the current rule in § 226.9(b)(1) may
                                             disclosures is changed, and a                                                                                  not communicate effectively to the
                                                                                                     9(b) Disclosures for Supplemental
                                             requirement to provide finance charge                                                                          consumer the material terms of checks
                                                                                                     Credit Access Devices and Additional
                                             disclosures whenever credit devices or                                                                         that access a credit card account, when
                                                                                                     Features
                                             features are added on terms different                                                                          those checks are mailed or sent to a
                                             from those previously disclosed.                           Section 226.9(b) requires certain                   consumer 30 days or more after the
                                                With respect to open-end (not home-                  disclosures when a creditor adds a                     § 226.6 disclosures for the underlying
                                             secured) plans, the Board proposes a                    credit device or feature to an existing                account are provided. The Board agrees
                                             number of substantive and technical                     open-end plan. When a creditor adds a                  with commenters that, after a significant
                                             revisions to § 226.9 and the                            credit feature or delivers a credit device             time has passed, it becomes less likely
                                             accompanying commentary, as further                     to the consumer within 30 days of                      that consumers will still have a copy of
                                             described below. The proposal would                     mailing or delivering the account-                     the account-opening disclosures, and all
                                             require certain disclosures to                          opening disclosures under current                      relevant change-in-terms notices.
                                             accompany checks that access a credit                   § 226.6(a), and the device or feature is                  With respect to open-end (not home-
                                             card account. In addition, the proposal                 subject to the same finance charge terms               secured) plans, the Board is proposing
                                             would require creditors to provide a                    previously disclosed, the creditor is not              to create a new § 226.9(b)(3) that would
                                             summary table of a limited number of                    required to provide additional                         require that certain information be
                                             key terms if those terms are changed.                   disclosures. If the credit feature or credit           disclosed each time that checks that
                                             The summary table would appear on the                   device is added more than 30 days after                access a credit card account are mailed
                                             first page of the notice or a separate                  mailing or delivering the account-                     to a consumer, for checks mailed more
                                             piece of paper. Moreover, if the change-                opening disclosures, and is subject to                 than 30 days following the delivery of
                                             in-terms notice is included with a                      the same finance charge terms                          the account-opening disclosures. This
                                             periodic statement, that summary table                  previously disclosed in the account-                   provision would apply regardless of
                                             would be required to be provided on the                 opening agreement, the creditor must                   whether that information was
                                             front of the first page of the periodic                 disclose that the feature or device is for             previously included in the account-
                                             statement, before the list of transactions              use in obtaining credit under the terms                opening disclosures. As under the
                                             for the statement period. Also, the Board               previously disclosed. However, if the                  current regulation, no additional
                                             would require creditors to provide                      added credit device or feature has                     disclosures would be required when a
                                             advance notice when a rate is increased                 finance charge terms that differ from the              creditor provides, within 30 days of the
                                             due to a consumer’s delinquency or                      disclosures previously given under                     account-opening disclosures, checks
                                             default or as a penalty. The Board’s                    § 226.6(a), then the disclosures required              that access a credit card account, if the
                                             proposal also would require creditors to                by § 226.6(a) that are applicable to the               finance charge terms are the same as
                                             provide 45 days advance notice for                      added feature or device must be given                  those that were previously disclosed.
                                             changes in terms or increases in rates                  before the consumer uses the new                       HELOCs would not be affected by this
                                             due to delinquency or default or penalty                feature or device.                                     proposed revision.
                                             pricing. Home-equity lines of credit                       In the December 2004 ANPR, the                         Creditors would be required to
                                             (HELOCs) subject to § 226.5b would not                  Board solicited comment as to whether                  provide the new § 226.9(b)(3)
                                             be affected by these proposed revisions.                there are formatting tools or                          disclosures on the front of the page
                                             For the reasons set forth in the section-               navigational aids that could more                      containing the checks that access a
                                             by-section analysis to § 226.6(b)(1), the               effectively link information in account-               credit card account. Specifically, the
                                             Board would update references to ‘‘free-                opening disclosures with information                   proposed amendments would require
                                             ride period’’ as ‘‘grace period’’ in the                provided in subsequent disclosures                     the following key terms be disclosed on
                                             regulation and commentary, without                      under § 226.9(b), such as checks that                  the front of the page containing the
                                             any intended substantive change.                        access a credit card account. Q45. Many                checks: (1) Any discounted initial rate,
                                                                                                     creditors commented that there would                   and when that rate will expire, if
                                             9(a) Furnishing Statement of Billing                    be no benefit to linking subsequent                    applicable; (2) the type of rate that will
                                             Rights                                                  disclosures and account-opening                        apply to the checks after expiration of
                                                TILA Section 127(a)(7) and § 226.9(a)                disclosures because many consumers                     any discounted initial rate (such as
                                             require creditors to mail or deliver a                  fail to retain the information they                    whether the purchase or cash advance
                                             billing error rights statement annually,                receive at account opening. Several                    rate applies) and the applicable annual
                                             either to all consumers or to each                      creditors commented that improved                      percentage rate; (3) any transaction fees
                                             consumer entitled to receive a periodic                 formatting could improve consumer                      applicable to the checks; and (4)
                                             statement. 15 U.S.C. 1637(a)(7). (See                   understanding; however, they were                      whether a grace period applies to the
                                             Model Form G–3.) Alternatively,                         concerned about overly prescriptive                    checks, and if one does not apply, that
                                             creditors may provide a billing rights                  requirements that might hinder                         interest will be charged immediately. If
                                             statement on each periodic statement.                   creditors’ ability to tailor their                     a discounted initial rate applies, a
                                             (See Model Form G–4.) Both the                          disclosure formats to their products and               creditor must disclose the type of rate
                                             regulation and commentary would be                      product terms. Some creditors and                      that will apply after the discounted
                                             unchanged under the proposal.                           consumer groups suggested importing                    initial rate expires, and the rate that will
                                             However, the Board proposes to revise                   the tabular format used to disclose                    apply after the discounted initial rate
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                                             both Model Forms G–3 and G–4 to                         information in credit card or charge card              expires. The disclosures must be
                                             improve the readability of these notices.               applications and solicitations to the                  accurate as of the time the disclosures
                                             The revised forms are in G–3(A) and G–                  subsequent disclosure context.                         are given. A variable annual percentage
                                             4(A) of Appendix G. For open-end (not                      The Board is proposing to retain the                rate is accurate if it was in effect within
                                             home-secured) plans, creditors may use                  current rules set forth in §§ 226.9(b)(1)              30 days of when the disclosures are
                                             Model Forms G–3(A) and G–4(A). For                      and 226.9(b)(2) for all credit devices and             given. Proposed § 226.9(b)(3) would


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                                                                     Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules                                            33009

                                             require that these key terms be disclosed                  Advance notice currently is not                     effective. The proposed revisions
                                             in a tabular format substantially similar               required in all cases. For example, if an              generally apply when a creditor is
                                             to Sample G–19 in Appendix G.                           interest rate or other finance charge                  changing terms that must be disclosed
                                                It is the Board’s understanding that                 increases due to a consumer’s default or               in the account-opening summary table
                                             checks that access a credit card account                delinquency, notice is required, but                   under § 226.6(b)(4). See section-by-
                                             often are mailed with the periodic                      need not be given in advance. See                      section analysis to § 226.6(b)(4). First,
                                             statement, so consumers will frequently                 current § 226.9(c)(1); comment 9(c)(1)–3.              the Board proposes to expand the
                                             receive an updated disclosure of the                    Furthermore, no change-in-terms notice                 circumstances under which consumers
                                             periodic rate in the same envelope as                   is required if the specific change is set              receive advance notice of changed
                                             the checks. The Board considered                        forth initially by the creditor in the                 terms, or increased rates due to
                                             permitting creditors to disclose the rate               account-opening disclosures. See                       delinquency, or for default or as a
                                             that applies to a check by means of a                   current comment 9(c)–1. For example,                   penalty. Second, the Board proposes to
                                             reference to the type of applicable                     some credit card account agreements                    give consumers earlier notice of a
                                             periodic rate (e.g., balance transfer or                permit the card issuer to increase the                 change in terms, or for increased rates
                                             cash advance) accompanied by a                          periodic rate if the consumer makes a                  due to delinquency or default or as a
                                             reference to the consumer’s periodic                    late payment. Because the                              penalty. Third, the Board proposes to
                                             statement. However, consumer testing                    circumstances of the increase are                      introduce format requirements to make
                                             conducted for the Board showed that                     specified in advance in the account                    the disclosures about changes in terms
                                             while participants looked at actual                     agreement, the creditor currently need                 or for increased rates due to
                                             numbers on the front of the page of                     not provide a change-in-terms notice;                  delinquency, default or as a penalty
                                             checks, they generally did not notice or                under current § 226.7(d) the new rate                  more effective. HELOCs would not be
                                             pay attention to a cross reference to the               will appear on the periodic statement                  affected by these proposed revisions.
                                             periodic statement.                                     for the cycle in which the increase                    The provisions dealing with notices
                                                Thus, the Board proposes that the                    occurs.                                                about increased rates due to
                                             actual APRs and fees applicable to the                     In the December 2004 ANPR, the                      delinquency, or default or as a penalty
                                             checks must be disclosed pursuant to                    Board sought comment as to whether                     are discussed in the section-by-section
                                             § 226.9(b)(3). The Board understands,                   mailing a notice 15 days prior to the                  analysis to § 226.9(g).
                                             however, that creditors may engage in                   effective date of a change in an interest                 Changes in late-payment fees and
                                             risk-based pricing with regard to checks                rate provided timely notice to                         over-the-credit limit fees. Creditors
                                             used by consumers, and seeks with this                  consumers. Q26. The Board also asked                   currently do not have to provide notice
                                             proposal to strike an appropriate                       whether existing disclosure rules for                  of changes to late-payment fees and
                                             balance between meaningful disclosure                   increases to interest rates and other                  over-the-credit-limit charges, pursuant
                                             for consumers and the operational                       finance charges were adequate to enable                to current § 226.9(c)(2). For open-end
                                             burden on creditors. The proposed rule                  consumers to make timely decisions                     (not home-secured) plans, the Board’s
                                             would require that creditors customize                  about how to manage their accounts.                    proposal would require 45 days advance
                                             each set of checks sent to reflect a                    Q27. Some commenters noted that                        notice for changes involving late-
                                             particular consumer’s rate. The Board                   consumers are surprised by changes to                  payment charges or over-the-credit-limit
                                             seeks comment on the operational                        the terms of their accounts and are not                charges, other than a reduction in the
                                             burden associated with customizing the                  aware that such changes are possible                   amount of the charges. See proposed
                                             checks, and on alternatives, such as                    before they take effect, because they do               § 226.9(c)(2)(i). The Board believes that
                                             whether providing a reference to the                    not receive advance notice of those                    it would be beneficial for consumers to
                                             type of rate that will apply,                           changes and do not remember the                        have advance notice of changes to these
                                             accompanied by a toll-free telephone                    information regarding those changes                    charges, which can be substantial
                                             number that a consumer could call to                    that was contained in the account-                     depending on how a consumer uses his
                                             receive additional information, would                   opening disclosures. Consumer                          or her account. Late-payment charges
                                             provide sufficient benefit to consumers                 advocates expressed concern that                       and over-the-credit-limit charges can
                                             while limiting burden on creditors.                     consumers are not aware when they                      have a large aggregate effect, particularly
                                                The Board also seeks comment as to                   have triggered rate increases, for                     since they need not be one-time charges,
                                             whether there are other credit devices or               example by paying late, and thus are                   and can be charged month after month
                                             additional features that creditors add to               unaware that it might be in their best                 if a consumer repeatedly makes late
                                             consumers’ accounts to which this                       interest to shop for alternative financing             payments or exceeds his or her credit
                                             proposed rule should apply.                             before the rate increase takes effect.                 limit. Advance notice regarding changes
                                                The Board has proposed several                       Some consumer commenters requested                     in the amount of these charges may
                                             technical revisions to improve the                      that the Board ban certain practices,                  assist consumers to make better
                                             clarity of § 226.9(b) and the associated                such as ‘‘universal default clauses,’’                 decisions regarding their account usage
                                             commentary.                                             which permit a creditor to raise a                     and regarding when and in what
                                                                                                     consumer’s interest rate to the penalty                amount they should make payments in
                                             9(c) Change in Terms
                                                                                                     rate if the consumer, for example, makes               order to avoid these potentially
                                               Under § 226.9(c) of Regulation Z,                     a late payment on any account, not just                recurring charges. This amendment
                                             certain changes to the terms of an open-                on accounts with that creditor.                        would require that 45 days’ advance
                                             end plan require specific notice of the                    The Board proposes three revisions to               notice be given only when the amount
                                             change. (TILA does not address changes                  the regulation and commentary to                       of a late-payment fee or over-the-credit-
                                             in terms to open-end plans.) The general                improve consumers’ awareness about                     limit fee changes, not when such a fee
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                                             rule is that creditors must provide 15                  changes in their account terms or                      is applied to a consumer’s account.
                                             days’ advance notice of changes in                      increased rates due to delinquency or                     Timing. As discussed above,
                                             terms required to be included in the                    default or as a penalty. These revisions               § 226.9(c)(1) currently provides that
                                             account-opening disclosures, with some                  also are intended to enhance consumers’                whenever any term required to be
                                             exceptions, or to increase the minimum                  ability to shop for alternative financing              disclosed under § 226.6 is changed or
                                             payment. See current § 226.9(c)(1).                     before such account terms become                       the required minimum payment is


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                                             33010                   Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules

                                             increased, a written notice must be                     or otherwise mitigate the effect of the                consumers who have not affirmatively
                                             mailed or delivered to the consumer at                  new terms.                                             consented to receive electronic
                                             least 15 days before that change                           The proposed 45 day notice period                   disclosures for the account, such as
                                             becomes effective. Commenters                           would not apply when the changes                       when a consumer seeks to make a
                                             responding to the December 2004 ANPR                    affect charges that are not required to be             payment online, and the creditor
                                             expressed a number of opinions about                    disclosed under § 226.6(b)(4). See                     imposes a fee for the service.
                                             this requirement. One consumer group                    proposed § 226.9(c)(2)(ii). Specifically,                 Format. Section 226.9 currently
                                             and a number of individual consumers                    if a creditor increases any component of               contains no restrictions or requirements
                                             stated that 15 days is not enough time                  a charge, or introduces a new charge,                  with regard to how change-in-terms
                                             for a consumer to seek alternative                      that is imposed as part of the plan under              notices are presented or formatted. The
                                             financing, and recommended that                         § 226.6(b)(1) but is not required to be                consumer testing conducted for the
                                             consumers be given more time. Some                      disclosed as part of the account-opening               Board explored the usability of current
                                             creditors stated that 15 days’ advance                  summary table under § 226.6(b)(4), the                 change-in-terms notices. The results of
                                             notice was adequate. Other industry                     creditor may either, at its option (1)                 this consumer testing suggest that
                                             commenters stated that they did not                     provide at least 45 days written advance               typical change-in-terms notices are not
                                             oppose increasing the notice period                     notice before the change becomes                       formatted in a manner that is noticeable
                                             from 15 days to 30 days, and added that                 effective, or (2) provide notice orally or             and easy for consumers to understand.
                                             many consumers already receive notice                   in writing of the amount of the charge                 Consumer testing also suggests that
                                             approximately one month before a                        to an affected consumer at a relevant                  improvements can be made to these
                                             change in terms becomes effective,                      time before the consumer agrees to or                  notices. A typical change-in-terms
                                             because the notices often are sent with                 becomes obligated to pay the charge. For               notice contains dense blocks of
                                             periodic statements. A few consumer                     example, a fee for expedited delivery of               contractual language in a small font, and
                                             group commenters recommended 90                         a credit card is a charge imposed as part              may be on an accordion-style pamphlet
                                             days’ advance notice for all changes to                 of the plan under § 226.6(b)(1) but is not             included with the consumer’s periodic
                                             terms.                                                  required to be disclosed in the account-               statement. Consumer testing indicated
                                                In light of the comments received and                opening summary table under                            that consumers may not look at these
                                             upon further consideration of this issue,               § 226.6(b)(4). If a creditor changes the               pamphlets when they are included with
                                             for open-end (not home-secured) plans,                  amount of that expedited delivery fee,                 periodic statements, and that some
                                                                                                     the creditor may provide written                       consumers have trouble navigating these
                                             the Board proposes to add
                                                                                                     advance notice of the change to affected               notices even when their attention is
                                             § 226.9(c)(2)(i) to extend the notice
                                                                                                     consumers at least 45 days before the                  explicitly drawn to the disclosures.
                                             period from 15 days to 45 days. For
                                                                                                     change becomes effective. Alternatively,               These pamphlets generally are not
                                             changes that require advance notice, the
                                                                                                     the creditor may provide notice orally or              designed to draw attention to the
                                             Board believes that consumers should
                                                                                                     in writing of the amount of the charge                 changes because they provide a
                                             have sufficient time, following the
                                                                                                     to an affected consumer at a relevant                  disclosure of contractual provisions.
                                             notice and before the change becomes                                                                              For open-end (not home-secured)
                                                                                                     time before the consumer agrees to or
                                             effective, to change the usage of their                                                                        plans, the Board proposes that creditors
                                                                                                     becomes obligated to pay the charge.
                                             plan or to pursue alternative means of                                                                         be required to provide a summary table
                                                                                                     See comment 9(c)(2)(ii)–1. Creditors
                                             financing their purchases, such as using                meet the standard to provide the notice                of a limited specified number of key
                                             another credit card, utilizing a home-                  at a relevant time if the oral or written              terms on the front of the first page of the
                                             equity line or installment loan, or                     notice of a charge is given when a                     change-in-terms notice, or segregated on
                                             shopping for a new credit card.                         consumer would likely notice it, such as               a separate sheet of paper. See proposed
                                                The Board considered requiring that                  when deciding whether to purchase the                  § 226.9(c)(2)(iii), Sample G–20 in
                                             advance notice of changes in terms be                   service that would trigger the charge.                 Appendix G. Creditors would be
                                             sent 30 days in advance, but concluded                  For example, if a consumer telephones                  required to utilize the same headings as
                                             that 30 days could be inadequate in                     a card issuer to discuss a particular                  in the account-opening tables in Model
                                             some circumstances. The rule governs                    service, a creditor would meet the                     Form G–17(A) and Samples G–17(B)
                                             when notices must be sent, not received                 standard if the creditor clearly and                   and G–17(C) in Appendix G. If the
                                             by the consumer, so in practice the                     conspicuously discloses the fee                        change-in-terms notice were included
                                             notice will be received by the consumer                 associated with the service that is the                with a periodic statement, a summary
                                             with less days remaining to act than the                topic of the telephone call. See                       table would be required to appear on the
                                             full advance notice period specified in                 comment 9(c)(2)(ii)–2. The Board                       front of the periodic statement,
                                             the rule. In light of delays in mail                    believes that for these charges,                       preceding the list of transactions for the
                                             delivery, for example, a notice sent to a               consumers do not need advance notice                   period. See §§ 226.7(b)(14),
                                             consumer 30 days in advance may give                    of the current amount of the charge.                   226.9(c)(2)(iii).
                                             a consumer only 25 days to seek                            As discussed in the section-by-section                 The Board believes that requiring a
                                             alternative financing before the change                 analysis to § 226.5(a)(1)(ii), creditors are           tabular summary of the key terms of the
                                             in terms takes effect. For example, if a                permitted under the E–Sign Act to                      consumer’s account would make
                                             consumer wants to shop for another                      provide in electronic form any TILA                    change-in-terms notices more useful to
                                             credit card, apply for, open, and transfer              disclosure that is required to be                      consumers by highlighting those terms
                                             a balance from an existing card to a new                provided or made available to                          that may be of most interest to them.
                                             card, 30 days may be too short a time                   consumers in writing if the consumer                   Based on consumer testing conducted
                                             in some cases. The Board’s proposal that                affirmatively consents to receipt of                   for the Board, when a summary of key
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                                             notice be sent 45 days in advance                       electronic disclosures in a prescribed                 terms was included on change-in-terms
                                             should ensure, in most cases, that a                    manner. 15 U.S.C. 7001 et seq. The                     notices tested, consumers tended to read
                                             consumer will have at least one                         Board requests comment on whether                      the notice and appeared to understand
                                             calendar month following receipt of the                 there are circumstances in which                       better what key terms were being
                                             notice and before the change in terms                   creditors should be permitted to provide               changed than when a summary was not
                                             takes effect, to seek alternative financing             cost disclosures in electronic form to                 included.


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                                                                     Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules                                           33011

                                                The proposal also would require that                 have received a number of complaints                   include specific terms for an increase,’’
                                             creditors provide other information in                  from consumers who were not notified                   because such a contractual term would
                                             the change-in-terms notice, specifically                when their credit limits were decreased,               be prohibited under § 226.5b.
                                             (1) a statement that changes are being                  and were surprised at the subsequent                     The Board welcomes comment on
                                             made to the account; (2) a statement                    imposition of an over-the-credit-limit                 whether there are any remaining
                                             indicating the consumer has the right to                fee. The Board is not proposing that                   references in § 226.9(c)(1) and the
                                             opt out of these changes, if applicable,                creditors may not reduce a consumer’s                  related commentary to changes in terms
                                             and a reference to additional                           credit limit. The Board recognizes that                that would be impermissible for open-
                                             information describing the opt out right                creditors have a legitimate interest in                end (home-secured) credit pursuant to
                                             provided in the notice, if applicable; (3)              mitigating the risk of loss when a                     § 226.5b.
                                             the date the changes to terms described                 consumer’s creditworthiness                            9(e) Disclosures Upon Renewal of Credit
                                             in the summary table will become                        deteriorates, and that a consumer’s                    or Charge Card
                                             effective; (4) if applicable, an indication             creditworthiness can deteriorate
                                             that the consumer may find additional                   quickly. Therefore, the Board’s proposal                  TILA Section 127(d), which is
                                             information about the summarized                        would simply require that a creditor                   implemented in § 226.9(e), requires card
                                             changes, and other changes to the                       provide a notice that it has reduced or                issuers that assess an annual or other
                                             account, in the notice; and (5) if the                  will be reducing a consumer’s credit                   periodic fee, including a fee based on
                                             creditor is changing a rate on the                      limit 45 days before imposing any fee or               activity or inactivity, on a credit card
                                             account, other than a penalty rate, a                   penalty rate for exceeding that new                    account of the type subject to § 226.5a
                                             statement that if a penalty rate applies                limit. This proposed amendment would                   to provide a renewal notice before the
                                             to the consumer’s account, the new rate                 apply only when the over-the-credit-                   fee is imposed. 15 U.S.C. 1637(d). The
                                             described in the notice does not apply                  limit fee is imposed solely as a result of             creditor must provide disclosures
                                             to the consumer’s account until the                     a reduction in the credit limit; if the                required for credit card applications
                                             consumer’s account balances are no                      over-the-credit-limit fee would have                   (although not in a tabular format) and
                                             longer subject to the penalty rate. This                been charged notwithstanding the                       must inform the consumer that the
                                             information must be placed directly                     reduction in a credit limit, no advance                renewal fee can be avoided by
                                             above the summary of key changes                        notice would be required. This                         terminating the account by a certain
                                             described above. This information is                    provision is not intended to permit                    date. The notice must generally be
                                             intended to give context to the summary                 creditors to provide a general notice at               provided at least 30 days or one billing
                                             of key changes.                                         account opening that a consumer’s                      cycle, whichever is less, before the
                                                With respect to the reference to a right             credit limit may change from time to                   renewal fee is assessed to the account.
                                             to opt out of the changes, the Board is                 time; rather, the notice should be sent                However, there is an alternative delayed
                                             not requiring that creditors provide such               with regard to a specific credit limit                 notice procedure where the fee can be
                                             an opt out right. State law or other                    reduction that has occurred or will be                 assessed; the fee must be reversed if the
                                             applicable laws may provide consumers                   occurring.                                             consumer terminates the account
                                             with a right to opt out of certain                         Rules affecting home-equity plans.                  provided the consumer is given notice.
                                             changes. If a consumer has the right to                 The Board proposes at the present time                    Creditors are given considerable
                                             opt out of the changes in the notice, a                 to retain in proposed § 226.9(c)(1),                   flexibility in the placement of the
                                             creditor must include a statement                       without intended substantive change,                   disclosures required under § 226.9(e).
                                             indicating the consumer has the right to                the current rules regarding the                        For example, the notice can be
                                             opt out of these changes, if applicable,                circumstances, timing, and content of                  preprinted on the periodic statement,
                                             and a reference to additional                           change-in-terms notices for HELOCs.                    such as on the back of the statement.
                                             information describing the opt out right                These rules will be reviewed in the                    See § 226.9(e)(3) and comment 9(e)(3)–
                                             provided in the notice, if applicable.                  Board’s upcoming review of the                         2. However, creditors that place any of
                                                Reduction in credit limit. Under                     provisions of Regulation Z addressing                  the disclosures on the back of the
                                             Regulation Z, a creditor generally may                  closed-end and open-end (home-                         periodic statement must include a
                                             decrease a consumer’s credit limit                      secured) credit.                                       reference to those disclosures under
                                             without providing any notice, except                       The Board is aware that the current                 § 226.9(e)(3). To aid in compliance, a
                                             with regard to HELOCs. As a result,                     change-in-terms rules, which have                      model clause that may, but is not
                                             there could be situations where a                       applicability both to HELOCs and open-                 required to, be used is proposed for
                                             consumer may exceed his or her credit                   end (not home-secured) credit, address                 creditors that use the delayed notice
                                             limit without realizing it, potentially                 several types of changes in terms that                 method. See proposed comment 9(e)(3)–
                                             triggering late-payment fees and penalty                are impermissible for HELOCs subject to                1.
                                             pricing. Under new § 226.9(c)(2)(v), for                § 226.5b. Section 226.5b imposes                          Comment 9(e)–4, which addresses
                                             open-end (not home-secured) plans, if a                 substantive restrictions on which terms                accuracy standards for disclosing rates
                                             creditor decreases the credit limit on an               of HELOCs may be changed, and in                       on variable rate plans, would be revised,
                                             account, advance notice of the decrease                 retaining the current change-in-terms                  for the same reasons and consistent with
                                             must be provided before an over-the-                    rules for HELOCs, the Board does not                   the proposed accuracy standard for
                                             limit fee or a penalty rate can be                      intend to amend or in any way change                   account-opening disclosures. See
                                             imposed solely as a result of the                       the substantive restrictions imposed by                section-by-section analysis to
                                             consumer exceeding the newly                            § 226.5b. Accordingly, the Board                       § 226.6(b)(2)(ii)(G).
                                             decreased credit limit. Under the                       proposes to make several deletions in                     Other proposed changes to § 226.9(e)
                                             proposal, notice must be provided in                    proposed § 226.9(c)(1) and the related                 are minor with no intended substantive
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                                             writing or orally at least 45 days prior                commentary with respect to HELOCs.                     change. For example, footnote 20a,
                                             to imposing the over-the-limit fee or                   For example, the Board proposes                        dealing with format, is deleted as
                                             penalty rate and shall state that the                   deleting in new comment 9(c)(1)–1 the                  unnecessary. The proposed
                                             credit limit on the account has been or                 requirement that notice ‘‘be given if the              reorganization of § 226.5a is intended,
                                             will be decreased. The Board and other                  contract allows the creditor to increase               in part, to separate more clearly content
                                             federal banking agencies in the past                    the rate at its discretion but does not                and format requirements in that section.


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                                             Nonetheless, to avoid any possible                      surprise to consumers who are not                      opening disclosures may be provided to
                                             confusion, comment 9(e)–2, which                        aware of, or do not understand, what                   the consumer too far in advance for the
                                             generally repeats footnote 20a, would be                behavior is considered a ‘‘default’’                   consumer to recall the circumstances
                                             retained.                                               under their agreement. As discussed in                 that may cause his or her rates to
                                                                                                     the section-by-section analysis to                     increase. In addition, the consumer may
                                             9(g) Increase in Rates Due to
                                                                                                     § 226.5a, consumer testing conducted                   not have retained a copy of the account-
                                             Delinquency or Default or Penalty
                                                                                                     for the Board indicated that some                      opening disclosures and may not be able
                                             Pricing
                                                                                                     consumers do not understand what                       to effectively link the information
                                                As discussed above with respect to                   factors can give rise to penalty pricing,              disclosed at account opening to the
                                             § 226.9(c), in the December 2004 ANPR,                  such as the fact that one late payment                 current repricing of his or her account.
                                             the Board asked whether existing                        may constitute a ‘‘default.’’ Moreover,                   The Board notes that this advance
                                             disclosure rules for increases to interest              when penalty pricing is imposed, it may                notice provision does not, in any
                                             rates and other finance charges were                    apply to all of the balances on a                      manner, limit the contractual ability of
                                             adequate to enable consumers to make                    consumer’s account and often applies to                creditors to establish the events that
                                             timely decisions about how to manage                    balances for several months or longer.                 trigger penalty pricing, or to establish
                                             their accounts. Q27. Consumer                           Penalty rates can be more than twice as                the rates that apply for such events. The
                                             advocates expressed concern that                        much as the consumer’s normal rate on                  Board also notes that use of this sort of
                                             consumers are not aware when they                       purchases; for example, default rates in               de facto delay in implementing contract
                                             have triggered rate increases, for                      excess of 30 percent are not uncommon.                 terms has precedent in Regulation Z.
                                             example by paying late, and thus are                       The Board believes that the way to                  For example, since 1988, § 226.20(c) has
                                             unaware that it might be in their interest              address penalty pricing is through                     provided that 25 days’ advance notice
                                             to shop for alternative financing before                improved disclosures regarding the                     must be given for certain increases in
                                             the rate increase takes effect. Some                    conditions under which penalty pricing                 the payment for an adjustable rate
                                             consumer commenters requested that                      may be imposed. In part, the Board is                  mortgage, even if the circumstances of
                                             the Board ban certain practices, such as                proposing, in connection with the                      the increase are specified in advance in
                                             ‘‘universal default clauses,’’ which                    disclosures given with credit card                     the contract.
                                             permit a creditor to raise a consumer’s                 applications and solicitations and at                     Under the proposed rule, creditors
                                             interest rate to the penalty rate if the                account opening, to enhance disclosures                would retain the ability to mitigate risk
                                             consumer defaults on any accounts, not                  about penalty pricing and revise                       by freezing credit accounts or lowering
                                             just on accounts with that creditor.                    terminology to address consumer                        the credit limit without providing
                                                The Board is not proposing at the                    confusion regarding the meaning of                     advance notice (subject to proposed
                                             present time to prohibit universal                      ‘‘default.’’ However, in light of the                  § 226.9(c)(2)(v) discussed above, which
                                             default clauses or similar practices.                   relatively low contractual threshold for               addresses over-the-credit-limit fees or
                                             Instead, as discussed in the section-by-                rate increases based on consumer                       penalty rates). Thus, creditors would be
                                             section analysis to § 226.5a, the Board’s               delinquency, default or as a penalty, the              able to effectively mitigate risk on
                                             proposal seeks to improve the                           Board believes that consumers also                     accounts that are delinquent or in
                                             effectiveness of the disclosures given to               would benefit from advance notice of                   default notwithstanding the fact that
                                             consumers regarding the conditions in                   these rate increases, which they                       they would be required to provide a
                                             which penalty pricing will apply. In                    otherwise may not expect. Advance                      notice 45 days before increasing the
                                             addition, the Board seeks to improve the                notice would give consumers an                         rate.
                                             ability of consumers to use the                         opportunity to shop for alternate                         The rule also would not require that
                                             disclosures given to them by proposing                  sources of credit, pay down account                    45 days’ advance notice be given for
                                             that disclosures be provided prior to the               balances before the rate increase takes                certain changes made in accordance
                                             application of penalty pricing to their                 effect, or contact the card issuer to                  with the contract, provided that such
                                             accounts. To this end, with respect to                  rectify any errors before penalty rates                adjustment is not due to delinquency,
                                             open-end (not home-secured) plans, the                  are imposed. To make this opportunity                  default or as a penalty. For example, if
                                             Board’s proposed rule would add                         viable, the Board is proposing that the                an employee offers an open-end plan
                                             § 226.9(g)(1) to require creditors to                   notice be provided at least 45 days                    with discounted rates to its employees,
                                             provide 45 days advance notice when a                   before the increase takes effect. The                  the employer would not be required to
                                             rate is increased due to a consumer’s                   Board requests comment on whether a                    give a former employee 45 days’
                                             delinquency or default, or if a rate is                 shorter time period, such as 30 days’                  advance notice before increasing the
                                             increased as a penalty for one or more                  advance notice, would be adequate                      rate on that individual’s account from
                                             events specified in the account                         notice for consumers whose interest                    the preferential employees’ rate to the
                                             agreement, such as a late payment or an                 rates are being increased due to default               standard rate, provided that the rate
                                             extension of credit that exceeds the                    or delinquency, or as a penalty.                       increase was set forth in the account
                                             credit limit. This notice would be                         The proposed rule would impose a de                 agreement.
                                             required even if, as is currently the case,             facto limitation on the implementation                    Disclosure content and format. With
                                             the creditor specifies the penalty rate                 of contractual terms between a                         respect to open-end (not home-secured)
                                             and the specific events that may trigger                consumer and creditor, in that creditors               plans, under the Board proposal, if a
                                             the penalty rate in the account-opening                 would no longer be permitted to provide                creditor is increasing the rate due to
                                             disclosures.                                            for the immediate application of penalty               delinquency or default or as a penalty,
                                                Neither Regulation Z nor TILA                        pricing upon the occurrence of certain                 the creditor must provide a notice with
                                             defines what a ‘‘default’’ is, and the                  events specified in the contract. The                  the following information: (1) A
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                                             Board is aware that credit agreements of                Board believes that this delay in                      statement that the delinquency or
                                             some creditors permit penalty pricing                   implementing contract terms is                         default rate or penalty rate has been
                                             based on a single late payment by the                   appropriate in light of the potential                  triggered, as applicable; (2) the date as
                                             consumer to that creditor. The Board is                 benefit to consumers. Many consumers                   of which the delinquency or default rate
                                             concerned that the imposition of                        are likely unaware of the events that                  or penalty rate will be applied to the
                                             penalty pricing can come as a costly                    will trigger such pricing. The account-                account, as applicable; (3) the


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                                             circumstances under which the                           difficulty. See comments 10(b)–1 and                   discussed above, the Board is proposing,
                                             delinquency or default rate or penalty                  –2. Pursuant to § 226.10(b) and                        in what would be new § 226.7(b)(11), to
                                             rate, as applicable, will cease to apply                comment 10(b)–1, if a creditor imposes                 require that for open-end (not home-
                                             to the consumer’s account, or that the                  a cut-off time, it must be disclosed on                secured) plans, creditors must disclose
                                             delinquency or default rate or penalty                  the periodic statement; many creditors                 the earliest of their cut-off times for
                                             rate will remain in effect for a                        put the cut-off time on the back of                    payments near the due date on the front
                                             potentially indefinite time period; and                 statements.                                            page of the periodic statement, if that
                                             (4) a statement indicating to which                        The December 2004 ANPR solicited                    earliest cut-off time is before 5 p.m. on
                                             balances on the account the                             comment regarding the cut-off times                    the due date. The Board believes that
                                             delinquency or default rate or penalty                  used currently by most issuers for                     the disclosure-based approach may
                                             rate will be applied, as applicable. See                receiving payments, whether cut-off                    benefit consumers without imposing an
                                             proposed § 226.9(g)(3)(i). In consumer                  times differ based on the type of                      unreasonable operational burden on
                                             testing conducted for the Board, some                   payment (e.g., check, EFT, telephone, or               creditors. Consumers would be able to
                                             participants did not appear to                          Internet), and whether the operating                   make better decisions about when to
                                             understand that penalty rates can apply                 times of third party processors differ                 make payments in order to avoid late-
                                             to all of their balances, including                     from those of creditors. Q47–Q48, Q50.                 payment fees and default rates if earlier
                                             existing balances. Some participants                    The December 2004 ANPR also                            cut-off times such as 12:00 p.m. were
                                             also did not appear to understand how                   requested comment regarding the                        more prominently disclosed on the
                                             long a penalty rate could be in effect.                 adequacy and clarity of current                        periodic statement. In recognition of the
                                             Without information about the balances                  disclosures of payment due dates and                   fact that creditors may have different
                                             to which the penalty rate applies and                   cut-off times, and asked whether the                   cut-off times depending on the type of
                                             how long it applies, consumers might                    Board should issue a rule requiring                    payment (e.g., mail, Internet, or
                                             have difficultly determining whether                    creditors to credit payments as of the                 telephone), the Board’s proposal would
                                             they should shop for another card or                    date they are received, regardless of the              require that creditors disclose only the
                                             pursue alternate sources of financing.                  time. Q49, Q51.                                        earliest cut-off time, if earlier than 5
                                             Consumers also may consider the                            Disclosure of cut-off times. In                     p.m. on the due date. See proposed
                                             duration of penalty pricing when                        response to the December 2004 ANPR,                    § 226.7(b)(11). HELOCs would not be
                                             shopping for alternative sources of                     the Board received a number of                         affected by the disclosure rule in
                                             credit which would enhance their                        comments describing issuers’ current                   § 226.7(b)(11).
                                             ability to make prudent decisions.                      practices regarding cut-off times. The                    Receipt of electronic payments made
                                                If the notice regarding increases in                 majority of industry commenters noted                  through a creditor’s Web site. The Board
                                             rates due to delinquency, default or                    that they do set cut-off times that are in             also proposes to add an example to
                                             penalty pricing were included on or                     the early or mid-afternoon, but that cut-              comment 10(a)–2 that states that for
                                             with a periodic statement, this notice                  off times may differ based on the means                payments made through a creditor’s
                                             must be in a tabular format. Under the                  by which a consumer makes his or her                   Web site, the date of receipt is the date
                                             proposal, the notice also would be                      payment, with telephone and Internet                   as of which the consumer authorizes the
                                             required to appear on the front of the                  payments often having later cut-off                    creditor to debit that consumer’s
                                             periodic statement, preceding the list of               times than payments made by mail.                      account electronically. Industry
                                             transactions for the period. See                        These industry commenters argued that                  comments to the December 2004 ANPR
                                             proposed §§ 226.7(b)(14),                               current disclosure of these cut-off times              stated that most credit card payments
                                             226.9(g)(3)(ii)(A). If the notice is not                is clear. Consumer groups and                          are still received by mail. Nevertheless,
                                             included on or with a periodic                          consumers commented that the majority                  the Internet is an increasingly utilized
                                             statement, the information described                    of banks now set a cut-off time on                     resource for making credit card
                                             above must be disclosed on the front of                 payment due dates and that these cut-                  payments and for receiving information
                                             the first page of the notice. See                       off times are a problem because they                   about accounts. Unlike payments
                                             § 226.9(g)(3)(ii)(B).                                   could result in a due date that is one day             delivered by mail, payments made via a
                                                                                                     earlier in practice than the date                      creditor’s Web site may be received
                                             Section 226.10 Prompt Crediting of                      disclosed. Consumer groups expressed                   almost immediately by that creditor.
                                             Payments                                                particular concern about cut-off times                    The proposed comment would refer to
                                                Section 226.10, which implements                     because they believe that issuers                      the date on which the consumer
                                             TILA Section 164, generally requires a                  simultaneously may be decreasing the                   authorizes the creditor to effect the
                                             creditor to credit to a consumer’s                      time period between the end of the                     electronic payment, not the date on
                                             account a payment that conforms to the                  statement period and the time when the                 which the consumer gives the
                                             creditor’s instructions (also known as a                payment is due.                                        instruction. The consumer may give an
                                             conforming payment) as of the date of                      Almost all industry comments                        advance instruction to make a payment
                                             receipt, except when a delay in                         opposed the Board’s suggestion to                      and some days may elapse before the
                                             crediting the account will not result in                require creditors to credit payments as                payment is actually made; accordingly,
                                             a finance or other charge. 15 U.S.C.                    of the date they are received, regardless              comment 10(a)–2 would refer to the date
                                             1666c; § 226.10(a). Section 226.10 also                 of the time, noting that issuers need                  on which the creditor is authorized to
                                             requires a creditor that accepts a non-                 flexibility to work with external vendors              debit the consumer’s account. If the
                                             conforming payment to credit the                        and that creditors’ internal processes                 consumer authorized an immediate
                                             payment within five days of receipt. See                and systems will to some extent dictate                payment, but provided the instruction
                                             § 226.10(b). The Board has interpreted                  the timing of payment crediting.                       after a creditor’s cut-off time, the
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                                             § 226.10 to permit creditors to specify                 Consumer and consumer group                            relevant date would be the following
                                             cut-off times indicating the time when                  comments proposed a rule that would                    business day. For example, a consumer
                                             a payment is due, provided that the                     require banks to consider the postmark                 may go online on a Sunday evening and
                                             requirements for making payments are                    to be the day the payment is received.                 instruct that a payment be made;
                                             reasonable, to allow most consumers to                     The Board is not proposing to require               however, the creditor could not transmit
                                             make conforming payments without                        a minimum cut-off time. Instead, as                    the request for the debit to the


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                                             consumer’s account until the next day,                  is considered a conforming payment for                 the prohibition would apply to all open-
                                             Monday. Under proposed comment                          purposes of § 226.10(b).                               end plans.
                                             10(a)–2 the date on which the creditor                     Third party processors. With regard to                 Commenters expressed differing
                                             was authorized to effect the electronic                 third party processors, industry                       views on how the Board might interpret
                                             payment would be deemed to be                           commenters noted that current practice                 ‘‘expiration date.’’ Some suggested using
                                             Monday, not Sunday. Proposed                            is that payments received by a third                   the expiration date on credit cards as
                                             comment 10(b)–1.i.B would clarify that                  party processor are treated as if they                 the date the account is deemed to
                                             the creditor may, as with other means of                were received directly by the creditor,                expire. Others noted that while cards
                                             payment, specify a cut-off time for an                  and that no further clarification is                   may expire from time to time, the
                                             electronic payment to be received on the                necessary. Accordingly, the Board is not               underlying open-end plans commonly
                                             due date in order to be credited on that                currently proposing any amendments to                  do not have maturity or expiration
                                             date. The Board solicits comment                        specifically address third party                       dates. These commenters were
                                             regarding the incidence of, and types of,               processors.                                            concerned that if an account were
                                             any delays that may prevent creditors or                                                                       deemed to ‘‘expire’’ when a credit card’s
                                             their third party processors from                       Section 226.11 Treatment of Credit                     expiration date occurs, new account-
                                             receiving electronic payments on the                    Balances; Account Termination                          opening disclosures would be required
                                             date on which the creditor is authorized                                                                       for the account to continue. The Board
                                                                                                     11(a) Credit Balances
                                             to effect the payment.                                                                                         believes that Congress did not intend
                                                The Board considered expanding this                     TILA Section 165, implemented in                    such a result. Therefore, comment
                                             comment to cover electronic payments                    § 226.11, sets forth specific steps that a             11(b)(1)–1 would clarify that the
                                             received by other means (e.g., if the                   creditor must take to return any credit                underlying credit agreement, not the
                                             consumer authorizes a payment to his                    balance in excess of $1 on a credit                    credit card, determines if there is a
                                             deposit account-holding bank’s Web                      account, including making a good faith                 stated expiration (maturity) date.
                                             site), because it is likely that such                   effort to refund any credit balance                    Creditors offering accounts without a
                                             electronic payments made through such                   remaining in the consumer’s account for                stated expiration date could not
                                             parties also may be received by the                     more than six months. 15 U.S.C. 1666d.                 terminate those accounts solely because
                                             creditor on the same day that they are                  The substance of § 226.11 would remain                 the consumer does not incur finance
                                             authorized. However, it could be                        unchanged; however, the commentary                     charges on the account.
                                             difficult for a creditor to monitor when                would be revised to provide that a                        Under the proposal, a new
                                             a consumer gives a third party an                       creditor may comply with this section                  § 226.11(b)(2) would be added to
                                             instruction to send a payment, and, in                  by refunding any credit balance upon                   provide that the new rule in
                                             addition, the creditor has no direct                    receipt of a consumer’s oral or                        § 226.11(b)(1) does not prevent creditors
                                             control over how long it takes the third                electronic request. See proposed                       from terminating an account under an
                                             party to process that instruction. As a                 comment 11(a)–1. In addition, the Board                open-end plan (with or without an
                                             result, the Board’s proposed                            proposes to move the current rules in                  expiration date) that is inactive for three
                                             clarification of comment 10(a)–2 is                     § 226.11 to a new paragraph (a), with the              consecutive months. Commenters were
                                             limited to electronic payments effected                 commentary renumbered accordingly,                     split on the need for guidance on an
                                             through the creditor’s own Web site,                    and to add a new paragraph (b) which                   ‘‘inactive’’ account. Of those that
                                             over which the creditor has control.                    implements the account termination                     suggested guidance, commenters
                                                Promotion of payment via the                         prohibition for certain open-end                       generally concurred that ‘‘activity’’
                                             creditor’s Web site. The Board also                     accounts in Section 1306 of the                        includes purchases or cash advances,
                                             proposes to update the commentary to                    Bankruptcy Act (further discussed                      for example. But commenters disagreed
                                             clarify that if a creditor discloses that               below). See TILA Section 127(h); 15                    whether an account with an outstanding
                                             payments can be made on that creditor’s                 U.S.C. 1637(h). The section title would                balance was ‘‘active.’’ Because finance
                                             Web site, then payments made through                    be amended to reflect the new subject                  charges are likely to accrue on balances
                                             the creditor’s Web site will be                         matter.
                                                                                                                                                            remaining after the end of a grace period
                                             considered conforming payments for                                                                             if any, the Board believes the Congress
                                             purposes of § 226.10(b). Many creditors                 11(b) Account Termination                              was addressing situations where no
                                             now permit consumers to make                                                                                   finance charges were accruing due to
                                             payments via their Web site. Payment                      TILA Section 127(h), added by the                    inactivity. Therefore, proposed
                                             on the creditor’s Web site may not be                   Bankruptcy Act, prohibits an open-end                  § 226.11(b)(2) would provide that an
                                             specified on or with the periodic                       creditor from terminating open-end                     account is inactive if there has been no
                                             statement as conforming payments, but                   accounts for certain reasons. Creditors                extension of credit (such as by purchase,
                                             it may be promoted in other ways, such                  cannot terminate an open-end plan                      cash advance, or balance transfer) and
                                             as in the account-opening agreement,                    before its expiration date solely because              the account has no outstanding balance.
                                             via e-mail, in promotional material, or                 the consumer has not incurred finance
                                             on the Web site itself. It would be                     charges on the account. The prohibition                Section 226.12 Special Credit Card
                                             reasonable for a consumer who receives                  does not prevent a creditor from                       Provisions
                                             materials from the creditor promoting                   terminating an account for inactivity in                  Section 226.12 contains special rules
                                             payment on the creditor’s Web site to                   three or more consecutive months. The                  applicable to credit cards and credit
                                             believe that it would be a conforming                   October 2005 ANPR solicited comment                    card accounts, including conditions
                                             payment and credited on the date of                     on the need for additional guidance,                   under which a credit card may be
                                             receipt. Therefore, the Board proposes                  such as when an account ‘‘expires’’ and                issued, liability of cardholders for
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                                             to amend comment 10(b)–2 to clarify                     when an account is ‘‘inactive.’’ Q106–                 unauthorized use, and cardholder rights
                                             that if a creditor promotes that it accepts             Q108.                                                  to assert merchant claims and defenses
                                             payments via its Web site (such as                        The Board proposes to implement                      against the card issuer. The proposal
                                             disclosing on the Web site itself or on                 TILA Section 127(h) in new § 226.11(b).                would, among other things, provide
                                             the periodic statement that payments                    The general rule is stated in                          additional guidance on the rules on
                                             can be made via the Web site), then it                  § 226.11(b)(1) and mirrors the statute;                unauthorized use and the rights of


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                                             cardholders to assert claims or defenses                the unsolicited issuance of additional                 the means by which the issuer may be
                                             involving a merchant against the card                   cards on existing accounts even when a                 notified in the event of loss or theft of
                                             issuer (consumer claims with                            previously accepted card is not being                  the card; and (3) the issuer must have
                                             merchants) and update the section to                    replaced. These industry commenters                    provided a means to identify the
                                             address Internet transactions.                          observed that the current constraints on               cardholder on the account or the
                                                                                                     distributing new types of credit cards                 authorized user of the card. The
                                             12(a) Issuance of Credit Card
                                                                                                     potentially impeded industry                           statutory provisions on unauthorized
                                                TILA Section 132, which is                           innovation in providing more                           use are implemented in § 226.12(b) of
                                             implemented by § 226.12(a) of                           convenient methods for consumers to                    the regulation. The Board is proposing
                                             Regulation Z, generally prohibits                       access their accounts. Industry                        a number of revisions that would clarify
                                             creditors from issuing credit cards                     commenters also contested the notion                   the scope of the provision and update
                                             except in response to a request or                      that sending additional cards on an                    the regulation to reflect current business
                                             application. Section 132 explicitly                     unsolicited basis would increase the                   practices. The proposed revisions also
                                             exempts from this prohibition credit                    risk of identity theft because, in their
                                             cards issued as renewals of or                                                                                 would provide guidance on the
                                                                                                     view, providing an additional card                     relationship between the unauthorized
                                             substitutes for previously accepted                     presents no greater risk than sending the
                                             credit cards. 15 U.S.C. 1642. Existing                                                                         use provision and the billing error
                                                                                                     first card, which the consumer has
                                             comment 12(a)(2)–5, the ‘‘one-for-one                                                                          provisions in § 226.13.
                                                                                                     requested, or a renewal card, which
                                             rule,’’ interprets these statutory and                  consumers often would not know when                       Scope. The definition of
                                             regulatory provisions by providing that,                to expect. Industry commenters also                    ‘‘unauthorized use’’ currently found in
                                             in general, a creditor may not issue                    noted that allowing the unsolicited                    footnote 22 would be moved into the
                                             more than one credit card as a renewal                  issuance of credit cards outside the                   regulation in new § 226.12(b)(1)(i). The
                                             of or substitute for an accepted credit                 context of a renewal or substitution                   definition provides that unauthorized
                                             card. The proposal would leave                          would not expose consumers to greater                  use is use of a credit card by a person
                                             § 226.12(a) and the accompanying                        liability for unauthorized transactions                who lacks ‘‘actual, implied, or apparent
                                             commentary generally unchanged,                         given the contemplated condition that                  authority’’ to use the credit card.
                                             except that the text of footnote 21                     liability for unauthorized use on the                  Comment 12(b)(1)–1 further clarifies
                                             defining the term ‘‘accepted credit card’’              card account may not increase with the                 that whether such authority exists must
                                             would be moved to new comment                           issuance of the additional card.                       be determined under state or other law.
                                             12(a)–2.                                                   At this time, the Board does not                    Commenters were asked in the
                                                In 2003, Board staff revised the                     propose to amend § 226.12(a) and the                   December 2004 ANPR about whether
                                             commentary to § 226.12(a) to allow card                 one-for-one rule to allow the unsolicited              there was a need to revise any of the
                                             issuers to replace an accepted credit                   issuance of credit cards outside the                   substantive protections for open-end
                                             card with more than one card, subject to                context of a renewal or substitution of                credit accounts. Q43. Some commenters
                                             certain conditions, including the                       an accepted access device. Based on                    urged the Board to consider adopting a
                                             limitation that the consumer’s total                    current card issuer practices, the Board               provision similar to the existing staff
                                             liability for unauthorized use with                     understands that some issuers may be                   commentary under Regulation E
                                             respect to the account could not                        unable to require separate activation                  (Electronic Fund Transfer Act) to
                                             increase with the issuance of the                       procedures for access devices on the                   address circumstances where a
                                             additional renewal or substitute card(s).               same credit card account. As a result,
                                             See comment 12(a)(2)–6; 68 FR 16,185;                                                                          consumer has furnished an access
                                                                                                     additional cards sent on an unsolicited                device to a person who has exceeded
                                             April 3, 2003. Card issuers could thus,                 basis outside the context of a renewal or
                                             for example, issue credit cards using a                                                                        the authority given. The proposal would
                                                                                                     substitution might be sent in activated                add a new comment 12(b)(1)–3 to clarify
                                             new format or technology to existing                    form, which could cause considerable
                                             accountholders, even though the new                                                                            that if a cardholder furnishes a credit
                                                                                                     harm to consumers. Even if the card
                                             card is intended to supplement rather                                                                          card to another person and that person
                                                                                                     issuer were not permitted to impose any
                                             than replace the traditional card. In the                                                                      exceeds the authority given, the
                                                                                                     additional liability on the consumer for
                                             December 2004 ANPR, the Board                                                                                  cardholder is liable for that credit
                                                                                                     unauthorized use, consumers would
                                             solicited comment as to whether it                                                                             transaction unless the cardholder has
                                                                                                     nevertheless still suffer the
                                             should consider revising § 226.12(a) to                 inconvenience of refuting unwarranted                  notified (in writing, orally, or otherwise)
                                             allow the unsolicited issuance of                       claims of liability.                                   the creditor that use of the credit card
                                             additional cards on an existing account                                                                        by that person is no longer authorized.
                                             outside of renewal or substitution under                12(b) Liability of Cardholder for                      See also comment 205.2(m)–2 of the
                                             certain conditions, including that the                  Unauthorized Use                                       Official Staff Commentary to Regulation
                                             additional cards be sent unactivated.                      TILA Section 133(a) limits a                        E, 12 CFR part 205. New comment
                                             Q46.                                                    cardholder’s liability for an                          12(b)(1)–4 would provide, however, that
                                                Consumer groups stated that                          unauthorized use of a credit card to no                an unauthorized use would include
                                             additional credit cards should only be                  more than $50 for transactions that                    circumstances where a person has
                                             sent if the consumer specifically                       occur prior to notification of the card                obtained a credit card, or otherwise has
                                             requests such cards, citing identity theft              issuer that an unauthorized use has                    initiated a credit card transaction
                                             concerns if issuers were permitted to                   occurred or may occur as the result of                 through robbery or fraud (e.g., if the
                                             send out credit cards without any                       loss, theft or otherwise. 15 U.S.C. 1643.              person holds the consumer at gunpoint).
                                             advance warning or notice. One                          Before a card issuer may impose                        See also comment 205.2(m)–3 of the
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                                             consumer group suggested that the                       liability for an unauthorized use of a                 Official Staff Commentary to Regulation
                                             Board require that consumers be                         credit card, it must satisfy certain                   E, § 205.5. In both cases, the Board
                                             notified in writing or by phone before                  conditions: (1) the card must be an                    believes it is appropriate for the same
                                             additional cards are sent. Industry                     accepted credit card; (2) the issuer must              standard to apply to credit cards that
                                             commenters strongly encouraged the                      have provided adequate notice of the                   applies to debit cards under Regulation
                                             Board to amend the regulation to permit                 cardholder’s maximum liability and of                  E. Thus, the Board is proposing to adopt


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                                             33016                   Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules

                                             the two standards under Regulation Z                    ‘‘adequate notice’’ to the cardholder of               § 226.5b, at the creditor’s option, the
                                             for consistency.                                        his or her maximum potential liability                 creditor may use Model Clause G–2 or
                                                The Board does not anticipate that the               and the means by which to notify the                   G–2(A). For open-end (not home-
                                             proposed comments would significantly                   issuer of the loss or theft of the card.               secured) plans, the creditor may use G–
                                             expand the circumstances under which                    Third, the card issuer also must have                  2(A).
                                             liability could be imposed on a                         provided a means to identify the
                                             cardholder for a particular transaction,                cardholder on the account or the                       12(c) Right of Cardholder to Assert
                                             in light of the existing reference in the               authorized user of the card. See                       Claims or Defenses Against Card Issuer
                                             definition of ‘‘unauthorized use’’ to                   § 226.12(b)(2).                                           Under TILA Section 170, as
                                             ‘‘implied or apparent authority.’’                         Under the proposal, the guidance                    implemented in § 226.12(c) of the
                                             Nevertheless, the addition of this                      regarding what constitutes adequate                    regulation, a cardholder may assert
                                             comment could help provide greater                      notice currently in footnote 23 would be               against the card issuer a claim or
                                             clarity for issuers when investigating                  moved to the staff commentary. See new                 defense for defective goods or services
                                             unauthorized use claims. Comment is                     comment 12(b)(2)(ii)–2. In addition, the               purchased with a credit card. The claim
                                             requested, however, as to whether this                  examples in comment 12(b)(2)(iii)–1                    or defense applies only as to unpaid
                                             clarification is necessary in light of the              describing means of identifying a                      balances for the goods or services, and
                                             existing definition of ‘‘unauthorized                   cardholder or user would be updated to                 if the merchant honoring the card fails
                                             use.’’ Current § 226.12(b)(1) would be                  contemplate additional biometric means                 to resolve the dispute. See 15 U.S.C.
                                             re-designated as § 226.12(b)(1)(ii).                    of identification other than a fingerprint             1666i. The cardholder may withhold
                                                Section 226.12(b)’s liability                        on a card.                                             payment up to the unpaid balance of the
                                             provisions apply only to unauthorized                      Comment 12(b)(2)(iii)–3 currently                   purchase that gave rise to the dispute
                                             uses of a cardholder’s credit card. Thus,               states that a cardholder may not be held               and any finance or other charges
                                             the liability limits established in                     liable under § 226.12(b) when the card                 imposed on that amount. The right is
                                             § 226.12(b) do not apply to                             itself or some other sufficient means of               limited to disputes exceeding $50 for
                                             unauthorized transactions involving the                 identification of the cardholder is not                purchases made in the consumer’s home
                                             use of a check that accesses a credit card              presented. In these circumstances, the                 state or within 100 miles. See
                                             account. (See prior discussion of ‘‘credit              card issuer has not satisfied one of the               § 226.12(c).18 The proposal would
                                             card’’ under § 226.2(a)(15).) The                       conditions precedent necessary to                      update the regulation to address current
                                             consumer would nevertheless be able to                  impose liability; that is, it has not                  business practices and move guidance
                                             assert the billing error protections in                 provided a means to identify the                       currently in the footnotes to the rule or
                                             § 226.13 which are independent of the                   cardholder of the account or the user of               the staff commentary as appropriate.
                                             protections under § 226.12(b). New                      the card. For example, no liability may                   In order to assert a claim under
                                             comment 12(b)–4 would contain this                      be imposed on the cardholder if a                      § 226.12(c), a cardholder must have
                                             clarification.                                          person without authority to do so orders               used a credit card to purchase the goods
                                                Some commenters on the December                      merchandise by telephone, using a                      or services associated with the dispute.
                                             2004 ANPR urged the Board to adopt a                    credit card number or another number                   Comment 12(c)(1)–1 lists examples of
                                             time period within which consumers                      that appears only on the card. The                     circumstances that are excluded or
                                             must make claims for unauthorized                       example would be updated to also apply                 included by § 226.12(c). The proposal
                                             transactions made through the use of a                  to Internet transactions.                              would add Internet transactions charged
                                             credit card. These commenters asserted                     In many instances, a credit card will
                                                                                                                                                            to the credit card account to the list of
                                             that over time, evidence becomes more                   bear a separate 3- or 4-digit number,
                                                                                                                                                            circumstances included within the
                                             difficult to obtain, making a creditor’s                which is typically printed on the back
                                                                                                                                                            scope of § 226.12(c) (provided that
                                             investigation more difficult and that a                 of the card on the signature block or in
                                                                                                                                                            certain conditions are met, including
                                             consumer’s early detection and                          some cases on the front of the card
                                                                                                                                                            that the disputed transaction take place
                                             notification would prevent additional                   above the card number. Although the
                                             fraud on the account. In contrast to                    provision of the 3- or 4-digit number                  in the same state as the cardholder’s
                                             TILA Section 161 which requires                         may suggest that the person providing                  current designated address, or within
                                             consumers to assert a billing error claim               the number is in possession of the card,               100 miles from that address).
                                             within 60 days after a periodic                         it does not meet the requirement to                       In technical revisions, guidance
                                             statement reflecting the error has been                 provide a means to identify the                        stating § 226.12(c)’s inapplicability to
                                             sent, TILA Section 133 does not                         cardholder or the authorized user of the               the transactions listed in footnote 24 has
                                             prescribe a time frame for asserting an                 card, as required by the regulation.                   been moved to comment 12(c)–3 with
                                             unauthorized use claim. 15 U.S.C. 1643.                 Thus, comment 12(b)(2)(iii)–3 would                    corresponding changes in comment
                                             The Board believes that had Congress                    clarify that a card issuer may not impose              12(c)(1)–1. The reference to ‘‘paper-
                                             intended that a consumer’s rights to                    liability on the cardholder when                       based debit cards’’ in existing comment
                                             assert an unauthorized use claim to be                  merchandise is ordered by telephone or                 12(c)(1)–1 would be deleted as obsolete.
                                             time-limited, it would have established                 Internet if the person using the card                  The Board is aware of at least one
                                             a time frame for asserting the claim.                   without the cardholder’s authority                     product, however, whereby a consumer
                                             Accordingly, the proposal does not                      provides the credit card number by                     can pay cash and is instantly issued an
                                             contain the suggested change.                           itself or with other information that                  account number (along with a 3-digit
                                                Conditions for imposing liability.                   appears on the card because it has not                 card identification number and
                                             Section 226.12(b)(2) requires the card                  met the requirement that a means to                    expiration date) that allows the
                                             issuer to satisfy three conditions before               identify the cardholder or authorized                  consumer to conduct transactions with
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                                             the issuer may impose any liability for                 user of the card in the transaction.                   an online merchant. No physical card
                                             an unauthorized use of a credit card.                      The Board is also proposing revisions               device is issued to the consumer.
                                             First, the credit card must be an                       to Model Clause G–2, which can be used                   18 Certain merchandise disputes, such as the
                                             accepted credit card. See footnote 21;                  to explain the consumer’s liability for                nondelivery of goods, may also be separatel asserted
                                             proposed comment 12–2. Second, the                      unauthorized use, to improve its                       as a ‘‘billing error’’ under §226.13(a)(3). See
                                             card issuer must have provided                          readability. For HELOCs subject to                     comment 12(c)–1.



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                                                                     Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / Proposed Rules                                           33017

                                             Comment is requested whether the                        for more favorable account terms) and                    The proposed revisions would clarify,
                                             reference to paper-based debit cards                    must specifically intend to grant a                    among other things, that (1) the billing
                                             should be retained or expanded to                       security interest in a deposit account.’’              error provisions apply to purchases
                                             include these ‘‘virtual’’ cards. Comment                The comment gives some examples of                     made using a third-party payment
                                             is also requested as to whether the                     how this requirement can be met, such                  intermediary, where the purchase is
                                             references to ‘‘check-guarantee cards’’                 as use of separate signature or initials to            funded through an extension of credit
                                             under comments 12(c)–3 (see existing                    authorize the security interest,                       using the consumer’s credit card or
                                             footnote 24) and 12(c)(1)–1 should                      placement of the security agreement on                 other open-end plan; (2) a creditor must
                                             continue to be retained as guidance in                  a separate page, or reference to a                     complete its investigation within the
                                             the commentary or whether they should                   specific amount or account number for                  time frames established under the
                                             also be deleted as obsolete.                            the deposit account. The comment also                  regulation and may not reverse any
                                                Section 226.12 also requires that the                states that the security interest must be              credits made once the time frames have
                                             disputed transaction must have                          ‘‘obtainable and enforceable by creditors              expired; and (3) a creditor may not
                                             occurred in the same state as the                       generally. If other creditors could not                deduct any portion of a disputed
                                             cardholder’s current designated address                 obtain a security interest in the                      amount or related charges when a
                                             or, if different, within 100 miles from                 consumer’s deposit accounts to the                     cardholder uses an automatic payment
                                             that address. See § 226.12(c)(3). Thus, if              same extent as the card issuer, the                    service offered directly by or through
                                             applicable state law provides that a                    security interest is prohibited by                     the creditor.
                                             mail, telephone, or Internet transaction                § 226.12(d)(2).’’                                        In technical revisions, the substance
                                             occurs at the cardholder’s address, such                   From time to time, questions have                   of footnotes 27–30 would be moved to
                                             transactions would be covered under                     been raised about comment 12(d)(2)–1.                  the regulation or the commentary, as
                                             § 226.12(c), even if the merchant is                    For example, some card issuers have                    appropriate, and footnote 31 would be
                                             located more than 100 miles from the                    asked whether using only one of the                    deleted. (See redesignation table below.)
                                             cardholder’s address. The conditions for                methods to ensure the consumer’s                       For the reasons set forth in the section-
                                             asserting merchant claims would be re-                  awareness and intent is sufficient,                    by-section analysis to § 226.6(b)(1), the
                                             designated under § 226.12(c)(3)(i)(A)                   versus using more than one. Card                       Board would update references to ‘‘free-
                                             and (B) in the proposal. In addition, the               issuers have also asked about the                      ride period’’ as ‘‘grace period’’ in the
                                             Board proposes to move the guidance                     requirement that the security interest be              regulation and commentary, without
                                             currently found in footnote 26 regarding                obtainable and enforceable by creditors                any intended substantive change.
                                             the applicability of some of the                        generally. The Board requests comment
                                                                                                                                                            13(a) Definition of Billing Error
                                             limitations in § 226.12(c) to                           on whether additional guidance is
                                             § 226.12(c)(3)(ii). Corresponding                       needed and, if so, the specific issues                    The definition of a billing error in
                                             revisions to reflect the proposed                       that the guidance should address.                      § 226.13(a) would be substantively
                                             changes would also be made to the staff                                                                        unchanged in the proposal. Under
                                                                                                     12(e) through 12(g)                                    § 226.13(a)(3), the term ‘‘billing error’’
                                             commentary, with additional clarifying
                                             changes.                                                  Sections § 226.12(e), (f), and (g)                   includes disputes about property or
                                                Guidance regarding how to calculate                  address, respectively: the prompt                      services that are not accepted by the
                                             the amount of the claim or defense that                 notification of returns and crediting of               consumer or not delivered to the
                                             may be asserted by the cardholder under                 refunds; discounts and tie-in                          consumer as agreed. See § 226.13(a)(3).
                                             § 226.12(c), currently found in footnote                arrangements; and guidance on the                      The proposal would add a new
                                             25, would be moved to the commentary                    applicable regulation (Regulation Z or                 comment 13(a)(3)–2 to clarify that
                                             in proposed comment 12(c)–4.                            Regulation E) in instances involving                   § 226.13(a)(3) also applies when a
                                                                                                     both credit and electronic fund transfer               consumer uses his or her credit card or
                                             12(d) Offsets by Card Issuer Prohibited                                                                        other open-end account to purchase a
                                                                                                     aspects. The Board does not propose