5 May 2009
[Federal Register: May 5, 2009 (Volume 74, Number 85)] [Proposed Rules] [Page 20803-20832] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr05my09-30] [[Page 20803]] ----------------------------------------------------------------------- Part III Federal Reserve System ----------------------------------------------------------------------- Department of the Treasury Office of Thrift Supervision ----------------------------------------------------------------------- National Credit Union Administration 12 CFR Part 227, 535, and 706 Unfair or Deceptive Acts or Practices; Clarifications; Proposed Rule [[Page 20804]] ----------------------------------------------------------------------- FEDERAL RESERVE SYSTEM 12 CFR Part 227 [Regulation AA; Docket No. R-1314] DEPARTMENT OF THE TREASURY Office of Thrift Supervision 12 CFR Part 535 [Docket ID OTS-2009-0006] RIN 1550-AC17 NATIONAL CREDIT UNION ADMINISTRATION 12 CFR Part 706 RIN 3133-AD62 Unfair or Deceptive Acts or Practices; Clarifications AGENCIES: Board of Governors of the Federal Reserve System (Board); Office of Thrift Supervision, Treasury (OTS); and National Credit Union Administration (NCUA). ACTION: Proposed rule; request for public comment. ----------------------------------------------------------------------- SUMMARY: In December 2008, the Board, OTS, and NCUA (collectively, the Agencies) exercised their authority under the Federal Trade Commission Act to issue a final rule prohibiting institutions from engaging in specific acts or practices in connection with consumer credit card accounts. The Agencies understand that clarification is needed regarding certain aspects of the final rule. Accordingly, in order to facilitate compliance, the Agencies propose to amend specific portions of the regulations and official staff commentary. DATES: Comments must be received on or before June 4, 2009. ADDRESSES: Because paper mail in the Washington DC area and at the Agencies is subject to delay, we encourage commenters to submit comments by e-mail, if possible. We also encourage commenters to use the title ``Unfair or Deceptive Acts or Practices'' to facilitate our organization and distribution of the comments. Comments submitted to one or more of the Agencies will be made available to all of the Agencies. Interested parties are invited to submit comments as follows: Board: You may submit comments, identified by Docket No. R-1314, by any of the following methods: |
Treatment of Deferred Interest and Similar Promotional Programs In the final rule, the Agencies concluded that deferred interest programs, as currently designed and marketed, are inconsistent with the general prohibition in Sec. --.24 on the application of increased rates to existing balances. See 74 FR 5527-5528. The Agencies noted that, although such programs provide substantial benefits to consumers who pay the balance in full prior to expiration of the program (thereby avoiding the assessment of interest charges), consumers who do not do so may be unfairly surprised, particularly because these programs are typically marketed as ``interest free.'' Accordingly, the Agencies determined that the assessment of deferred interest is effectively a repricing of past transactions subject to Sec. --.24 and that prohibiting this practice would improve transparency and enable consumers to make more informed decisions regarding the cost of using credit. See id. The Agencies specifically stated, however, that Sec. --.24 does not prohibit institutions from offering promotional programs that provide similar benefits to consumers but do not raise concerns about unfair surprise. In particular, the Agencies noted that an institution could offer a program where interest is assessed on purchases at a disclosed rate for a period of time but the interest charged is waived if the principal is paid in full by the end of that period. The Agencies understand that the distinction in the January 2009 Rule between deferred interest and waived interest has caused confusion with respect to the manner in which institutions should structure promotional programs under which the consumer will not be obligated to pay interest that accrues on a balance if that balance is paid in full by a specified date or within a specified period of time. In light of this confusion, the Agencies believe that the January 2009 Rule focused too heavily on the form or technical aspects of these programs.\19\ Deferred interest programs should not be categorically prohibited while waived interest programs are categorically exempt from the requirements of the final rule. Instead, the Agencies believe the better approach is to focus on applying consistent standards to ensure that consumers are not unfairly surprised by the cost of using these types of promotional programs. Accordingly, the Agencies propose the following amendments. --------------------------------------------------------------------------- \19\ In particular, the Agencies understand that the references in the January 2009 Rule to ``assessing'' or ``charging'' interest have caused uncertainty about whether, during the promotional period, an institution must treat accrued interest for which the consumer may or may not ultimately be responsible (depending on whether the balance is paid in full prior to expiration) as part of the consumer's debt. The Agencies did not intend to regulate the accounting treatment of this accrued interest. Instead, the Agencies intended to ensure that consumers understand the amount of interest for which they will be responsible if the balance is not paid in full before expiration. As discussed elsewhere in this SUPPLEMENTARY INFORMATION, the Board is proposing amendments to Regulation Z in today's Federal Register to accomplish this purpose. --------------------------------------------------------------------------- As an initial matter, the Agencies understand that the distinction in the January 2009 Rule between ``deferred interest'' programs and ``waived interest'' programs could be read to suggest that some programs were covered by the final rule and others were not. Because the protections consumers receive should not depend on this technical distinction, the Agencies propose to amend the commentary to Sec. --.24 to clarify that, although institutions may continue to provide promotional programs under which the consumer will not be obligated to pay interest that accrues on a balance if that balance is paid in full within a specified period of time, those programs are subject to all of the protections in Sec. --.24, including the general prohibition on so-called ``hair trigger'' or ``universal default'' repricings of existing balances. See proposed comments 24(a)-2.iv and 24(b)(3)-4.iii. Thus, for example, if a consumer relies on this type of promotional program when making a purchase, the institution cannot deny the consumer the opportunity to avoid interest charges on that purchase by paying the purchase in full prior to expiration of the promotional period unless the consumer is more than 30 days' delinquent on the account.\20\ --------------------------------------------------------------------------- \20\ If, however, the waived or deferred interest balance is not paid in full on or before the date the program expires, the institution is not required to wait an additional 30 days before charging accrued interest. See proposed comment 24(a)-2.iv. --------------------------------------------------------------------------- Furthermore, as discussed above, the Agencies propose to amend the payment allocation rules in Sec. --.23 to ensure that consumers are not required to pay off all balances on the account in order to receive the benefits of these types of promotional programs. In addition, elsewhere in today's Federal Register, the Board has proposed to amend the advertising requirements in Regulation Z, 12 CFR 226.16, to address concerns that the use of terms such as ``no interest'' to describe deferred or waived interest programs may confuse consumers. Specifically, whenever ``no interest'' or a similar term is used in an advertisement for a deferred or waived interest program, proposed 12 CFR 226.16(h) would require the creditor to disclose that any balance subject to the program must be paid in full by the end of the promotional period to avoid interest charges (for example, ``no interest if paid in full within six months''). In addition, the creditor would be required to state that, if the balance subject to the program is not paid in full within the promotional period, interest will be charged from the date the consumer became obligated for each transaction subject to the program.\21\ The Agencies believe that [[Page 20813]] these amendments will ensure that institutions can continue to offer programs that provide substantial benefits to consumers while protecting consumers from unexpected increases in the cost of completed transactions. --------------------------------------------------------------------------- \21\ As discussed above, the Board has also proposed to amend the periodic statement disclosures in Regulation Z, 12 CFR 226.7, to ensure that consumers who utilize these types of promotional programs are informed of the date on which the program expires and the amount of interest for which they will be responsible if the promotional balance is not paid in full by that date. --------------------------------------------------------------------------- Finally, the Agencies understand that there is some confusion regarding implementation of the final rule with respect to existing deferred interest programs. As noted above, the effective date of the January 2009 Rule is July 1, 2010. In the SUPPLEMENTARY INFORMATION to that rule, the Agencies provided guidance regarding the implementation of Sec. --.24. See 74 FR 5534. The Agencies did not, however, address the effect of the rule on deferred interest programs established prior to the effective date that expire after that date. The Agencies did not intend to convert these programs into interest-free loans by prohibiting an institution from charging interest if the deferred interest balance is not paid in full prior to expiration of the deferred interest period. However, the Agencies will not permit institutions to continue practices prohibited by the January 2009 Rule after the effective date. Accordingly, if a deferred interest program established prior to the effective date permits a consumer to avoid deferred interest charges by paying the deferred interest balance in full by a date that falls on or after July 1, 2010, the institution may charge deferred interest to the account consistent with the terms of the program, provided that: (1) Any periodic statement mailed or delivered on or after July 1, 2010 complies with the disclosure requirements in 12 CFR 226.7 (as amended); and (2) as of July 1, 2010, the institution fully complies with the protections in the January 2009 Rule (as amended), including the payment allocation requirements in proposed Sec. --.23(b) and the prohibitions on ``hair trigger'' and ``universal default'' repricings in Sec. --.24. 24(c) Treatment of Protected Balances The Agencies propose to amend comment 24(c)(2)-1 to clarify that Sec. --.24(c)(2) does not prohibit an institution from continuing to assess a periodic fee that was assessed before the account had a protected balance or from assessing fees such as late payment fees if the only balance on the account is a protected balance. Requests for Comment The Agencies request comment on: |
4. Account opening. i. Multiple accounts with same bank. When a consumer has a credit card account with a bank and the consumer opens a new credit card account with the same bank (or its affiliate or subsidiary), the opening of the new account constitutes an ``account opening'' for purposes of Sec. 227.24 if, more than 15/30 days after the new account is opened, the consumer has the ability to obtain additional extensions of credit on each account. For example, assume that, on January 1 of year one, a consumer opens a credit card account with a bank. On July 1 of year one, the consumer opens a second credit card account with that bank. On July 15, a $1,000 balance is transferred from the first account to the second account. The opening of the second account constitutes the opening of an account for purposes of Sec. 227.24 so long as, on July 17/August 1, the consumer can engage in transactions using either account. Under these circumstances, the bank could not increase an annual percentage rate on the second account pursuant to Sec. 227.24(b)(3) until July 1 of year two (which is one year after the second account was opened). ii. Replacement or consolidation. A. Generally. A consumer credit card account has not been opened for purposes of Sec. 227.24 when a consumer credit card account issued by a bank is replaced or consolidated with another consumer credit card account issued by the same bank (or its affiliate or subsidiary). Circumstances in which a consumer credit card account has not been opened for purposes of Sec. 227.24 include when: (1) A retail credit card is replaced with a cobranded general purpose card that can be used at a wider number of merchants; (2) A credit card account is replaced with another consumer credit card account offering different features; (3) A credit card account is consolidated or combined with one or more other credit card accounts into a single credit card account; or (4) A credit card account acquired through merger or acquisition is replaced with a credit card account issued by the acquiring bank. B. Limitation. A bank that replaces or consolidates a consumer credit card account with another consumer credit card account issued by the bank (or its affiliate or subsidiary) may not increase an annual percentage rate in a manner otherwise prohibited by Sec. 227.24. For example, assume that, on January 1 of year one, a consumer opens a consumer credit card account with an annual percentage rate for purchases of 15%. On July 1 of year one, the account is replaced with a consumer credit card account that offers different features (such as rewards on purchases). Under [[Page 20817]] these circumstances, the bank cannot increase the annual percentage rate for purchases to a rate that is higher than 15% pursuant to Sec. 227.24(b)(3) until January 1 of year two (which is one year after the first account was opened).[ltrif] 24(a) General Rule 1. Rates that will apply to each category of transactions. Section 227.24(a) requires banks to disclose, at account opening, the annual percentage rates that will apply to each category of transactions on the account. A bank cannot satisfy this requirement by disclosing at account opening only a range of rates or that a rate will be ``up to'' a particular amount. [rtrif]The disclosure requirements in Sec. 227.24(a) do not apply to annual percentage rates that are contingent on a particular event or occurrence or may be applied at the bank's discretion (such as penalty rates) insofar as those rates may be applied consistent with Sec. 227.24.[ltrif] 2. * * * i. Assume that, at account opening on January 1 of year one, a bank discloses that the annual percentage rate for purchases is a non- variable rate of 15% and will apply for six months. The bank also discloses that, after six months, the annual percentage rate for purchases will be a variable rate that is currently 18% and will be adjusted quarterly by adding a margin of 8 percentage points to a publicly available index not under the bank's control. [rtrif]Furthermore,[ltrif] [lsqbb]Finally,[rsqbb] the bank discloses that the annual percentage rate for cash advances is the same variable rate that will apply to purchases after six months. [rtrif]Finally, the bank discloses that, to the extent consistent with Sec. 227.24 and other applicable law, a non-variable penalty rate of 30% may apply if the consumer makes a late payment.[ltrif] The payment due date for the account is the twenty-fifth day of the month and the required minimum periodic payments are applied to accrued interest and fees but do not reduce the purchase and cash advance balances. * * * * * iii. Assume that, at account opening on January 1 of year one, a bank discloses that the annual percentage rate for purchases is a variable rate determined by adding a margin of 6 percentage points to a publicly-available index outside of the bank's control. The bank also discloses that, to the extent consistent with Sec. 227.24 and other applicable law, a non-variable penalty rate of 28% may apply if the consumer makes a late payment. The due date for the account is the fifteenth of the month. On May 30 of year two, the account has a purchase balance of $1,000. On May 31, the creditor provides a notice pursuant to 12 CFR 226.9(c) informing the consumer of a new variable rate that will apply on July 16 for all purchases made on or after June 8 (calculated by using the same index and an increased margin of 8 percentage points). On June 7, the consumer makes a $500 purchase. On June 8, the consumer makes a $200 purchase. On June 25, the bank has not received the payment due on June 15 and provides the consumer with a notice pursuant to 12 CFR 226.9(g) stating that the penalty rate of 28% will apply as of August 9 to all transactions made on or after July 3 [rtrif]and that, if the consumer becomes more than 30 days late, the penalty rate will apply to all balances on the account[ltrif]. On July 4, the consumer makes a $300 purchase. * * * * * C. Same facts as paragraph A. above except the payment due on June 15 of year two is received on July 20. Section 227.24(b)(4) permits the bank to apply the 28% penalty rate to all balances on the account and to future transactions because it has not received payment within 30 days after the due date. Because the bank provided a 12 CFR 226.9(g) notice on June [rtrif]25[ltrif][lsqbb]24[rsqbb] stating the 28% penalty rate, the bank may apply the 28% penalty rate to all balances on the account as well as any future transactions on August 9 without providing an additional notice pursuant to 12 CFR 226.9(g). [rtrif]iv. Assume that, at account opening on January 1 of year one, the bank discloses a promotional program under which interest on purchases made during January will accrue at a non-variable rate of 20%, but the consumer will not be obligated to pay that interest if those purchases are paid in full by December 31 of year one. On January 15, the consumer makes a purchase of $2,000. No other transactions are made on the account. The payment due on April 1 is not received until April 10. Section 227.24 does not permit the bank to deny the consumer the opportunity to avoid interest charges on the $2,000 purchase by paying that purchase in full on or before December 31 of year one. If, however, the $2,000 purchase remains unpaid on January 1 of year two, Sec. 227.24 does not prohibit the bank from charging the interest accrued on that purchase during year one.[ltrif] 24(b) Exceptions [rtrif]1. Delayed implementation of rate increase. If Sec. 227.24(b) permits a bank to apply an increased annual percentage rate on a date that is not the first day of a billing cycle, the bank may delay application of the increased rate until the first day of the following billing cycle without relinquishing the ability to apply that rate. For example, assume that, at account opening on January 1, a bank discloses that a non-variable annual percentage rate of 10% will apply to purchases for six months and a non-variable rate of 15% will apply thereafter. The first day of the billing cycle for the account is the fifteenth of the month. If the six-month period expires on July 1, the bank may delay application of the 15% rate until July 15 without relinquishing its ability to apply that rate under Sec. 227.24(b)(1).[ltrif] 24(b)(1) Account Opening Disclosure Exception 1. Prohibited increases in rate. Section Sec. 227.24(b)(1) permits an increase in the annual percentage rate for a category of transactions to a rate disclosed at account opening upon expiration of a period of time that was also disclosed at account opening. Section 227.24(b)(1) does not permit application of [rtrif]an increased annual percentage rate[ltrif] [lsqbb]increased rates that are[rsqbb] disclosed at account opening [rtrif]that is[ltrif] [lsqbb]but are[rsqbb] contingent on a particular event or occurrence or [rtrif]that[ltrif] may be applied at the bank's discretion. The following examples illustrate rate increases that are not permitted by Sec. 227.24[lsqbb](a)[rsqbb]: * * * * * [lsqbb]iii. Assume that a bank discloses at account opening on January 1 of year one that interest on purchases will be deferred for one year, although interest will accrue on purchases during that year at a non-variable rate of 20%. The bank further discloses that, if all purchases made during year one are not paid in full by the end of that year, the bank will begin charging interest on the purchase balance and new purchases at 20% and will retroactively charge interest on the purchase balance at a rate of 20% starting on the date of each purchase made during year one. On January 1 of year one, the consumer makes a purchase of $1,500. No other transactions are made on the account. On January 1 of year two, $500 of the $1,500 purchase remains unpaid. Section 227.24 does not permit the bank to reach back to charge interest on the $1,500 purchase from January 1 through December 31 of year one. However, the bank may apply the previously-disclosed 20% rate to the $500 purchase balance beginning on January 1 of year two (pursuant to Sec. 227.24(b)(1)).[rsqbb] [lsqbb]2. Loss of grace period. Nothing in Sec. 227.24 prohibits a bank from assessing interest due to the loss of a grace period to the extent consistent with Sec. 227.25.[rsqbb] [[Page 20818]] [rtrif]2.[ltrif] [lsqbb]3.[rsqbb] Application of rate that is lower than disclosed rate. Section Sec. 227.24(b)(1) permits an increase in the annual percentage rate for a category of transactions to a rate disclosed at account opening upon expiration of a period of time that was also disclosed at account opening. Nothing in Sec. 227.24 prohibits a bank from applying a rate that is lower than [rtrif]a[ltrif] [lsqbb]the[rsqbb] disclosed rate [rtrif]either during or[ltrif] upon expiration of the period. However, [rtrif]once the[ltrif] [lsqbb]if a[rsqbb] lower rate is applied to an existing balance, the bank cannot subsequently increase the rate on that balance unless it [lsqbb]has[rsqbb] provided the consumer with advance notice of the increase pursuant to 12 CFR 226.9[rtrif](b)[ltrif] or (c). [rtrif]This notice must state the period of time during which the lower rate will apply and the rate that will apply after expiration of that period.[ltrif] Furthermore, [rtrif]a bank that applies a lower rate to transactions that occurred during the first year after account opening may not subsequently increase the rate that applies to those transactions to a rate that is higher than the increased rate disclosed at account opening[ltrif] [lsqbb]the bank cannot increase the rate on that existing balance to a rate that is higher than the increased rate disclosed at account opening[rsqbb]. The following [rtrif]examples illustrate[ltrif] [lsqbb]example illustrates[rsqbb] the application of [rtrif]the[ltrif] [lsqbb]this[rsqbb] rule: * * * * * [rtrif]ii. Assume that a bank discloses at account opening on January 1 of year one that a non-variable annual percentage rate of 15% will apply to purchases for one year, after which that rate will increase to a non-variable rate of 18%. The bank also discloses that, to the extent consistent with Sec. 227.24 and other applicable law, a non-variable penalty rate of 30% may apply if the consumer's required minimum periodic payment is received after the payment due date, which is the tenth of the month. The required minimum periodic payments are applied to accrued interest and fees but do not reduce the purchase balance. A. On September 30 of year one, the account has a purchase balance of $1,400 at the 15% rate. On October 1, the bank provides a notice pursuant to 12 CFR 226.9(c) informing the consumer that the rate for new purchases will decrease to a non-variable rate of 10% for six months (from October 1 through March 31 of year two) and that, beginning on April 1 of year two, the rate for purchases will increase to a non-variable rate of 20%. The bank does not apply the 10% rate to the $1,400 purchase balance. On October 15 of year one, the consumer makes a $300 purchase at the 10% rate. On January 1 of year two, the bank may begin accruing interest on the $1,400 purchase balance at 18% (as disclosed at account opening). On January 15 of year two, the consumer makes a $150 purchase at the 10% rate. On April 1 of year two, the 10% rate that applies to the $300 purchase and the $150 purchase expires. The bank may begin accruing interest on the $150 purchase at 20% (as disclosed in the 12 CFR 226.9(c) notice). Because, however, the $300 purchase occurred during the first year after account opening, the bank cannot increase the rate that applies to that purchase to a rate that is higher than the 18% rate disclosed at account opening. B. Same facts as above except that the required minimum periodic payment due on November 10 of year one is not received until November 15. Section 227.24(b)(1) does not permit the bank to increase any annual percentage rate on the account at this time. The bank may, however, apply the 30% penalty rate to new transactions beginning on January 1 of year two pursuant to Sec. 227.24(b)(3) by providing a 12 CFR 226.9(g) notice informing the consumer of this increase no later than November 16 of year one. On January 1 of year two, Sec. 227.24(b)(1) permits the bank to begin accruing interest on the $1,400 purchase balance at 18% (as disclosed at account opening). If the consumer makes the $150 purchase on January 15 of year two, Sec. 227.24(b)(3) would permit the bank to apply the 30% rate to that purchase. On April 1 of year two, the 10% rate that applies to the $300 purchase expires. Because this purchase occurred during the first year after account opening, the bank cannot increase the rate that applies to that purchase to a rate that is higher than the 18% rate disclosed at account opening.[ltrif] 24(b)(2) Variable Rate Exception * * * * * 5. Changing a variable [lsqbb]annual percentage[rsqbb] rate to a non-variable [lsqbb]annual percentage[rsqbb] rate. * * * * * * * * 24(b)(3) Advance Notice Exception * * * * * 2. Transactions that [rtrif]occurred prior to provision of notice or within seven days after provision of notice[ltrif] [lsqbb]occur more than seven days after notice provided[rsqbb]. [rtrif]Section 227.24(b)(3) generally permits a bank to apply an increased rate to transactions that occur after provision of a 12 CFR 226.9(b) notice or more than seven days after provision of a 12 CFR 226.9(c) or (g) notice. If a rate increase is disclosed pursuant to both 12 CFR 226.9(b) and 12 CFR 226.9(c), that rate may only be applied to transactions that occur more than seven days after provision of the 12 CFR 226.9(c) notice. Section 227.24(b)(3) does not permit a bank to reach back to days before the effective date of the rate increase under 12 CFR 226.9(c) or (g) when calculating interest charges. See comment 24(b)(3)-3.[ltrif] [lsqbb]Section 227.24(b)(3) generally prohibits a bank from applying an increased rate to transactions that occur within seven days after provision of the 12 CFR 226.9 (c) or (g) notice.[rsqbb] [rtrif]Whether a transaction occurred prior to provision of a notice or within seven days after provision of a notice is determined by the date of the transaction. In some cases, however, a merchant may place a ``hold'' on the available credit on an account for an estimated transaction amount when the actual transaction amount will not be known until a later date. In these circumstances, the date of the transaction for purposes of Sec. 227.24(b)(3) is the date on which the merchant determines the actual transaction amount. For example, assume that, when a consumer uses a credit card account to check into a hotel on July 1, the hotel obtains authorization for a $750 hold on the account to ensure there is adequate available credit to cover the anticipated cost of the stay. When the consumer checks out on July 4, the actual cost of the stay is $850 because of additional incidental costs, and the hotel charges this amount to the account. For purposes of Sec. 227.24(b)(3), the transaction occurred on July 4.[ltrif] [lsqbb]This prohibition does not, however, apply to transactions that are authorized within seven days after provision of the 12 CFR 226.9 (c) or (g) notice but are settled more than seven days after the notice was provided.[rsqbb] 3. Examples. i. Assume that a consumer credit card account is opened on January 1 of year one. On March 14 of year two, the account has a purchase balance of $2,000 at a non-variable annual percentage rate of 15%. On March 15, the bank provides a notice pursuant to 12 CFR 226.9(c) informing the consumer that the rate for new purchases will increase to a non-variable rate of 18% on May 1. The notice further states that the 18% rate will apply for six months (until November 1) and states that thereafter the bank will apply a variable rate that is currently 22% and is determined by adding a margin of 12 percentage points to a publicly-available index that is not under the bank's [[Page 20819]] control. The seventh day after provision of the notice is March 22 and, on that date, the consumer makes a $200 purchase. On March 24, the consumer makes a $1,000 purchase. On May 1, Sec. 227.24(b)(3) permits the bank to begin accruing interest at 18% on the $1,000 purchase made on March 24. The bank is not permitted to apply the 18% rate to the $2,200 purchase balance as of March 22. After six months (November 2), the bank may begin accruing interest on any remaining portion of the $1,000 purchase at the previously-disclosed variable rate determined using the 12-point margin. [lsqbb]ii. Same facts as above except that the $200 purchase is authorized by the bank on March 22 but is not settled until March 23. On May 1, Sec. 227.24(b)(3) permits the bank to start charging interest at 18% on both the $200 purchase and the $1,000 purchase. The bank is not permitted to apply the 18% rate to the $2,000 purchase balance as of March 22.[rsqbb] [rtrif]ii.[ltrif] [lsqbb]iii.[rsqbb] Same facts as [lsqbb]in paragraph i.[rsqbb] above except that on September 17 of year two (which is 45 days before expiration of the 18% non-variable rate), the bank provides a notice pursuant to 12 CFR 226.9(c) informing the consumer that, on November 2, a new variable rate will apply to new purchases and any remaining portion of the $1,000 balance (calculated by using the same index and a reduced margin of 10 percentage points). The notice further states that, on May 1 of year three, the margin will increase to the margin disclosed [rtrif]in the March 15 notice[ltrif] [lsqbb]at account opening[rsqbb] (12 percentage points). On May 1 of year three, Sec. 227.24(b)(3) permits the bank to increase the margin used to determine the variable rate that applies to new purchases to 12 percentage points and to apply that rate to any remaining portion of the $1,000 purchase as well as to new purchases. [lsqbb]See comment 24(b)(1)-3.[rsqbb] The bank is not permitted to apply this rate to any remaining portion of the $2,200 purchase balance as of March 22. [rtrif]4. Application of a lower rate. Nothing in Sec. 227.24 prohibits a bank from lowering the annual percentage rate that applies to an existing balance or to new transactions. However, once the lower rate is applied to an existing balance, the bank cannot subsequently increase the rate on that balance unless it provided the consumer with advance notice of the increase pursuant to 12 CFR 226.9(b) or (c). This notice must state the period of time during which the lower rate will apply and the rate that will apply after expiration of that period. Furthermore, a bank that applies a decreased rate to transactions that occurred prior to provision of the notice--or, in the case of a 12 CFR 226.9(c) or (g) notice, transactions that occurred within seven days after provision of the notice--may not subsequently increase the rate that applies to those transactions to a rate that is higher than the rate that applied prior to the decrease. The following examples illustrate the application of the rule: i. Assume that a bank discloses at account opening on January 1 of year one that a non-variable annual percentage rate of 10% will apply to purchases for one year, after which that rate will increase to a non-variable rate of 15%. The bank also discloses that, to the extent consistent with Sec. 227.24 and other applicable law, a non-variable penalty rate of 30% may apply if the consumer's required minimum periodic payment is received after the payment due date, which is the tenth of the month. The required minimum periodic payments are applied to accrued interest and fees but do not reduce the purchase balance. On June 30 of year two, the account has a purchase balance of $1,000 at the 15% rate. On July 1, the bank provides a notice pursuant to 12 CFR 226.9(c) informing the consumer that the rate for new purchases will decrease to a non-variable rate of 5% for six months (from July 1 through December 31 of year two) and that, beginning on January 1 of year three, the rate for purchases will increase to a non-variable rate of 17%. On July 8 of year two, the consumer makes a $200 purchase. On July 9, the consumer makes a $100 purchase. On January 1 of year three, Sec. 227.24(b)(3) permits the bank to begin accruing interest on the $100 purchase at 17%. The bank may not apply the 17% rate to the $200 purchase because that transaction occurred within seven days after provision of the 12 CFR 226.9(c) notice. If the bank applied the 5% rate to the $1,000 purchase balance and the $200 purchase, the bank may not increase the rate that applies to those amounts to a rate that is higher than 15% on January 1 of year three. ii. Same facts as above except that the required minimum periodic payment due on September 10 of year two is not received until September 15 of year two. On September 15 of year two, the bank provides a notice pursuant to 12 CFR 226.9(g) informing the consumer that the rate for new purchases will increase to the 30% penalty rate on October 31. On October 31, Sec. 227.23(b)(3) permits the bank to begin accruing interest at 30% on any purchase made on or after September 23. The bank may not, however, apply the 30% rate to the $1,300 in purchases. Instead, the bank must continue to apply the 5% rate to the $100 purchase until at least January 1 of year three when Sec. 227.24(b)(3) permits the bank to begin accruing interest on that purchase at 17%. Similarly, if the bank applied the 5% rate to the $1,000 purchase balance and the $200 purchase, the bank may begin accruing interest on those amounts at 15% on January 1 of year three. iii. Assume that a bank discloses at account opening on January 1 of year one that the rate that applies to purchases is a variable annual percentage rate that is currently 18% and will be adjusted quarterly by adding a margin of 8 percentage points to a publicly available index not under the bank's control. The bank also discloses that, to the extent consistent with Sec. 227.24 and other applicable law, a non-variable penalty rate of 30% may apply if the consumer's required minimum periodic payment is received after the payment due date, which is the first of the month. On July 30 of year two, the consumer uses the account for a $1,000 purchase in response to a promotional offer. Under the terms of this offer, interest on purchases made during the months of July through September will accrue at the variable rate for purchases but the consumer will not be obligated to pay that interest if all purchases made during that three-month period are paid in full by December 31 of year two. The payment due on September 1 of year two is not received until September 6. Section 227.24 does not permit the bank to deny the consumer the opportunity to avoid interest charges on the $1,000 purchase by paying that purchase in full on or before December 31 of year two. The bank may, however, provide a notice pursuant to 12 CFR 226.9(g) on September 2 of year two informing the consumer that the promotional offer does not apply to purchases made on or after September 10 and that the rate for such purchases will increase to the 30% penalty rate on October 18. On December 31 of year two, the $1,000 purchase has been paid in full. Under these circumstances, the bank may not charge any interest accrued on the $1,000 purchase. iv. Assume that a bank discloses at account opening on January 1 of year one that the rate that applies to cash advances is a variable annual percentage rate that is currently 24% and will be adjusted quarterly by adding a margin of 14 percentage points to a publicly available index not under the bank's control. On July 1 of year two, the bank provides checks that access the account [[Page 20820]] and, pursuant to 12 CFR 226.9(b)(3)(A), discloses that a promotional rate of 15% will apply to credit extended by use of the checks until January 1 of year three, after which the cash advance rate determined using the 14-point margin will apply. On July 15 of year two, the consumer uses one of the checks to pay for a $500 transaction. On January 1 of year three, Sec. 227.24(b)(3) permits the bank to apply the cash advance rate determined using the 14-point margin to the $500 transaction.[ltrif] 24(b)(5) Workout [rtrif]and Temporary Hardship[ltrif] Arrangement Exception 1. Scope of exception. Nothing in Sec. 227.24(b)(5) permits a bank to alter the requirements of Sec. 227.24 pursuant to a workout [rtrif]or temporary hardship[ltrif] arrangement between a consumer and the bank. For example, a bank cannot increase an annual percentage rate pursuant to a workout [rtrif]or temporary hardship[ltrif] arrangement unless otherwise permitted by Sec. 227.24. In addition, a bank cannot require the consumer to make payments with respect to a protected balance that exceed the payments permitted under Sec. 227.24(c). 2. Variable [lsqbb]annual percentage[rsqbb] rates. If the annual percentage rate that applied to a category of transactions prior to commencement of the workout [rtrif]or temporary hardship[ltrif] arrangement varied with an index consistent with Sec. 227.24(b)(2), the rate applied to that category of transactions following an increase pursuant to Sec. 227.24(b)(5) must be determined using the same formula (index and margin). 3. Example[rtrif]s[ltrif]. [rtrif]i.[ltrif] Assume that, consistent with Sec. 227.24(b)(4), the margin used to determine a variable annual percentage rate that applies to a $5,000 balance is increased from 5 percentage points to 15 percentage points. Assume also that the bank and the consumer subsequently agree to a workout arrangement that reduces the margin back to 5 points on the condition that the consumer pay a specified amount by the payment due date each month. If the consumer does not pay the agreed-upon amount by the payment due date, the bank may increase the margin for the variable rate that applies to the $5,000 balance up to 15 percentage points. 12 CFR 226.9 does not require advance notice of this type of increase. [rtrif]ii. Assume that a consumer fails to make four consecutive minimum payments totaling $480 on a consumer credit card account with a balance of $6,000 and that, consistent with Sec. 227.24(b)(4), the annual percentage rate that applies to that balance is increased from a non-variable rate of 15% to a non-variable penalty rate of 30%. Assume also that the bank and the consumer subsequently agree to a temporary hardship arrangement that reduces all rates on the account to 0% on the condition that the consumer pay an amount by the payment due date each month that is sufficient to cure the $480 delinquency within six months. If the consumer pays the agreed-upon amount by the payment due date during the six-month period and cures the delinquency, the bank may increase the rate that applies to any remaining portion of the $6,000 balance to 15% or any other rate up to the 30% penalty rate.[ltrif] 24(c) Treatment of Protected Balances * * * * * 24(c)(1) Repayment * * * * * Paragraph 24(c)(1)(i) * * * * * 2. Amortization when applicable [lsqbb]annual percentage[rsqbb] rate is variable. * * * * * * * * 24(c)(2) Fees and Charges 1. Fee or charge based solely on the protected balance. A bank is prohibited from assessing a fee or charge based solely on balances to which Sec. 227.24(c) applies. For example, a bank is prohibited from assessing a monthly maintenance fee that would not be charged if the account did not have a protected balance. A bank is not, however, prohibited from [rtrif]continuing to assess a periodic fee that was assessed before the account had a protected balance.[ltrif] [rtrif]Similarly, a bank is not prohibited from[ltrif] assessing fees such as late payment fees or fees for exceeding the credit limit even if such fees are based in part on the protected balance [rtrif]or if the only balance on the account is a protected balance[ltrif]. Sec. 227.25--Unfair Balance Computation Method 25(a) General Rule * * * * * [rtrif]3. Charging accrued interest at expiration of certain promotional programs. When a bank offers a promotional program under which a consumer will not be obligated to pay interest that accrues on a balance if that balance is paid in full prior to a specified date or expiration of a specified period of time, Sec. 227.25 does not prohibit the bank from charging that accrued interest to the account if the balance is not paid in full prior to the specified date (consistent with applicable law and regulatory guidance).[ltrif] * * * * * Department of the Treasury Office of Thrift Supervision 12 CFR Chapter V Text of Proposed Revisions Certain conventions have been used to highlight the proposed revisions. New language is shown inside [rtrif]bold-type arrows[ltrif] while language that would be deleted is set off with [lsqbb]bold-type brackets[rsqbb]. Authority and Issuance For the reasons discussed in the joint preamble, OTS proposes to further amend 12 CFR part 535, as amended at 74 FR 5567, January 29, 2009, as set forth below: PART 535--UNFAIR OR DECEPTIVE ACTS OR PRACTICES 1. Section 535.23 is revised to read as follows: Sec. 535.23 Unfair allocation of payments. When different annual percentage rates apply to different balances on a consumer credit card account[rtrif]: (a) General rule. Except as provided in paragraph (b) of this section[ltrif], you must allocate any amount paid by the consumer in excess of the required minimum periodic payment among the balances using one of the following methods: [rtrif](1)[ltrif] [lsqbb](a)[rsqbb] High-to-low method. The amount paid by the consumer in excess of the required minimum periodic payment is allocated first to the balance with the highest annual percentage rate and any remaining portion to the other balances in descending order based on the applicable annual percentage rate. [rtrif](2)[ltrif] [lsqbb](b)[rsqbb] Pro rata method. The amount paid by the consumer in excess of the required minimum periodic payment is allocated among the balances in the same proportion as each balance bears to the total balance. [rtrif](b) Special rule for accounts subject to certain promotional programs. When a promotional program provides that a consumer will not be obligated to pay interest that accrues on a balance if that balance is paid in full prior to the expiration of a specified period of time, you must allocate amounts paid by the consumer in excess of the required minimum periodic payment first to that balance during the two billing cycles immediately preceding expiration of the specified period and any remaining [[Page 20821]] portion to the other balances consistent with paragraph (a) of this section.[ltrif] 2. Section 535.24 is amended by revising paragraph (b) to read as follows: Sec. 535.24 Unfair increases in annual percentage rates. * * * * * (b) Exceptions. The prohibition in paragraph (a) of this section on increasing annual percentage rates does not apply where an annual percentage rate may be increased pursuant to one of the exceptions in this paragraph. (1) Account opening disclosure exception. An annual percentage rate for a category of transactions may be increased to [rtrif]an annual percentage rate[ltrif] [lsqbb]a rate[rsqbb] disclosed at account opening upon expiration of a period of time disclosed at account opening. [rtrif]This exception does not permit application of an increased annual percentage rate disclosed at account opening that is contingent on a particular event or occurrence or that may be applied at your discretion.[ltrif] (2) Variable rate exception. An annual percentage rate for a category of transactions that varies according to an index that is not under your control and is available to the general public may be increased due to an increase in the index. (3) Advance notice exception. An annual percentage rate for a category of transactions may be increased pursuant to a notice under 12 CFR 226.9[rtrif](b), (c), or (g)[ltrif] [lsqbb](c) or (g)[rsqbb][rtrif], provided that: (i) If you disclose the increased rate pursuant to 12 CFR 226.9(b), that rate must not be applied to transactions that occurred prior to provision of the notice; (ii) If you disclose the increased rate pursuant to 12 CFR 226.9(c) or (g), that rate must not be applied to transactions that occurred within seven days after provision of the notice; and (iii) This exception does not permit an increase in any annual percentage rate during the first year after the account is opened.[ltrif] [lsqbb]for transactions that occur more than seven days after provision of the notice. This exception does not permit an increase in any annual percentage rate during the first year after the account is opened.[rsqbb] (4) Delinquency exception. An annual percentage rate may be increased due to your not receiving the consumer's required minimum periodic payment within 30 days after the due date for that payment. (5) Workout [rtrif]and temporary hardship[ltrif] arrangement exception. An annual percentage rate may be increased due to the consumer's [rtrif]completion of[ltrif] [lsqbb]failure to comply with the terms of[rsqbb] a workout [rtrif]or temporary hardship[ltrif] arrangement between you and the consumer [rtrif]or the consumer's failure to comply with the terms of such an arrangement[ltrif], provided that the annual percentage rate applicable to a category of transactions following any such increase does not exceed the rate that applied to that category of transactions prior to commencement of the [lsqbb]workout[rsqbb] arrangement. [rtrif](6) Servicemembers Civil Relief Act exception. An annual percentage rate that has been decreased pursuant to 50 U.S.C. app. 527 may be increased once that provision no longer applies, provided that the annual percentage rate applicable to a category of transactions following any such increase does not exceed the rate that applied to that category of transactions prior to the decrease.[ltrif] * * * * * 3. In Appendix A to Part 535: A. Add Section 535.21--Definitions. B. Under Section 535.22--Unfair Acts or Practices Regarding Time to Make Payment, under 22(b) Compliance with General Rule, paragraph 3. is revised. C. Under Section 535.23--Unfair Acts or Practices Regarding Allocation of Payments: (i) Paragraph 2., the heading of paragraph 3., and paragraphs 4. and 6. are revised; (ii) Redesignate 23(a) High-to-Low Method as 23(a)(1) High-to-Low Method; (iii) Under 23(a)(1) High-to-Low Method, paragraph 1.v. is added; (iv) Redesignate 23(b) Pro Rata Method as 23(a)(2) Pro Rata Method; (v) Under 23(a)(2) Pro Rata Method, paragraph 1. is revised; and (vi) Add 23(b) Special Rule for Accounts Subject to Certain Promotional Programs. D. Under Section 535.24--Unfair Acts or Practices Regarding Increases in Annual Percentage Rates: (i) Paragraph 1. is revised; (ii) Add paragraphs 2., 3., 4.; (iii) Under 24(a) General Rule, paragraphs 1., 2.i. introductory text, 2.iii. introductory text, and 2.iii.C. are revised, and paragraph 2.iv. is added; (iv) Under 24(b) Exceptions, add paragraph 1.; (v) Under 24(b)(1) Account Opening Disclosure Exception, paragraph 1. introductory text is revised, paragraph 1.iii. and paragraph 2. are removed, paragraph 3. is redesignated as paragraph 2., the introductory text of newly designated paragraph 2. is revised, and paragraph 2.ii. is added; (vi) Under 24(b)(2) Variable Rate Exception, the heading of paragraph 5. is revised; (vii) Under 24(b)(3) Advance Notice Exception, paragraphs 2. and 3. are revised and paragraph 4. is added; (viii) Revise 24(b)(5) Workout Arrangement Exception; (ix) Under 24(c) Treatment of Protected Balances, under 24(c)(1) Repayment, under Paragraph 24(c)(1)(i), the heading of paragraph 2. is revised; and (x) Under 24(c) Treatment of Protected Balances, under 24(c)(2) Fees and Charges, paragraph 1. is revised. E. Under Section 535.25--Unfair Balance Computation Method, under 25(a) General Rule, paragraph 3. is revised. |
Appendix A to Part 535--Official Staff Commentary * * * * * Subpart C--Consumer Credit Card Account Practices [rtrif]Sec. 535.21--Definitions 21(a) Annual Percentage Rate 1. Use of ``rate.'' For purposes of Subpart C, ``rate'' has the same meaning as ``annual percentage rate'' unless otherwise specified. 21(c) Consumer Credit Card Account 1. Closed accounts. If a consumer credit card account with an outstanding balance is closed, the account continues to be the same consumer credit card account for purposes of Subpart C with respect to that balance. For example, if a savings association or a consumer closes a consumer credit card account with an outstanding balance, the savings association would still be prohibited from increasing the annual percentage rate that applies to that balance unless permitted by one of the exceptions in Sec. 535.24(b). 2. Acquired accounts. If, through merger or acquisition (for example), a savings association acquires a consumer credit card account with an outstanding balance, the account continues to be the same consumer credit card account for purposes of Subpart C with respect to that balance. For example, if a consumer credit card account has a $1,000 purchase balance with an annual percentage rate of 15% and the savings association that acquires that account applies an 18% rate to purchases, the savings association would be prohibited from applying the 18% rate to the $1,000 balance unless permitted by one of the exceptions in Sec. 535.24(b). 3. Balance transfers. i. Between accounts issued by the same savings association. If a balance is transferred from a consumer credit card account issued by a savings association to another credit account issued by the same savings association or its affiliate or subsidiary, the account continues to be the same consumer credit card account for purposes of Subpart C with respect to that balance unless the account to which the balance is transferred is an open-end credit plan secured by the consumer's dwelling. For example, if a [[Page 20822]] consumer credit card account has a $2,000 purchase balance with an annual percentage rate of 15% and that balance is transferred to another consumer credit card account issued by the same savings association that applies an 18% rate to purchases, the savings association would be prohibited from applying the 18% rate to the $2,000 balance unless permitted by one of the exceptions in Sec. 535.24(b). Additional circumstances in which a balance is considered transferred for purposes of this comment include when: A. A retail credit card with an outstanding balance is replaced or substituted with a cobranded general purpose card that can be used with a broader merchant base; B. A credit card account with an outstanding balance is replaced or substituted with another credit card account offering different features; C. A credit card account with an outstanding balance is consolidated or combined with one or more other credit card accounts into a single credit card account; and D. A credit card account is replaced or substituted with a line of credit that can be accessed solely by an account number. ii. Between accounts issued by different institutions. If a balance is transferred to a consumer credit card account issued by a savings association from a credit account issued by a different savings association or an institution that is not an affiliate or subsidiary of the savings association that issued the consumer credit card account, the provisions of Subpart C do not prohibit the savings association to which the balance is transferred from applying its account terms to that balance, provided that those terms comply with Subpart C. For example, if a consumer credit card account issued by savings association A has a $1,000 purchase balance at an annual percentage rate of 15% and the consumer transfers that balance to a consumer credit card account with a purchase rate of 17% issued by savings association B, savings association B may apply the 17% rate to the $1,000 balance. However, savings association B may not subsequently increase the rate on that balance unless permitted by one of the exceptions in Sec. 535.24(b).[ltrif] Sec. 535.22--Unfair Time To Make Payment * * * * * 22(b) Compliance With General Rule * * * * * 3. Example of alternative method of compliance. Assume that, for a particular type of consumer credit card account, a savings association only provides periodic statements electronically and only accepts payments electronically (consistent with applicable law and regulatory guidance[rtrif], including the consumer notice and consent procedures of the Electronic Signatures in Global and National Commerce Act (E-Sign Act), 15 U.S.C. 7001 et seq.[ltrif]). Under these circumstances, the savings association could comply with Sec. 535.22(a) even if it does not provide periodic statements 21 days before the payment due date consistent with Sec. 535.22(b)(2). Sec. 535.23--Unfair Allocation of Payments * * * * * 2. Adjustments of one dollar or less permitted. When allocating payments, the savings association may adjust amounts by one dollar or less. For example, if a savings association is allocating $100 pursuant to Sec. 535.23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb] among balances of $1,000, $2,000, and $4,000, the savings association may apply $14 to the $1,000 balance, $29 to the $2,000 balance, and $57 to the $4,000 balance. 3. Applicable balances and [annual percentage] rates. * * * 4. Use of permissible allocation methods. A savings association is not prohibited from changing the allocation method for a consumer credit card account or from using different allocation methods for different consumer credit card accounts, so long as the methods used are consistent with Sec. 535.23. For example, a savings association may change from allocating to the highest rate balance first pursuant to Sec. 535.23(a)[rtrif](1)[ltrif] to allocating pro rata pursuant to Sec. 535.23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb] or vice versa. Similarly, a savings association may allocate to the highest rate balance first pursuant to Sec. 535.23(a)[rtrif](1)[ltrif] on some of its accounts and allocate pro rata pursuant to Sec. 535.23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb] on other accounts. * * * * * 6. Balances with the same [annual percentage] rate. When the same annual percentage rate applies to more than one balance on an account and a different annual percentage rate applies to at least one other balance on that account, Sec. 535.23 [rtrif]generally[ltrif] does not require that any particular method be used when allocating among the balances with the same annual percentage rate. Under these circumstances, a savings association may treat the balances with the same rate as a single balance or separate balances. See comments 23(a)[rtrif](1)[ltrif]-1.iv and 23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb]-2.iv. [rtrif]However, when a consumer will not be obligated to pay interest that accrues on a balance if that balance is paid in full prior to the expiration of a specified period of time, that balance must be treated as a balance with an annual percentage rate of zero for purposes of Sec. 535.23 during that period of time. For example, if an account has a $1,000 purchase balance and a $2,000 balance on which the consumer will not be obligated to pay interest if that balance is paid in full prior to July 1 and a 15% annual percentage rate applies to both, the balances must be treated as balances with different rates for purposes of Sec. 535.23 until July 1. In addition, for purposes of allocating pursuant to Sec. 535.23(a)(1), any amount paid by the consumer in excess of the required minimum periodic payment must be applied first to the $1,000 purchase balance except during the last two billing cycles of the promotional period (when it must be applied first to any remaining portion of the $2,000 balance). See comment 23(a)(1)-1.v.[ltrif] 23(a)[rtrif](1)[ltrif] High-to-Low Method 1. * * * [rtrif]v. Assume that on January 1 a consumer uses a credit card account to make a $1,200 purchase subject to a promotional offer under which interest accrues at an annual percentage rate of 15% but the consumer will not be obligated to pay that interest if the balance is paid in full on or before June 30. The billing cycles for this account begin on the first day of the month and end on the last day of the month. Each month from January through June, the consumer uses the account to make $200 in purchases that are not subject to the promotional offer but are subject to the 15% rate. Each month from February through June, the consumer pays $400 in excess of the required minimum periodic payment on the payment due date, which is the twenty-fifth of the month. Any interest that accrues on the non- promotional purchases is paid by the required minimum periodic payment. A savings association using this method would allocate the $400 excess payments received on February 25, March 25, and April 25 as follows: $200 to pay off the non-promotional balance (that is subject to the 15% rate) and the remaining $200 to the promotional balance (that is treated as a balance with a rate of zero). Section 535.23(b), however, requires the savings association to allocate the entire $400 excess payment received on May 25 to the promotional balance. Similarly, Sec. 535.23(b) requires the savings association to allocate the $400 excess payment received on June 25 as follows: $200 to the promotional balance (which pays that purchase in full) and the remaining $200 to the non-promotional balance.[ltrif] 23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb] Pro Rata Method 1. Total balance. A savings association may, but is not required to, deduct amounts paid by the consumer's required minimum periodic payment when calculating the total balance for purposes of Sec. 535.23[rtrif](a)(2)[ltrif][lsqbb](b)(3)[rsqbb]. See comment 23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb]-2.iii. * * * * * [rtrif]23(b) Special Rule for Accounts Subject to Certain Promotional Programs 1. Grace periods. Section 535.23(b) applies to promotional programs under which the consumer is not obligated to pay interest that accrues on a balance if that balance is paid in full prior to the expiration of a specified period of time. A grace period during which a consumer may repay one or more balances on a consumer credit card account is not a ``promotional program'' for purposes of Sec. 535.23(b).[ltrif] Sec. 535.24--Unfair Increases in Annual Percentage Rates 1. Relationship to Regulation Z, 12 CFR part 226. A savings association that complies with the applicable disclosure requirements in Regulation Z, 12 CFR part 226, has complied with the disclosure requirements in Sec. 535.24. See 12 CFR 226.5a, 226.6, 226.9. For example, a savings association may comply with the requirement in Sec. 535.24(a) to disclose at account opening the annual percentage rates that will apply to each category of transactions by complying with the disclosure requirements in 12 CFR 226.5a regarding applications and solicitations and the requirements in 12 CFR 226.6 regarding account-opening disclosures. Similarly, in [[Page 20823]] order to increase an annual percentage rate on new transactions pursuant to Sec. 535.24(b)(3), a savings association must comply with the disclosure requirements in 12 CFR 226.9[rtrif](b), (c), or (g)[ltrif][lsqbb](c) or (g)[rsqbb]. However, nothing in Sec. 535.24 alters the requirements in 12 CFR 226.9(c) and (g) that creditors provide consumers with written notice at least 45 days prior to the effective date of certain increases in the annual percentage rates on open-end (not home-secured) credit plans. [rtrif]2. Relationship to grace period. Nothing in Sec. 535.24 prohibits a savings association from assessing interest due to the loss of a grace period to the extent consistent with Sec. 535.25. In addition, a savings association has not reduced an annual percentage rate on a consumer credit account for purposes of Sec. 535.24 if the savings association does not charge interest on a balance when the consumer pays that balance in full prior to the expiration of a grace period. 3. Category of transactions. For purposes of Sec. 535.24, a ``category of transactions'' is a type or group of transactions to which an annual percentage rate applies that is different than the annual percentage rate that applies to other transactions. For example, purchase transactions, cash advance transactions, and balance transfer transactions are separate categories of transactions for purposes of Sec. 535.24 if a savings association applies different annual percentage rates to each. Furthermore, if, for example, the savings association applies different annual percentage rates to different types of purchase transactions (such as one rate for purchases of gasoline and a different rate for all other purchases), each type constitutes a separate category of transactions for purposes of Sec. 535.24. 4. Account opening. i. Multiple accounts with same savings association. When a consumer has a credit card account with a savings association and the consumer opens a new credit card account with the same savings association (or its affiliate or subsidiary), the opening of the new account constitutes an ``account opening'' for purposes of Sec. 535.24 if, more than 15/30 days after the new account is opened, the consumer has the ability to obtain additional extensions of credit on each account. For example, assume that, on January 1 of year one, a consumer opens a credit card account with a savings association. On July 1 of year one, the consumer opens a second credit card account with that savings association. On July 15, a $1,000 balance is transferred from the first account to the second account. The opening of the second account constitutes the opening of an account for purposes of Sec. 535.24 so long as, on July 17/August 1, the consumer can engage in transactions using either account. Under these circumstances, the savings association could not increase an annual percentage rate on the second account pursuant to Sec. 535.24(b)(3) until July 1 of year two (which is one year after the second account was opened). ii. Replacement or consolidation. A. Generally. A consumer credit card account has not been opened for purposes of Sec. 535.24 when a consumer credit card account issued by a savings association is replaced or consolidated with another consumer credit card account issued by the same savings association (or its affiliate or subsidiary). Circumstances in which a consumer credit card account has not been opened for purposes of Sec. 535.24 include when: (1) A retail credit card is replaced with a cobranded general purpose card that can be used at a wider number of merchants; (2) A credit card account is replaced with another consumer credit card account offering different features; (3) A credit card account is consolidated or combined with one or more other credit card accounts into a single credit card account; or (4) A credit card account acquired through merger or acquisition is replaced with a credit card account issued by the acquiring institution. B. Limitation. A savings association that replaces or consolidates a consumer credit card account with another consumer credit card account issued by the savings association (or its affiliate or subsidiary) may not increase an annual percentage rate in a manner otherwise prohibited by Sec. 535.24. For example, assume that, on January 1 of year one, a consumer opens a consumer credit card account with an annual percentage rate for purchases of 15%. On July 1 of year one, the account is replaced with a consumer credit card account that offers different features (such as rewards on purchases). Under these circumstances, the savings association cannot increase the annual percentage rate for purchases to a rate that is higher than 15% pursuant to Sec. 535.24(b)(3) until January 1 of year two (which is one year after the first account was opened).[ltrif] 24(a) General Rule 1. Rates that will apply to each category of transactions. Section 535.24(a) requires savings associations to disclose, at account opening, the annual percentage rates that will apply to each category of transactions on the account. A savings association cannot satisfy this requirement by disclosing at account opening only a range of rates or that a rate will be ``up to'' a particular amount. [rtrif]The disclosure requirements in Sec. 535.24(a) do not apply to annual percentage rates that are contingent on a particular event or occurrence or may be applied at the savings association's discretion (such as penalty rates) insofar as those rates may be applied consistent with Sec. 535.24.[ltrif] 2. * * * i. Assume that, at account opening on January 1 of year one, a savings association discloses that the annual percentage rate for purchases is a non-variable rate of 15% and will apply for six months. The savings association also discloses that, after six months, the annual percentage rate for purchases will be a variable rate that is currently 18% and will be adjusted quarterly by adding a margin of 8 percentage points to a publicly available index not under the savings association's control. [rtrif]Furthermore,[ltrif] [lsqbb]Finally,[rsqbb] the savings association discloses that the annual percentage rate for cash advances is the same variable rate that will apply to purchases after six months. [rtrif]Finally, the savings association discloses that, to the extent consistent with Sec. 535.24 and other applicable law, a non-variable penalty rate of 30% may apply if the consumer makes a late payment.[ltrif] The payment due date for the account is the twenty-fifth day of the month and the required minimum periodic payments are applied to accrued interest and fees but do not reduce the purchase and cash advance balances. * * * * * iii. Assume that, at account opening on January 1 of year one, a savings association discloses that the annual percentage rate for purchases is a variable rate determined by adding a margin of 6 percentage points to a publicly-available index outside of the savings association's control. The savings association also discloses that, to the extent consistent with Sec. 535.24 and other applicable law, a non-variable penalty rate of 28% may apply if the consumer makes a late payment. The due date for the account is the fifteenth of the month. On May 30 of year two, the account has a purchase balance of $1,000. On May 31, the creditor provides a notice pursuant to 12 CFR 226.9(c) informing the consumer of a new variable rate that will apply on July 16 for all purchases made on or after June 8 (calculated by using the same index and an increased margin of 8 percentage points). On June 7, the consumer makes a $500 purchase. On June 8, the consumer makes a $200 purchase. On June 25, the savings association has not received the payment due on June 15 and provides the consumer with a notice pursuant to 12 CFR 226.9(g) stating that the penalty rate of 28% will apply as of August 9 to all transactions made on or after July 3 [rtrif]and that, if the consumer becomes more than 30 days late, the penalty rate will apply to all balances on the account[ltrif]. On July 4, the consumer makes a $300 purchase. * * * * * C. Same facts as paragraph A. above except the payment due on June 15 of year two is received on July 20. Section 535.24(b)(4) permits the savings association to apply the 28% penalty rate to all balances on the account and to future transactions because it has not received payment within 30 days after the due date. Because the savings association provided a 12 CFR 226.9(g) notice on June [rtrif]25[ltrif][lsqbb]24[rsqbb] stating the 28% penalty rate, the savings association may apply the 28% penalty rate to all balances on the account as well as any future transactions on August 9 without providing an additional notice pursuant to 12 CFR 226.9(g). [rtrif]iv. Assume that, at account opening on January 1 of year one, the savings association discloses a promotional program under which interest on purchases made during January will accrue at a non-variable rate of 20%, but the consumer will not be obligated to pay that interest if those purchases are paid in full by December 31 of year one. On January 15, the consumer makes a purchase of $2,000. No other transactions are made on the account. The payment due on April 1 is not received until April 10. Section 535.24 does not permit the savings association to deny the consumer the opportunity to avoid interest charges on the $2,000 purchase by [[Page 20824]] paying that purchase in full on or before December 31 of year one. If, however, the $2,000 purchase remains unpaid on January 1 of year two, Sec. 535.24 does not prohibit the savings association from charging the interest accrued on that purchase during year one.[ltrif] 24(b) Exceptions [rtrif]1. Delayed implementation of rate increase. If Sec. 535.24(b) permits a savings association to apply an increased annual percentage rate on a date that is not the first day of a billing cycle, the savings association may delay application of the increased rate until the first day of the following billing cycle without relinquishing the ability to apply that rate. For example, assume that, at account opening on January 1, a savings association discloses that a non-variable annual percentage rate of 10% will apply to purchases for six months and a non-variable rate of 15% will apply thereafter. The first day of the billing cycle for the account is the fifteenth of the month. If the six-month period expires on July 1, the savings association may delay application of the 15% rate until July 15 without relinquishing its ability to apply that rate under Sec. 535.24(b)(1).[ltrif] 24(b)(1) Account Opening Disclosure Exception 1. Prohibited increases in rate. Section Sec. 535.24(b)(1) permits an increase in the annual percentage rate for a category of transactions to a rate disclosed at account opening upon expiration of a period of time that was also disclosed at account opening. Section 535.24(b)(1) does not permit application of [rtrif]an increased annual percentage rate[ltrif] [lsqbb]increased rates that are[rsqbb] disclosed at account opening [rtrif]that is[ltrif] [lsqbb]but are[rsqbb] contingent on a particular event or occurrence or [rtrif]that[ltrif] may be applied at the savings association's discretion. The following examples illustrate rate increases that are not permitted by Sec. 535.24[lsqbb](a)[rsqbb]: * * * * * [lsqbb]iii. Assume that a savings association discloses at account opening on January 1 of year one that interest on purchases will be deferred for one year, although interest will accrue on purchases during that year at a non-variable rate of 20%. The savings association further discloses that, if all purchases made during year one are not paid in full by the end of that year, the savings association will begin charging interest on the purchase balance and new purchases at 20% and will retroactively charge interest on the purchase balance at a rate of 20% starting on the date of each purchase made during year one. On January 1 of year one, the consumer makes a purchase of $1,500. No other transactions are made on the account. On January 1 of year two, $500 of the $1,500 purchase remains unpaid. Section 535.24 does not permit the savings association to reach back to charge interest on the $1,500 purchase from January 1 through December 31 of year one. However, the savings association may apply the previously-disclosed 20% rate to the $500 purchase balance beginning on January 1 of year two (pursuant to Sec. 535.24(b)(1)).[rsqbb] [lsqbb]2. Loss of grace period. Nothing in Sec. 535.24 prohibits a savings association from assessing interest due to the loss of a grace period to the extent consistent with Sec. 535.25.[rsqbb] [rtrif]2.[ltrif] [lsqbb]3.[rsqbb] Application of rate that is lower than disclosed rate. Section Sec. 535.24(b)(1) permits an increase in the annual percentage rate for a category of transactions to a rate disclosed at account opening upon expiration of a period of time that was also disclosed at account opening. Nothing in Sec. 535.24 prohibits a savings association from applying a rate that is lower than [rtrif]a[ltrif] [lsqbb]the[rsqbb] disclosed rate [rtrif]either during or[ltrif] upon expiration of the period. However, [rtrif]once the[ltrif] [lsqbb]if a[rsqbb] lower rate is applied to an existing balance, the savings association cannot subsequently increase the rate on that balance unless it [lsqbb]has[rsqbb] provided the consumer with advance notice of the increase pursuant to 12 CFR 226.9[rtrif](b)[ltrif] or (c). [rtrif]This notice must state the period of time during which the lower rate will apply and the rate that will apply after expiration of that period.[ltrif] Furthermore, [rtrif]a savings association that applies a lower rate to transactions that occurred during the first year after account opening may not subsequently increase the rate that applies to those transactions to a rate that is higher than the increased rate disclosed at account opening[ltrif] [lsqbb]the savings association cannot increase the rate on that existing balance to a rate that is higher than the increased rate disclosed at account opening[rsqbb]. The following [rtrif]examples illustrate[ltrif] [lsqbb]example illustrates[rsqbb] the application of [rtrif]the[ltrif] [lsqbb]this[rsqbb] rule: * * * * * [rtrif]ii. Assume that a savings association discloses at account opening on January 1 of year one that a non-variable annual percentage rate of 15% will apply to purchases for one year, after which that rate will increase to a non-variable rate of 18%. The savings association also discloses that, to the extent consistent with Sec. 535.24 and other applicable law, a non-variable penalty rate of 30% may apply if the consumer's required minimum periodic payment is received after the payment due date, which is the tenth of the month. The required minimum periodic payments are applied to accrued interest and fees but do not reduce the purchase balance. A. On September 30 of year one, the account has a purchase balance of $1,400 at the 15% rate. On October 1, the savings association provides a notice pursuant to 12 CFR 226.9(c) informing the consumer that the rate for new purchases will decrease to a non- variable rate of 10% for six months (from October 1 through March 31 of year two) and that, beginning on April 1 of year two, the rate for purchases will increase to a non-variable rate of 20%. The savings association does not apply the 10% rate to the $1,400 purchase balance. On October 15 of year one, the consumer makes a $300 purchase at the 10% rate. On January 1 of year two, the savings association may begin accruing interest on the $1,400 purchase balance at 18% (as disclosed at account opening). On January 15 of year two, the consumer makes a $150 purchase at the 10% rate. On April 1 of year two, the 10% rate that applies to the $300 purchase and the $150 purchase expires. The savings association may begin accruing interest on the $150 purchase at 20% (as disclosed in the 12 CFR 226.9(c) notice). Because, however, the $300 purchase occurred during the first year after account opening, the savings association cannot increase the rate that applies to that purchase to a rate that is higher than the 18% rate disclosed at account opening. B. Same facts as above except that the required minimum periodic payment due on November 10 of year one is not received until November 15. Section 535.24(b)(1) does not permit the savings association to increase any annual percentage rate on the account at this time. The savings association may, however, apply the 30% penalty rate to new transactions beginning on January 1 of year two pursuant to Sec. 535.24(b)(3) by providing a 12 CFR 226.9(g) notice informing the consumer of this increase no later than November 16 of year one. On January 1 of year two, Sec. 535.24(b)(1) permits the savings association to begin accruing interest on the $1,400 purchase balance at 18% (as disclosed at account opening). If the consumer makes the $150 purchase on January 15 of year two, Sec. 535.24(b)(3) would permit the savings association to apply the 30% rate to that purchase. On April 1 of year two, the 10% rate that applies to the $300 purchase expires. Because this purchase occurred during the first year after account opening, the savings association cannot increase the rate that applies to that purchase to a rate that is higher than the 18% rate disclosed at account opening.[ltrif] 24(b)(2) Variable Rate Exception * * * * * 5. Changing a variable [lsqbb]annual percentage[rsqbb] rate to a non-variable [lsqbb]annual percentage[rsqbb] rate. * * * * * * * * 24(b)(3) Advance Notice Exception * * * * * 2. Transactions that [rtrif]occurred prior to provision of notice or within seven days after provision of notice[ltrif] [lsqbb]occur more than seven days after notice provided[rsqbb]. [rtrif]Section 535.24(b)(3) generally permits a savings association to apply an increased rate to transactions that occur after provision of a 12 CFR 226.9(b) notice or more than seven days after provision of a 12 CFR 226.9(c) or (g) notice. If a rate increase is disclosed pursuant to both 12 CFR 226.9(b) and 12 CFR 226.9(c), that rate may only be applied to transactions that occur more than seven days after provision of the 12 CFR 226.9(c) notice. Section 535.24(b)(3) does not permit a savings association to reach back to days before the effective date of the rate increase under 12 CFR 226.9(c) or (g) when calculating interest charges. See comment 24(b)(3)-3.[ltrif] [lsqbb]Section 535.24(b)(3) generally prohibits a savings association from applying an increased rate to transactions that occur within seven days after provision of the 12 CFR 226.9 (c) or (g) notice.[rsqbb] [rtrif]Whether a transaction occurred prior to provision of a notice or within seven days after provision of a notice is determined by the date of the transaction. In some cases, however, a merchant may place a ``hold'' on the available credit on an account for an [[Page 20825]] estimated transaction amount when the actual transaction amount will not be known until a later date. In these circumstances, the date of the transaction for purposes of Sec. 535.24(b)(3) is the date on which the merchant determines the actual transaction amount. For example, assume that, when a consumer uses a credit card account to check into a hotel on July 1, the hotel obtains authorization for a $750 hold on the account to ensure there is adequate available credit to cover the anticipated cost of the stay. When the consumer checks out on July 4, the actual cost of the stay is $850 because of additional incidental costs, and the hotel charges this amount to the account. For purposes of Sec. 535.24(b)(3), the transaction occurred on July 4.[ltrif] [lsqbb]This prohibition does not, however, apply to transactions that are authorized within seven days after provision of the 12 CFR 226.9 (c) or (g) notice but are settled more than seven days after the notice was provided.[rsqbb] 3. Examples. i. Assume that a consumer credit card account is opened on January 1 of year one. On March 14 of year two, the account has a purchase balance of $2,000 at a non-variable annual percentage rate of 15%. On March 15, the savings association provides a notice pursuant to 12 CFR 226.9(c) informing the consumer that the rate for new purchases will increase to a non-variable rate of 18% on May 1. The notice further states that the 18% rate will apply for six months (until November 1) and states that thereafter the savings association will apply a variable rate that is currently 22% and is determined by adding a margin of 12 percentage points to a publicly- available index that is not under the savings association's control. The seventh day after provision of the notice is March 22 and, on that date, the consumer makes a $200 purchase. On March 24, the consumer makes a $1,000 purchase. On May 1, Sec. 535.24(b)(3) permits the savings association to begin accruing interest at 18% on the $1,000 purchase made on March 24. The savings association is not permitted to apply the 18% rate to the $2,200 purchase balance as of March 22. After six months (November 2), the savings association may begin accruing interest on any remaining portion of the $1,000 purchase at the previously-disclosed variable rate determined using the 12-point margin. [lsqbb]ii. Same facts as above except that the $200 purchase is authorized by the savings association on March 22 but is not settled until March 23. On May 1, Sec. 535.24(b)(3) permits the savings association to start charging interest at 18% on both the $200 purchase and the $1,000 purchase. The savings association is not permitted to apply the 18% rate to the $2,000 purchase balance as of March 22.[rsqbb] [rtrif]ii.[ltrif] [lsqbb]iii.[rsqbb] Same facts as [lsqbb]in paragraph i.[rsqbb] above except that on September 17 of year two (which is 45 days before expiration of the 18% non-variable rate), the savings association provides a notice pursuant to 12 CFR 226.9(c) informing the consumer that, on November 2, a new variable rate will apply to new purchases and any remaining portion of the $1,000 balance (calculated by using the same index and a reduced margin of 10 percentage points). The notice further states that, on May 1 of year three, the margin will increase to the margin disclosed [rtrif]in the March 15 notice[ltrif] [lsqbb]at account opening[rsqbb] (12 percentage points). On May 1 of year three, Sec. 535.24(b)(3) permits the savings association to increase the margin used to determine the variable rate that applies to new purchases to 12 percentage points and to apply that rate to any remaining portion of the $1,000 purchase as well as to new purchases. [lsqbb]See comment 24(b)(1)-3.[rsqbb] The savings association is not permitted to apply this rate to any remaining portion of the $2,200 purchase balance as of March 22. [rtrif]4. Application of a lower rate. Nothing in Sec. 535.24 prohibits a savings association from lowering the annual percentage rate that applies to an existing balance or to new transactions. However, once the lower rate is applied to an existing balance, the savings association cannot subsequently increase the rate on that balance unless it provided the consumer with advance notice of the increase pursuant to 12 CFR 226.9(b) or (c). This notice must state the period of time during which the lower rate will apply and the rate that will apply after expiration of that period. Furthermore, a savings association that applies a decreased rate to transactions that occurred prior to provision of the notice--or, in the case of a 12 CFR 226.9(c) or (g) notice, transactions that occurred within seven days after provision of the notice--may not subsequently increase the rate that applies to those transactions to a rate that is higher than the rate that applied prior to the decrease. The following examples illustrate the application of the rule: i. Assume that a savings association discloses at account opening on January 1 of year one that a non-variable annual percentage rate of 10% will apply to purchases for one year, after which that rate will increase to a non-variable rate of 15%. The savings association also discloses that, to the extent consistent with Sec. 535.24 and other applicable law, a non-variable penalty rate of 30% may apply if the consumer's required minimum periodic payment is received after the payment due date, which is the tenth of the month. The required minimum periodic payments are applied to accrued interest and fees but do not reduce the purchase balance. On June 30 of year two, the account has a purchase balance of $1,000 at the 15% rate. On July 1, the savings association provides a notice pursuant to 12 CFR 226.9(c) informing the consumer that the rate for new purchases will decrease to a non-variable rate of 5% for six months (from July 1 through December 31 of year two) and that, beginning on January 1 of year three, the rate for purchases will increase to a non-variable rate of 17%. On July 8 of year two, the consumer makes a $200 purchase. On July 9, the consumer makes a $100 purchase. On January 1 of year three, Sec. 535.24(b)(3) permits the savings association to begin accruing interest on the $100 purchase at 17%. The savings association may not apply the 17% rate to the $200 purchase because that transaction occurred within seven days after provision of the 12 CFR 226.9(c) notice. If the savings association applied the 5% rate to the $1,000 purchase balance and the $200 purchase, the savings association may not increase the rate that applies to those amounts to a rate that is higher than 15% on January 1 of year three. ii. Same facts as above except that the required minimum periodic payment due on September 10 of year two is not received until September 15 of year two. On September 15 of year two, the savings association provides a notice pursuant to 12 CFR 226.9(g) informing the consumer that the rate for new purchases will increase to the 30% penalty rate on October 31. On October 31, Sec. 535.23(b)(3) permits the savings association to begin accruing interest at 30% on any purchase made on or after September 23. The savings association may not, however, apply the 30% rate to the $1,300 in purchases. Instead, the savings association must continue to apply the 5% rate to the $100 purchase until at least January 1 of year three when Sec. 535.24(b)(3) permits the savings association to begin accruing interest on that purchase at 17%. Similarly, if the savings association applied the 5% rate to the $1,000 purchase balance and the $200 purchase, the savings association may begin accruing interest on those amounts at 15% on January 1 of year three. iii. Assume that a savings association discloses at account opening on January 1 of year one that the rate that applies to purchases is a variable annual percentage rate that is currently 18% and will be adjusted quarterly by adding a margin of 8 percentage points to a publicly available index not under the savings association's control. The savings association also discloses that, to the extent consistent with Sec. 535.24 and other applicable law, a non-variable penalty rate of 30% may apply if the consumer's required minimum periodic payment is received after the payment due date, which is the first of the month. On July 30 of year two, the consumer uses the account for a $1,000 purchase in response to a promotional offer. Under the terms of this offer, interest on purchases made during the months of July through September will accrue at the variable rate for purchases but the consumer will not be obligated to pay that interest if all purchases made during that three-month period are paid in full by December 31 of year two. The payment due on September 1 of year two is not received until September 6. Section 535.24 does not permit the savings association to deny the consumer the opportunity to avoid interest charges on the $1,000 purchase by paying that purchase in full on or before December 31 of year two. The savings association may, however, provide a notice pursuant to 12 CFR 226.9(g) on September 2 of year two informing the consumer that the promotional offer does not apply to purchases made on or after September 10 and that the rate for such purchases will increase to the 30% penalty rate on October 18. On December 31 of year two, the $1,000 purchase has been paid in full. Under these circumstances, the savings association may not charge any interest accrued on the $1,000 purchase. iv. Assume that a savings association discloses at account opening on January 1 of year one that the rate that applies to cash advances is a variable annual percentage rate [[Page 20826]] that is currently 24% and will be adjusted quarterly by adding a margin of 14 percentage points to a publicly available index not under the savings association's control. On July 1 of year two, the savings association provides checks that access the account and, pursuant to 12 CFR 226.9(b)(3)(A), discloses that a promotional rate of 15% will apply to credit extended by use of the checks until January 1 of year three, after which the cash advance rate determined using the 14-point margin will apply. On July 15 of year two, the consumer uses one of the checks to pay for a $500 transaction. On January 1 of year three, Sec. 535.24(b)(3) permits the savings association to apply the cash advance rate determined using the 14-point margin to the $500 transaction.[ltrif] 24(b)(5) Workout [rtrif]and Temporary Hardship[ltrif] Arrangement Exception 1. Scope of exception. Nothing in Sec. 535.24(b)(5) permits a savings association to alter the requirements of Sec. 535.24 pursuant to a workout [rtrif]or temporary hardship[ltrif] arrangement between a consumer and the savings association. For example, a savings association cannot increase an annual percentage rate pursuant to a workout [rtrif]or temporary hardship[ltrif] arrangement unless otherwise permitted by Sec. 535.24. In addition, a savings association cannot require the consumer to make payments with respect to a protected balance that exceed the payments permitted under Sec. 535.24(c). 2. Variable [lsqbb]annual percentage[rsqbb] rates. If the annual percentage rate that applied to a category of transactions prior to commencement of the workout [rtrif]or temporary hardship[ltrif] arrangement varied with an index consistent with Sec. 535.24(b)(2), the rate applied to that category of transactions following an increase pursuant to Sec. 535.24(b)(5) must be determined using the same formula (index and margin). 3. Example [rtrif]s[ltrif]. [rtrif]i.[ltrif] Assume that, consistent with Sec. 535.24(b)(4), the margin used to determine a variable annual percentage rate that applies to a $5,000 balance is increased from 5 percentage points to 15 percentage points. Assume also that the savings association and the consumer subsequently agree to a workout arrangement that reduces the margin back to 5 points on the condition that the consumer pay a specified amount by the payment due date each month. If the consumer does not pay the agreed-upon amount by the payment due date, the savings association may increase the margin for the variable rate that applies to the $5,000 balance up to 15 percentage points. 12 CFR 226.9 does not require advance notice of this type of increase. [rtrif]ii. Assume that a consumer fails to make four consecutive minimum payments totaling $480 on a consumer credit card account with a balance of $6,000 and that, consistent with Sec. 535.24(b)(4), the annual percentage rate that applies to that balance is increased from a non-variable rate of 15% to a non- variable penalty rate of 30%. Assume also that the savings association and the consumer subsequently agree to a temporary hardship arrangement that reduces all rates on the account to 0% on the condition that the consumer pay an amount by the payment due date each month that is sufficient to cure the $480 delinquency within six months. If the consumer pays the agreed-upon amount by the payment due date during the six-month period and cures the delinquency, the savings association may increase the rate that applies to any remaining portion of the $6,000 balance to 15% or any other rate up to the 30% penalty rate.[ltrif] 24(c) Treatment of Protected Balances * * * * * 24(c)(1) Repayment * * * * * Paragraph 24(c)(1)(i) * * * * * 2. Amortization when applicable [lsqbb]annual percentage[rsqbb] rate is variable. * * * * * * * * 24(c)(2) Fees and Charges 1. Fee or charge based solely on the protected balance. A savings association is prohibited from assessing a fee or charge based solely on balances to which Sec. 535.24(c) applies. For example, a savings association is prohibited from assessing a monthly maintenance fee that would not be charged if the account did not have a protected balance. A savings association is not, however, prohibited from [rtrif]continuing to assess a periodic fee that was assessed before the account had a protected balance.[ltrif] [rtrif]Similarly, a savings association is not prohibited from[ltrif] assessing fees such as late payment fees or fees for exceeding the credit limit even if such fees are based in part on the protected balance [rtrif]or if the only balance on the account is a protected balance[ltrif]. Sec. 535.25--Unfair Balance Computation Method 25(a) General Rule * * * * * [rtrif]3. Charging accrued interest at expiration of certain promotional programs. When a savings association offers a promotional program under which a consumer will not be obligated to pay interest that accrues on a balance if that balance is paid in full prior to a specified date or expiration of a specified period of time, Sec. 535.25 does not prohibit the savings association from charging that accrued interest to the account if the balance is not paid in full prior to the specified date (consistent with applicable law and regulatory guidance).[ltrif] * * * * * National Credit Union Administration For the reasons discussed in the joint preamble, the NCUA Board proposes to further amend 12 CFR Part 706, as amended at 74 FR 5575, January 29, 2009, as set forth below: PART 706--UNFAIR OR DECEPTIVE ACTS OR PRACTICES 1. The authority citation for part 706 continues to read as follows: Authority: 15 U.S.C. 57a. 2. Revise Sec. 706.23 as follows: Sec. 706.23 Unfair allocation of payments. When different annual percentage rates apply to different balances on a consumer credit card account: (a) General rule. Except as provided in paragraph (b) of this section, a federal credit union must allocate any amount paid by a member in excess of the required minimum periodic payment among the balances using one of the following methods: (1) High-to-low method. The amount paid by a member in excess of the required minimum periodic payment is allocated first to the balance with the highest annual percentage rate and any remaining portion to the other balances in descending order based on the applicable annual percentage rate. (2) Pro rata method. The amount paid by a member in excess of the required minimum periodic payment is allocated among the balances in the same proportion as each balance bears to the total balance. (b) Special rule for accounts subject to certain promotional programs. When a promotional program provides that a member will not be obligated to pay interest that accrues on a balance if that balance is paid in full prior to the expiration of a specified period of time, a federal credit union must allocate amounts paid by a member in excess of the required minimum periodic payment first to that balance during the two billing cycles immediately preceding expiration of the specified period and any remaining portion to the other balances consistent with paragraph (a) of this section. 3. Amend Sec. 706.24 by revising paragraphs (b)(1) through (b)(5) and adding paragraph (b)(6) to read as follows: Sec. 706.24 Unfair increases in annual percentage rates. * * * * * (b) * * * (1) Account opening disclosure exception. An annual percentage rate for a category of transactions may be increased to an annual percentage rate disclosed at account opening upon expiration of a period of time disclosed at account opening. This exception does not permit application of an increased annual percentage rate disclosed at account opening that is contingent on a particular event or occurrence or that may be applied at the federal credit union's discretion. (2) Variable rate exception. An annual percentage rate for a category of transactions that varies according to an [[Page 20827]] index that is not under the federal credit union's control and is available to the general public may be increased due to an increase in the index. (3) Advance notice exception. An annual percentage rate for a category of transactions may be increased pursuant to a notice under 12 CFR 226.9(b), (c), or (g), provided that: (i) If the federal credit union discloses the increased rate pursuant to 12 CFR 226.9(b), that rate must not be applied to transactions that occurred prior to provision of the notice; (ii) If the federal credit union discloses the increased rate pursuant to 12 CFR 226.9(c) or (g), that rate must not be applied to transactions that occurred within seven days after provision of the notice; and (iii) This exception does not permit an increase in any annual percentage rate during the first year after an account is opened. (4) Delinquency exception. An annual percentage rate may be increased due to the federal credit union not receiving a member's required minimum periodic payment within 30 days after the due date for that payment. (5) Workout and temporary hardship arrangement exception. An annual percentage rate may be increased due to a member's completion of a workout or temporary hardship arrangement between a federal credit union and the member or a member's failure to comply with the terms of such an arrangement, provided that the annual percentage rate applicable to a category of transactions following any such increase does not exceed the rate that applied to that category of transactions prior to commencement of the arrangement. (6) Servicemembers Civil Relief Act exception. An annual percentage rate that has been decreased pursuant to 50 U.S.C. app. 527 may be increased once that provision no longer applies, provided that the annual percentage rate applicable to a category of transactions following any such increase does not exceed the rate that applied to that category of transactions prior to the decrease. * * * * * 4. In Appendix A to Part 706: A. Add Section 706.21--Definitions. B. Under Section 706.22--Unfair Acts or Practices Regarding Time To Make Payment, under 22(b) Compliance with General Rule, paragraph 3. is revised. C. Under Section 706.23--Unfair Acts or Practices Regarding Allocation of Payments: (i) Paragraph 2., the heading of paragraph 3., and paragraphs 4. and 6. are revised; (ii) Redesignate 23(a) High-to-Low Method as 23(a)(1) High-to-Low Method; (iii) Under 23(a)(1) High-to-Low Method, paragraph 1.v. is added; (iv) Redesignate 23(b) Pro Rata Method as 23(a)(2) Pro Rata Method; (v) Under 23(a)(2) Pro Rata Method, paragraph 1. is revised; and (vi) Add 23(b) Special Rule for Accounts Subject to Certain Promotional Programs. D. Under Section 706.24--Unfair Acts or Practices Regarding Increases in Annual Percentage Rates: (i) Paragraph 1. is revised; (ii) Add paragraphs 2., 3., 4.; (iii) Under 24(a) General Rule, paragraphs 1., 2.i. introductory text, 2.iii. introductory text, and 2.iii.C. are revised, and paragraph 2.iv. is added; (iv) Under 24(b) Exceptions, add paragraph 1.; (v) Under 24(b)(1) Account Opening Disclosure Exception, paragraph 1. introductory text is revised, paragraph 1.iii. and paragraph 2. are removed, paragraph 3. is redesignated as paragraph 2., the introductory text of newly designated paragraph 2. is revised, and paragraph 2.ii. is added; (vi) Under 24(b)(2) Variable Rate Exception, the heading of paragraph 5. is revised; (vii) Under 24(b)(3) Advance Notice Exception, paragraphs 2. and 3. are revised and paragraph 4. is added; (viii) Revise 24(b)(5) Workout Arrangement Exception; (ix) Under 24(c) Treatment of Protected Balances, under 24(c)(1) Repayment, under Paragraph 24(c)(1)(i), the heading of paragraph 2. is revised; and (x) Under 24(c) Treatment of Protected Balances, under 24(c)(2) Fees and Charges, paragraph 1. is revised. E. Under Section 706.25--Unfair Balance Computation Method, under 25(a) General Rule, paragraph 3. is revised. Appendix A to Part 706--Official Staff Commentary * * * * * Subpart C--Consumer Credit Card Account Practices Rule Sec. 706.21--Definitions 21(a) Annual Percentage Rate 1. Use of ``rate.'' For purposes of Subpart C, ``rate'' has the same meaning as ``annual percentage rate'' unless otherwise specified. 21(c) Consumer Credit Card Account 1. Closed accounts. If a consumer credit card account with an outstanding balance is closed, the account continues to be the same consumer credit card account for purposes of Subpart C with respect to that balance. For example, if a federal credit union or a member closes a consumer credit card account with an outstanding balance, the federal credit union would still be prohibited from increasing the annual percentage rate that applies to that balance unless permitted by one of the exceptions in Sec. 706.24(b). 2. Acquired accounts. If, through merger or acquisition, for example, a federal credit union acquires a consumer credit card account with an outstanding balance, the account continues to be the same consumer credit card account for purposes of Subpart C with respect to that balance. For example, if a consumer credit card account has a $1,000 purchase balance with an annual percentage rate of 12% and the federal credit union that acquires that account applies a 15% rate to purchases, the federal credit union would be prohibited from applying the 15% rate to the $1,000 balance unless permitted by one of the exceptions in Sec. 706.24(b). 3. Balance transfers. i. Between accounts issued by the same federal credit union. If a balance is transferred from a consumer credit card account issued by a federal credit union to another credit account issued by the same federal credit union, the account continues to be the same consumer credit card account for purposes of Subpart C with respect to that balance unless the account to which the balance is transferred is an open-end credit plan secured by a member's dwelling. For example, if a consumer credit card account has a $2,000 purchase balance with an annual percentage rate of 12% and that balance is transferred to another consumer credit card account issued by the same federal credit union that applies a 15% rate to purchases, the federal credit union would be prohibited from applying the 15% rate to the $2,000 balance unless permitted by one of the exceptions in Sec. 706.24(b). Additional circumstances in which a balance is considered transferred for purposes of this comment include when: A. A retail credit card with an outstanding balance is replaced or substituted with a cobranded general purpose card that can be used with a broader merchant base; B. A credit card account with an outstanding balance is replaced or substituted with another credit card account offering different features; C. A credit card account with an outstanding balance is consolidated or combined with one or more other credit card accounts into a single credit card account; and D. A credit card account is replaced or substituted with a line of credit that can be accessed solely by an account number. ii. Between accounts issued by different federal credit unions. If a balance is transferred to a consumer credit card account issued by a federal credit union from a consumer credit card account issued by a different financial institution that is not an affiliate or subsidiary of the federal credit union that issued the consumer credit card account, the account is not the same consumer credit card account for purposes of Subpart C with respect to that balance. Thus, [[Page 20828]] the provisions of Subpart C do not prohibit the federal credit union to which the balance is transferred from applying its account terms to that balance, provided that those terms comply with Subpart C. For example, if a consumer credit card account issued by federal credit union A has a $1,000 purchase balance at an annual percentage rate of 13% and a member transfers that balance to a consumer credit card account with a purchase rate of 15% issued by federal credit union B, federal credit union B may apply the 15% rate to the $1,000 balance. However, federal credit union B may not subsequently increase the rate on that balance unless permitted by one of the exceptions in Sec. 706.24(b). |
706.22--Unfair Time To Make Payment * * * * * 22(b) Compliance With General Rule * * * * * 3. Example of alternative method of compliance. Assume that, for a particular type of consumer credit card account, a federal credit union only provides periodic statements electronically and only accepts payments electronically (consistent with applicable law and regulatory guidance, including the consumer notice and consent procedures of the Electronic Signatures in Global and National Commerce Act (E-Sign Act), 15 U.S.C. 7001 et seq.). Under these circumstances, the federal credit union could comply with Sec. 706.22(a) even if it does not provide periodic statements 21 days before the payment due date consistent with Sec. 706.22(b)(2). * * * * * Sec. 706.23--Unfair Acts or Practices Regarding Allocation of Payments * * * * * 2. Adjustments of one dollar or less permitted. When allocating payments, the federal credit union may adjust amounts by one dollar or less. For example, if a federal credit union is allocating $100 pursuant to Sec. 706.23(a)(2) among balances of $1,000, $2,000, and $4,000, the federal credit union may apply $14 to the $1,000 balance, $29 to the $2,000 balance, and $57 to the $4,000 balance. 3. Applicable balances and rates. * * * 4. Use of permissible allocation methods. A federal credit union is not prohibited from changing the allocation method for a consumer credit card account or from using different allocation methods for different consumer credit card accounts, so long as the methods used are consistent with Sec. 706.23. For example, a federal credit union may change from allocating to the highest rate balance first pursuant to Sec. 706.23(a)(1) to allocating pro rata pursuant to Sec. 706.23(a)(2) or vice versa. Similarly, a federal credit union may allocate to the highest rate balance first pursuant to Sec. 706.23(a)(1) on some of its accounts and allocate pro rata pursuant to Sec. 706.23(a)(2) on other accounts. * * * * * 6. Balances with the same rate. When the same annual percentage rate applies to more than one balance on an account and a different annual percentage rate applies to at least one other balance on that account, Sec. 706.23 generally does not require that any particular method be used when allocating among the balances with the same annual percentage rate. Under these circumstances, a federal credit union may treat the balances with the same rate as a single balance or separate balances. See comments 23(a)(1)-1.iv and 23(a)(2)-2.iv. However, when a member will not be obligated to pay interest that accrues on a balance if that balance is paid in full prior to the expiration of a specified period of time, that balance must be treated as a balance with an annual percentage rate of zero for purposes of Sec. 706.23 during that period of time. For example, if an account has a $1,000 purchase balance and a $2,000 balance on which the member will not be obligated to pay interest if that balance is paid in full prior to July 1 and a 15% annual percentage rate applies to both, the balances must be treated as balances with different rates for purposes of Sec. 706.23 until July 1. In addition, for purposes of allocating pursuant to Sec. 706.23(a)(1), any amount paid by the member in excess of the required minimum periodic payment must be applied first to the $1,000 purchase balance except during the last two billing cycles of the promotional period (when it must be applied first to any remaining portion of the $2,000 balance). See comment 23(a)(1)-1.v. 23(a)(1) High-to-Low Method 1. * * * v. Assume that on January 1 a member uses a credit card account to make a $1,200 purchase subject to a promotional offer under which interest accrues at an annual percentage rate of 15% but the member will not be obligated to pay that interest if the balance is paid in full on or before June 30. The billing cycles for this account begin on the first day of the month and end on the last day of the month. Each month from January through June, the member uses the account to make $200 in purchases that are not subject to the promotional offer but are subject to the 15% rate. Each month from February through June, the member pays $400 in excess of the required minimum periodic payment on the payment due date, which is the twenty-fifth of the month. Any interest that accrues on the non-promotional purchases is paid by the required minimum periodic payment. A federal credit union using this method would allocate the $400 excess payments received on February 25, March 25, and April 25 as follows: $200 to pay off the non-promotional balance (that is subject to the 15% rate) and the remaining $200 to the promotional balance (that is treated as a balance with a rate of zero). Section 706.23(b), however, requires the federal credit union to allocate the entire $400 excess payment received on May 25 to the promotional balance. Similarly, Sec. 706.23(b) requires the federal credit union to allocate the $400 excess payment received on June 25 as follows: $200 to the promotional balance (which pays that purchase in full) and the remaining $200 to the non-promotional balance. 23(a)(2) Pro Rata Method 1. Total balance. A federal credit union may, but is not required to, deduct amounts paid by the member's required minimum periodic payment when calculating the total balance for purposes of Sec. 706.23(a)(2). See comment 23(a)(2)-2.iii. * * * * * 23(b) Special Rule for Accounts Subject to Certain Promotional Programs 1. Grace periods. Section 706.23(b) applies to promotional programs under which the member is not obligated to pay interest that accrues on a balance if that balance is paid in full prior to the expiration of a specified period of time. A grace period during which a member may repay one or more balances on a consumer credit card account is not a ``promotional program'' for purposes of Sec. 706.23(b). * * * * * Sec. 706.24--Unfair Increases in Annual Percentage Rates 1. Relationship to Regulation Z, 12 CFR part 226. A federal credit union that complies with the applicable disclosure requirements in Regulation Z, 12 CFR part 226, has complied with the disclosure requirements in Sec. 706.24. See 12 CFR 226.5a, 226.6, 226.9. For example, a federal credit union may comply with the requirement in Sec. 706.24(a) to disclose at account opening the annual percentage rates that will apply to each category of transactions by complying with the disclosure requirements in 12 CFR 226.5a regarding applications and solicitations and the requirements in 12 CFR 226.6 regarding account-opening disclosures. Similarly, in order to increase an annual percentage rate on new transactions pursuant to Sec. 706.24(b)(3), a federal credit union must comply with the disclosure requirements in 12 CFR 226.9(b), (c), or (g). However, nothing in Sec. 706.24 alters the requirements in 12 CFR 226.9(c) and (g) that creditors provide consumers with written notice at least 45 days prior to the effective date of certain increases in the annual percentage rates on open-end (not home- secured) credit plans. 2. Relationship to grace period. Nothing in Sec. 706.24 prohibits a federal credit union from assessing interest due to the loss of a grace period to the extent consistent with Sec. 706.25. Additionally, a federal credit union has not reduced an annual percentage rate on a consumer credit account for purposes of Sec. 706.24 if the federal credit union does not charge interest on a balance when the member pays that balance in full prior to the expiration of a grace period. 3. Category of transactions. For purposes of Sec. 706.24, a ``category of transactions'' is a type or group of transactions to which an annual percentage rate applies that is different than the annual percentage rate that applies to other transactions. For example, purchase transactions, cash advance transactions, and balance transfer transactions are separate categories of transactions for purposes of Sec. 706.24 if a federal credit union applies different annual percentage rates to each. Furthermore, if, for example, the federal credit union applies [[Page 20829]] different annual percentage rates to different types of purchase transactions (such as one rate for purchases of gasoline and a different rate for all other purchases), each type constitutes a separate category of transactions for purposes of Sec. 706.24. 4. Account opening. i. Multiple accounts with same federal credit union. When a member has a credit card account with a federal credit union and the member opens a new credit card account with the same federal credit union (or its affiliate or subsidiary), the opening of the new account constitutes an ``account opening'' for purposes of Sec. 706.24 if, more than 15/30 days after the new account is opened, the member has the ability to obtain additional extensions of credit on each account. For example, assume that, on January 1 of year one, a member opens a credit card account with a federal credit union. On July 1 of year one, the member opens a second credit card account with that federal credit union. On July 15, a $1,000 balance is transferred from the first account to the second account. The opening of the second account constitutes the opening of an account for purposes of Sec. 706.24 so long as, on July 17/August 1, the member can engage in transactions using either account. Under these circumstances, the bank could not increase an annual percentage rate on the second account pursuant to Sec. 706.24(b)(3) until July 1 of year two (which is one year after the second account was opened). ii. Replacement or consolidation. A. Generally. A consumer credit card account has not been opened for purposes of Sec. 227.24 when a consumer credit card account issued by a bank is replaced or consolidated with another consumer credit card account issued by the same bank (or its affiliate or subsidiary). Circumstances in which a consumer credit card account has not been opened for purposes of Sec. 227.24 include when: (1) A retail credit card is replaced with a cobranded general purpose card that can be used at a wider number of merchants; (2) A credit card account is replaced with another consumer credit card account offering different features; (3) A credit card account is consolidated or combined with one or more other credit card accounts into a single credit card account; or (4) A credit card account acquired through merger or acquisition is replaced with a credit card account issued by the acquiring federal credit union. B. Limitation. A bank that replaces or consolidates a consumer credit card account with another consumer credit card account issued by the bank (or its affiliate or subsidiary) may not increase an annual percentage rate in a manner otherwise prohibited by Sec. 227.24. For example, assume that, on January 1 of year one, a consumer opens a consumer credit card account with an annual percentage rate for purchases of 15%. On July 1 of year one, the account is replaced with a consumer credit card account that offers different features (such as rewards on purchases). Under these circumstances, the bank cannot increase the annual percentage rate for purchases to a rate that is higher than 15% pursuant to Sec. 227.24(b)(3) until January 1 of year two (which is one year after the first account was opened). 24(a) General Rule 1. Rates that will apply to each category of transactions. Section 706.24(a) requires federal credit unions to disclose, at account opening, the annual percentage rates that will apply to each category of transactions on the account. A federal credit union cannot satisfy this requirement by disclosing at account opening only a range of rates or that a rate will be ``up to'' a particular amount. The disclosure requirements in Sec. 706.24(a) do not apply to annual percentage rates that are contingent on a particular event or occurrence or may be applied at the federal credit union's discretion (such as penalty rates) insofar as those rates may be applied consistent with Sec. 706.24. 2. * * * i. Assume that, at account opening on January 1 of year one, a federal credit union discloses that the annual percentage rate for purchases is a non-variable rate of 5% and will apply for six months. The federal credit union also discloses that, after six months, the annual percentage rate for purchases will be a variable rate that is currently 9% and will be adjusted quarterly by adding a margin of 3 percentage points to a publicly available index not under the federal credit union's control. Furthermore, the federal credit union discloses that the annual percentage rate for cash advances is the same variable rate that will apply to purchases after six months. Finally, the federal credit union discloses that, to the extent consistent with Sec. 706.24 and other applicable law, a non-variable penalty rate of 15% may apply if a member makes a late payment. The payment due date for the account is the twenty- fifth day of the month and the required minimum periodic payments are applied to accrued interest and fees but do not reduce the purchase and cash advance balances. * * * * * iii. Assume that, at account opening on January 1 of year one, a federal credit union discloses that the annual percentage rate for purchases is a variable rate determined by adding a margin of 2 percentage points to a publicly-available index outside of the federal credit union's control. The federal credit union also discloses that, to the extent consistent with Sec. 706.24 and other applicable law, a non-variable penalty rate of 15% may apply if a member makes a late payment. The due date for the account is the fifteenth of the month. On May 30 of year two, the account has a purchase balance of $1,000. On May 31, the federal credit union provides a notice pursuant to 12 CFR 226.9(c) informing the member of a new variable rate that will apply on July 16 for all purchases made on or after June 8 (calculated by using the same index and an increased margin of 8 percentage points). On June 7, the member makes a $500 purchase. On June 8, the member makes a $200 purchase. On June 25, the federal credit union has not received the payment due on June 15 and provides the member with a notice pursuant to 12 CFR 226.9(g) stating that the penalty rate of 15% will apply as of August 9 to all transactions made on or after July 3 and that, if the member becomes more than 30 days late, the penalty rate will apply to all balances on the account. On July 4, the member makes a $300 purchase. * * * * * C. Same facts as paragraph A. above except the payment due on June 15 of year two is received on July 20. Section 706.24(b)(4) permits the federal credit union to apply the 15% penalty rate to all balances on the account and to future transactions because it has not received payment within 30 days after the due date. Because the federal credit union provided a 12 CFR 226.9(g) notice on June 25 stating the 15% penalty rate, the federal credit union may apply the 15% penalty rate to all balances on the account as well as any future transactions on August 9 without providing an additional notice pursuant to 12 CFR 226.9(g). iv. Assume that, at account opening on January 1 of year one, the federal credit union discloses a promotional program under which interest on purchases made during January will accrue at a non- variable rate of 10%, but the member will not be obligated to pay that interest if those purchases are paid in full by December 31 of year one. On January 15, the member makes a purchase of $2,000. No other transactions are made on the account. The payment due on April 1 is not received until April 10. Section 706.24 does not permit the federal credit union to deny the member the opportunity to avoid interest charges on the $2,000 purchase by paying that purchase in full on or before December 31 of year one. If, however, the $2,000 purchase remains unpaid on January 1 of year two, Sec. 706.24 does not prohibit the federal credit union from charging the interest accrued on that purchase during year one. 24(b) Exceptions 1. Delayed implementation of rate increase. If Sec. 706.24(b) permits a federal credit union to apply an increased annual percentage rate on a date that is not the first day of a billing cycle, the federal credit union may delay application of the increased rate until the first day of the following billing cycle without relinquishing the ability to apply that rate. For example, assume that, at account opening on January 1, a federal credit union discloses that a non-variable annual percentage rate of 10% will apply to purchases for six months and a non-variable rate of 15% will apply thereafter. The first day of the billing cycle for the account is the fifteenth of the month. If the six-month period expires on July 1, the federal credit union may delay application of the 15% rate until July 15 without relinquishing its ability to apply that rate under Sec. 706.24(b)(1). 24(b)(1) Account Opening Disclosure Exception 1. Prohibited increases in rate. Section Sec. 706.24(b)(1) permits an increase in the annual percentage rate for a category of transactions to a rate disclosed at account opening upon expiration of a period of time that was also disclosed at account opening. Section 706.24(b)(1) does not permit application of an increased annual percentage rate disclosed at account opening that is contingent on a particular event or [[Page 20830]] occurrence or may be applied at the federal credit union's discretion. The following examples illustrate rate increases that are not permitted by Sec. 706.24: * * * * * 2. Application of rate that is lower than disclosed rate. Section Sec. 706.24(b)(1) permits an increase in the annual percentage rate for a category of transactions to a rate disclosed at account opening upon expiration of a period of time that was also disclosed at account opening. Nothing in Sec. 706.24 prohibits a federal credit union from applying a rate that is lower than a disclosed rate either during or upon expiration of the period. However, once the lower rate is applied to an existing balance, the federal credit union cannot subsequently increase the rate on that balance unless it provided the member with advance notice of the increase pursuant to 12 CFR 226.9(b) or (c). This notice must state the period of time during which the lower rate will apply and the rate that will apply after expiration of that period. Furthermore, a federal credit union that applies a lower rate to transactions that occurred during the first year after account opening may not subsequently increase the rate that applies to those transactions to a rate that is higher than the increased rate disclosed at account opening. The following examples illustrate the application of the rule: * * * * * ii. Assume that a federal credit union discloses at account opening on January 1 of year one that a non-variable annual percentage rate of 10% will apply to purchases for one year, after which that rate will increase to a non-variable rate of 12%. The federal credit union also discloses that, to the extent consistent with Sec. 706.24 and other applicable law, a non-variable penalty rate of 15% may apply if the member's required minimum periodic payment is received after the payment due date, which is the tenth of the month. The required minimum periodic payments are applied to accrued interest and fees but do not reduce the purchase balance. A. On September 30 of year one, the account has a purchase balance of $1,400 at the 10% rate. On October 1, the federal credit union provides a notice pursuant to 12 CFR 226.9(c) informing the member that the rate for new purchases will decrease to a non- variable rate of 7% for six months (from October 1 through March 31 of year two) and that, beginning on April 1 of year two, the rate for purchases will increase to a non-variable rate of 13%. The federal credit union does not apply the 7% rate to the $1,400 purchase balance. On October 15 of year one, the member makes a $300 purchase at the 7% rate. On January 1 of year two, the federal credit union may begin accruing interest on the $1,400 purchase balance at 12% (as disclosed at account opening). On January 15 of year two, the member makes a $150 purchase at the 7% rate. On April 1 of year two, the 7% rate that applies to the $300 purchase and the $150 purchase expires. The federal credit union may begin accruing interest on the $150 purchase at 13% (as disclosed in the 12 CFR 226.9(c) notice). Because, however, the $300 purchase occurred during the first year after account opening, the federal credit union cannot increase the rate that applies to that purchase to a rate that is higher than the 12% rate disclosed at account opening. B. Same facts as above except that the required minimum periodic payment due on November 10 of year one is not received until November 15. Section 706.24(b)(1) does not permit the federal credit union to increase any annual percentage rate on the account at this time. The federal credit union may, however, apply the 15% penalty rate to new transactions beginning on January 1 of year two pursuant to Sec. 706.24(b)(3) by providing a 12 CFR 226.9(g) notice informing the member of this increase no later than November 16 of year one. On January 1 of year two, Sec. 706.24(b)(1) permits the federal credit union to begin accruing interest on the $1,400 purchase balance at 12% (as disclosed at account opening). If the member makes the $150 purchase on January 15 of year two, Sec. 706.24(b)(3) would permit the federal credit union to apply the 15% rate to that purchase. On April 1 of year two, the 7% rate that applies to the $300 purchase expires. Because this purchase occurred during the first year after account opening, the federal credit union cannot increase the rate that applies to that purchase to a rate that is higher than the 12% rate disclosed at account opening. 24(b)(2) Variable Rate Exception * * * * * 5. Changing a variable rate to a non-variable rate. * * * * * * * * 24(b)(3) Advance Notice Exception * * * * * 2. Transactions that occurred prior to provision of notice or within seven days after provision of notice. Section 706.24(b)(3) generally permits a federal credit union to apply an increased rate to transactions that occur after provision of a 12 CFR 226.9(b) notice or more than seven days after provision of a 12 CFR 226.9(c) or (g) notice. If a rate increase is disclosed pursuant to both 12 CFR 226.9(b) and 12 CFR 226.9(c), that rate may only be applied to transactions that occur more than seven days after provision of the 12 CFR 226.9(c) notice. Section 706.24(b)(3) does not permit a federal credit union to reach back to days before the effective date of the rate increase under 12 CFR 226.9(c) or (g) when calculating interest charges. See comment 24(b)(3)-3. Whether a transaction occurred prior to provision of a notice or within seven days after provision of a notice is determined by the date of the transaction. In some cases, however, a merchant may place a ``hold'' on the available credit on an account for an estimated transaction amount when the actual transaction amount will not be known until a later date. In these circumstances, the date of the transaction for purposes of Sec. 706.24(b)(3) is the date on which the merchant determines the actual transaction amount. For example, assume that, when a member uses a credit card account to check into a hotel on July 1, the hotel obtains authorization for a $750 hold on the account to ensure there is adequate available credit to cover the anticipated cost of the stay. When the member checks out on July 4, the actual cost of the stay is $850 because of additional incidental costs, and the hotel charges this amount to the account. For purposes of Sec. 706.24(b)(3), the transaction occurred on July 4. 3. Examples. i. Assume that a consumer credit card account is opened on January 1 of year one. On March 14 of year two, the account has a purchase balance of $2,000 at a non-variable annual percentage rate of 5%. On March 15, the federal credit union provides a notice pursuant to 12 CFR 226.9(c) informing a member that the rate for new purchases will increase to a non-variable rate of 8% on May 1. The notice further states that the 8% rate will apply for six months (until November 1) and states that thereafter the federal credit union will apply a variable rate that is currently 9% and is determined by adding a margin of 5 percentage points to a publicly- available index that is not under the federal credit union's control. The seventh day after provision of the notice is March 22 and, on that date, the member makes a $200 purchase. On March 24, the member makes a $1,000 purchase. On May 1, Sec. 706.24(b)(3) permits the federal credit union to begin accruing interest at 8% on the $1,000 purchase made on March 24. The federal credit union is not permitted to apply the 8% rate to the $2,200 purchase balance as of March 22. After six months (November 2), the federal credit union may begin accruing interest on any remaining portion of the $1,000 purchase at the previously-disclosed variable rate determined using the 3-point margin. ii. Same facts as above except that on September 17 of year two (which is 45 days before expiration of the 8% non-variable rate), the federal credit union provides a notice pursuant to 12 CFR 226.9(c) informing the member that, on November 2, a new variable rate will apply to new purchases and any remaining portion of the $1,000 balance (calculated by using the same index and a reduced margin of 3 percentage points). The notice further states that, on May 1 of year three, the margin will increase to the margin disclosed in the March 15 notice (6 percentage points). On May 1 of year three, Sec. 706.24(b)(3) permits the federal credit union to increase the margin used to determine the variable rate that applies to new purchases to 5 percentage points and to apply that rate to any remaining portion of the $1,000 purchase as well as to new purchases. The federal credit union is not permitted to apply this rate to any remaining portion of the $2,200 purchase balance as of March 22. 4. Application of a lower rate. Nothing in Sec. 706.24 prohibits a federal credit union from lowering the annual percentage rate that applies to an existing balance or to new transactions. However, once the lower rate is applied to an existing balance, the federal credit union cannot subsequently increase the rate on that balance unless it provided a member with advance notice of the increase pursuant to 12 CFR 226.9(b) or (c). This notice must state the period of time during [[Page 20831]] which the lower rate will apply and the rate that will apply after expiration of that period. Furthermore, a federal credit union that applies a decreased rate to transactions that occurred prior to provision of the notice--or, in the case of a 12 CFR 226.9(c) or (g) notice, transactions that occurred within seven days after provision of the notice--may not subsequently increase the rate that applies to those transactions to a rate that is higher than the rate that applied prior to the decrease. The following examples illustrate the application of the rule: i. Assume that a federal credit union discloses at account opening on January 1 of year one that a non-variable annual percentage rate of 7% will apply to purchases for one year, after which that rate will increase to a non-variable rate of 9%. The federal credit union also discloses that, to the extent consistent with Sec. 706.24 and other applicable law, a non-variable penalty rate of 15% may apply if the member's required minimum periodic payment is received after the payment due date, which is the tenth of the month. The required minimum periodic payments are applied to accrued interest and fees but do not reduce the purchase balance. On June 30 of year two, the account has a purchase balance of $1,000 at the 9% rate. On July 1, the federal credit union provides a notice pursuant to 12 CFR 226.9(c) informing the consumer that the rate for new purchases will decrease to a non-variable rate of 5% for six months (from July 1 through December 31 of year two) and that, beginning on January 1 of year three, the rate for purchases will increase to a non-variable rate of 10%. On July 8 of year two, the member makes a $200 purchase. On July 9, the member makes a $100 purchase. On January 1 of year three, Sec. 706.24(b)(3) permits the federal credit union to begin accruing interest on the $100 purchase at 10%. The federal credit union may not apply the 10% rate to the $200 purchase because that transaction occurred within seven days after provision of the 12 CFR 226.9(c) notice. If the federal credit union applied the 5% rate to the $1,000 purchase balance and the $200 purchase, the federal credit union may not increase the rate that applies to those amounts to a rate that is higher than 9% on January 1 of year three. ii. Same facts as above except that the required minimum periodic payment due on September 10 of year two is not received until September 15 of year two. On September 15 of year two, the federal credit union provides a notice pursuant to 12 CFR 226.9(g) informing the member that the rate for new purchases will increase to the 15% penalty rate on October 31. On October 31, Sec. 706.23(b)(3) permits the federal credit union to begin accruing interest at 15% on any purchase made on or after September 23. The federal credit union may not, however, apply the 15% rate to the $1,300 in purchases. Instead, the federal credit union must continue to apply the 5% rate to the $100 purchase until at least January 1 of year three when Sec. 706.24(b)(3) permits the federal credit union to begin accruing interest on that purchase at 10%. Similarly, if the federal credit union applied the 5% rate to the $1,000 purchase balance and the $200 purchase, the federal credit union may begin accruing interest on those amounts at 9% on January 1 of year three. iii. Assume that a federal credit union discloses at account opening on January 1 of year one that the rate that applies to purchases is a variable annual percentage rate that is currently 7% and will be adjusted quarterly by adding a margin of 3 percentage points to a publicly available index not under the federal credit union's control. The federal credit union also discloses that, to the extent consistent with Sec. 706.24 and other applicable law, a non-variable penalty rate of 15% may apply if the member's required minimum periodic payment is received after the payment due date, which is the first of the month. On July 30 of year two, the member uses the account for a $1,000 purchase in response to a promotional offer. Under the terms of this offer, interest on purchases made during the months of July through September will accrue at the variable rate for purchases but the member will not be obligated to pay that interest if all purchases made during that three-month period are paid in full by December 31 of year two. The payment due on September 1 of year two is not received until September 6. Section 706.24 does not permit the federal credit union to deny the member the opportunity to avoid interest charges on the $1,000 purchase by paying that purchase in full on or before December 31 of year two. The federal credit union may, however, provide a notice pursuant to 12 CFR 226.9(g) on September 2 of year two informing the member that the promotional offer does not apply to purchases made on or after September 10 and that the rate for such purchases will increase to the 15% penalty rate on October 18. On December 31 of year two, the $1,000 purchase has been paid in full. Under these circumstances, the federal credit union may not charge any interest accrued on the $1,000 purchase. iv. Assume that a federal credit union discloses at account opening on January 1 of year one that the rate that applies to cash advances is a variable annual percentage rate that is currently 9% and will be adjusted quarterly by adding a margin of 3 percentage points to a publicly available index not under the federal credit union's control. On July 1 of year two, the federal credit union provides checks that access the account and, pursuant to 12 CFR 226.9(b)(3)(A), discloses that a promotional rate of 5% will apply to credit extended by use of the checks until January 1 of year three, after which the cash advance rate determined using the 3- point margin will apply. On July 15 of year two, the member uses one of the checks to pay for a $500 transaction. On January 1 of year three, Sec. 706.24(b)(3) permits the federal credit union to apply the cash advance rate determined using the 3-point margin to the $500 transaction. 24(b)(5) Workout and Temporary Hardship Arrangement Exception 1. Scope of exception. Nothing in Sec. 706.24(b)(5) permits a federal credit union to alter the requirements of Sec. 706.24 pursuant to a workout or temporary hardship arrangement between a member and the federal credit union. For example, a federal credit union cannot increase an annual percentage rate pursuant to a workout or temporary hardship arrangement unless otherwise permitted by Sec. 706.24. In addition, a federal credit union cannot require the member to make payments with respect to a protected balance that exceeds the payments permitted under Sec. 706.24(c). 2. Variable rates. If the annual percentage rate that applied to a category of transactions prior to commencement of the workout or temporary hardship arrangement varied with an index consistent with Sec. 706.24(b)(2), the rate applied to that category of transactions following an increase pursuant to Sec. 706.24(b)(5) must be determined using the same formula (index and margin). 3. Examples. i. Assume that, consistent with Sec. 706.24(b)(4), the margin used to determine a variable annual percentage rate that applies to a $5,000 balance is increased from 3 percentage points to 5 percentage points. Assume also that the federal credit union and the member subsequently agree to a workout arrangement that reduces the margin back to 3 points on the condition that the member pay a specified amount by the payment due date each month. If the member does not pay the agreed-upon amount by the payment due date, the federal credit union may increase the margin for the variable rate that applies to the $5,000 balance up to 5 percentage points. 12 CFR 226.9 does not require advance notice of this type of increase. ii. Assume that a member fails to make four consecutive minimum payments totaling $480 on a consumer credit card account with a balance of $6,000 and that, consistent with Sec. 706.24(b)(4), the annual percentage rate that applies to that balance is increased from a non-variable rate of 5% to a non-variable penalty rate of 15%. Assume also that the federal credit union and the member subsequently agree to a temporary hardship arrangement that reduces all rates on the account to 0% on the condition that the member pay an amount by the payment due date each month that is sufficient to cure the $480 delinquency within six months. If the member pays the agreed-upon amount by the payment due date during the six-month period and cures the delinquency, the federal credit union may increase the rate that applies to any remaining portion of the $6,000 balance to 5% or any other rate up to the 15% penalty rate. 24(c) Treatment of Protected Balances * * * * * 24(c)(1) Repayment * * * * * Paragraph 24(c)(1)(i) * * * * * 2. Amortization when applicable rate is variable. * * * * * * * * 24(c)(2) Fees and Charges 1. Fee or charge based solely on the protected balance. A federal credit union is prohibited from assessing a fee or charge based solely on balances to which Sec. 706.24(c) applies. For example, a federal credit union [[Page 20832]] is prohibited from assessing a monthly maintenance fee that would not be charged if the account did not have a protected balance. A federal credit union is not, however, prohibited from continuing to assess a periodic fee that was assessed before the account had a protected balance. Similarly, a federal credit union is not prohibited from assessing fees such as late payment fees or fees for exceeding the credit limit even if such fees are based in part on the protected balance or if the only balance on the account is a protected balance. Sec. 706.25--Unfair Balance Computation Method 25(a) General Rule * * * * * 3. Charging accrued interest at expiration of certain promotional programs. When a federal credit union offers a promotional program under which a member will not be obligated to pay interest that accrues on a balance if that balance is paid in full prior to a specified date or expiration of a specified period of time, Sec. 706.25 does not prohibit the federal credit union from charging that accrued interest to the account if the balance is not paid in full prior to the specified date (consistent with applicable law and regulatory guidance). * * * * * By order of the Board of Governors of the Federal Reserve System, April 24, 2009. Jennifer J. Johnson, Secretary of the Board. Dated: April 17, 2009. By the Office of Thrift Supervision. John E. Bowman, Acting Director. By the National Credit Union Administration Board, on April 24, 2009. Mary F. Rupp, Secretary of the Board. [FR Doc. E9-9861 Filed 5-4-09; 8:45 am] BILLING CODE 6210-01-P
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