CUNA Regulatory Comment Call

May 12, 2008

NCUA Proposal Addressing Unfair and Deceptive Practices for Credit Cards and Overdraft Protection Plans

EXECUTIVE SUMMARY

• The National Credit Union Administration (NCUA), along with the Federal Reserve Board (Fed) and the Office of Thrift Supervision, has published a joint proposed rule that will prohibit a number of credit card practices and will impose restrictions on overdraft protection plans. The Fed has also published two separate but related proposals that amend Regulation Z, the Truth in Lending Act, and Regulation DD, the Truth in Savings Act. CUNA will issue separate Regulatory Comment Calls that provide additional information on these proposals. Since they are interrelated, it is expected that all of these rules will be finalized at the same time.
• CUNA is concerned about the scope of these proposals and will be working with our Federal Credit Union Subcommittee, Consumer Protection Subcommittee and Payments Subcommittee to identify which, if any of the proposals we oppose, should support, or develop changes for.
• NCUA’s proposal will apply to federal credit unions. Although the Federal Trade Commission (FTC) has authority in this area over state-chartered credit unions and will not be issuing a proposal at this time, we anticipate the FTC will expect state-chartered credit unions to comply with this rule.
• For credit cards, the proposal addresses time periods for making payments, payment allocations, interest rate increases on outstanding balances, fees resulting from credit holds, methods for computing balances that are subject to interest charges, excessive security deposits and fees that are charged when credit is issued, and advertisements that include multiple interest rates and multiple credit limits.
• For overdraft protection plans, the proposal requires consumers to be provided an opportunity to “opt-out” of the plan and addresses fees resulting from holds on debit card transactions.
• A related proposal on risk-based pricing was recently issued by the Fed and the FTC. This is addressed in a separate CUNA Regulatory Comment Call that will be issued shortly.
• Comments on this proposal will be due August 4, 2008. Comments are due to CUNA by July 23, 2008.

Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Senior Vice President and Deputy General Counsel Mary Dunn at mdunn@cuna.com and to Senior Assistant General Counsel Jeff Bloch at jbloch@cuna.com; or mail them to Mary and Jeff in c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, 6th Floor, Washington, DC 20004. You may also contact us if you would like a copy of the proposal or you may access here.

BACKGROUND

With respect to federal credit unions, the FTC Act gives NCUA the authority to define and prevent unfair and deceptive practices. The proposal is being issued under this authority and is prohibiting seven practices that will apply to credit cards and two practices that will apply to overdraft protection plans.

Over the past several years, both NCUA and the Fed have issued rules, guidance, and proposals with regard to credit cards and overdraft protection plans. As part of an extensive overview of Regulation Z, the Fed last year issued a comprehensive proposal to the disclosure rules as they apply to credit cards. The Fed and NCUA have also in recent years issued guidance and rules that have imposed additional requirements in connection with overdraft protection plans. This latest proposal is intended to supplement the earlier rules and guidance.

DESCRIPTION OF THE PROPOSAL

I. Credit Cards

The proposal will address the following practices as they pertain to credit cards, although they will not apply to home-equity plans accessible by credit cards or to lines of credit that are accessible by debit cards.

Late Payments

The proposal will prohibit creditors from considering a payment as late, unless the consumer is provided with reasonable time to make payments, which should be at least 21 days before the due date. Creditors with reasonable procedures to ensure statements are delivered within a certain amount of days from the closing date of the billing cycle will be able to add that number to the 21-day period for purposes of determining the due date that complies with these provisions. This requirement does not apply to or require that creditors provide a “grace period” in which no interest is charged if payments are received by a certain date.

Allocation of Payments

For a credit card that includes balances subject to different interest rates, creditors will be required to allocate the amount in excess of the minimum payment under one of the three following methods or in another manner no less beneficial:

• Apply the amount first to the balance with the highest interest rate and then apply any remaining amounts to the other balances in order from the highest rate to the lowest rate.
• Divide the amount equally among the balances.
• Divide the amount in a pro-rata manner among the balances. This would allocate the amount among the balances based on the percentage of that balance as compared to the total of all the balances.

Creditors would no longer be permitted to apply payments to balances with the lowest interest rate before applying it to those subject to higher rates. Also, if an account includes a balance subject to a discounted rate or a balance in which interest is deferred for a period of time, creditors would be required to apply payments to all the other balances before applying payments to those subject to a discounted rate or deferred interest. However, creditors will be able to apply payments to the balance in which interest is deferred during the last two billing cycles of the deferred interest period. Creditors will also not be able to require consumers to repay a portion of the promotional rate balance or deferred interest amount in order to receive a grace period for purchases, which would happen if payments are first applied to these balances.

Increasing the Interest Rate on an Outstanding Balance

Creditors will not be able to increase the interest rate on an outstanding balance, unless: 1) it is a variable rate that rises due to a change in the underlying index, as long as the creditor does not change the method used to determine the indexed rate; 2) it is a promotional rate that expired or otherwise no longer applies according to the terms of the account agreement, as long as the rate is not increased to a penalty rate; and 3) the minimum payment was not received within thirty days after the due date. Creditors will also not be permitted to assess any fee or charge based solely on the outstanding balance. This is meant to address “universal default” provisions in which certain financial institutions have raised interest rates based on the consumer’s payment history with other creditors.

Under the proposal, the outstanding balance in which a creditor could not apply an increased rate would be the amount owed as of 14 days after the creditor provided the 45-day notice of the rate increase. The creditor would not need to determine the specific date the notice was received by the consumer for purposes of calculating the 14-day period. Instead, the creditor could determine this based on the time it takes to generate the notice. For example, if reasonable procedures are used to ensure the notice is generated three days after the rate is increased, the outstanding balance would be the amount owed as of 17 days after the rate is increased.

After the rate increase is in effect, creditors may require payment of the outstanding balance under one of the following methods or another method that is no less beneficial to the consumer:

• Periodic payments that amortize the outstanding balance in no less than five years after the rate increase went into effect.
• A minimum payment based on a percentage of the outstanding balance that is double the payment that was required before the rate increase went into effect.

Assessing Fees if the Credit Limit is Exceeded

The proposal will prohibit creditors from assessing a fee if the consumer exceeds the credit limit solely because a hold is placed on the available credit, such as when the hold placed by the merchant exceeds the amount the consumer is obligated to pay. The fee may be imposed if the actual amount of the transaction exceeded the credit limit.

Creditors will also not be able to impose a fee when the hold on the transaction causes a subsequent transaction to exceed the credit limit. These provisions will not prohibit the use of credit holds, just the imposition of a fee under these specific circumstances.

Prohibition of “Double-Cycle Billing”

Creditors will be prohibited from calculating interest charges based on balances in a billing cycle that precedes the most recent cycle. This is commonly referred to as “double-cycle billing.” There will be two exceptions, as follows:

• Creditors will be permitted to charge consumers for deferred interest if, for example, the consumer did not pay the balance by a specific date. The deferred interest may be charged even though the interest accrued over multiple billing cycles.
• Creditors will be permitted to impose interest charges if it is based on a billing error dispute that results in additional interest charges, even though the interest is based on balances in prior billing cycles.

Security Deposits and Fees for Issuing Credit

The proposal will prohibit creditors from charging fees or security deposits for the issuance of credit within the first year after the account is opened if these charges exceed the majority of the available credit. Fees or deposits that are more than 25% but less than 50% of the available credit must be spread out over one year. This will only apply to deposits and fees charged to the account and not to deposits and fees paid from separate funds. Fees will be defined as any annual or periodic fee, a fee based on account activity or inactivity, and any non-periodic fee that relates to opening the account.

Offers of Credit that Advertise Multiple Interest Rates or Multiple Credit Limits

Creditors that advertise multiple interest rates or multiple credit limits in firm offers of credit will be required to disclose the factors for qualifying for the lowest interest rate or the highest credit limit if those factors depend on creditworthiness, as opposed to being based on the features of the card. This disclosure must be understandable and designed to call attention to this information, and the following statement may be used to meet this requirement, assuming the factors mentioned in the statement are used by the creditor: “If you are approved for credit, your annual percentage rate and/or credit limit will depend on your credit history, income, and debts.”

II. Overdraft Protection Plans

The proposal will also address the following practices as they pertain to overdraft protection plans, which will not include overdrafts paid pursuant to a line of credit, such as transfers from a credit card account, a home equity line of credit, another account at the institution, or an overdraft line of credit:

Opt-out Right

Before charging a fee, creditors will be required to provide consumers with a notice and a reasonable opportunity to “opt-out” of the overdraft plan. This will apply to all transactions that overdraw the account, including checks, automated clearinghouse (ACH) transactions, ATM withdrawals, recurring payments, or point-of-sale (POS) debit card purchases. Consumers would also be permitted to limit the opt-out to ATM and POS debit card transactions, since consumers would not be subject to merchant fees or other adverse consequences if the overdraft is not paid for these transactions.

The opt-out notice must be provided both before a fee is charged for the first time and during each periodic statement cycle in which a fee is assessed, if the consumer does not choose to opt-out. If the consumer does not opt- out after the first opportunity but decides to opt-out after being assessed the fee and receiving the notice during the statement period, the opt-out would only be applicable to subsequent transactions and the consumer would remain responsible for paying the fee. Only one opt-out notice would need to be provided during the statement period, even if multiple fees are charged during that period.

The creditor must comply with the opt-out request as soon as reasonably practicable after it receives the request. The opt-out will remain in effect, unless it is revoked by the consumer in writing or electronically.

The following are exceptions in which a fee may be charged even if the consumer has elected to opt-out:

• If the purchase amount presented at settlement by a merchant for a debit card transaction exceeds the amount that was originally requested for pre-authorization, which differs from a debit hold, as described below.
• When a merchant or payee presents a debit card transaction for payment by paper-based means, rather than electronically, and the payee does not obtain authorization from the card issuer at the time of the transaction.

Overdrafts Due to Debit Holds

For debit card transactions, creditors will be prohibited from assessing a fee if the overdraft results solely by a hold placed on funds that exceed the actual purchase amount of the transaction. A fee may be imposed: 1) if the purchase amount itself would have caused the overdraft; 2) if other transactions have been authorized but not yet been presented for settlement; or 3) if a deposited check in the account is returned. This is assuming the consumer did not opt-out of paying overdrafts in these situations.

• Should individual States be permitted to seek an exemption from these rules if the State law provides greater or a substantially similar level of protection, or will this undermine the uniform application of Federal standards?
  
  

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• NCUA requests comment on the following questions in connection with the proposal to provide consumers reasonable time to make payments, which should be at least 21 days:
  • What is the number of days after the closing date of the billing cycle that you typically mail or deliver periodic statements?
  • What percentage of your members receive statements by mail and electronically and what percentage make payments by mail, electronically, telephone, or through other means?
  • Will the 21-day period give consumers sufficient time to review the statement and make payments?
  • What will be the costs to alter your systems to comply with these provisions and to deliver the statements 21 days in advance of the due date?
  • Should NCUA and the other agencies adopt a rule to prohibit the treating of a payment as late if received within a certain number of days after the due date and, if so, how many days should that be?
  • Should NCUA and the other agencies adopt a rule to require that, at the request of the consumer, the creditor must reverse a decision to treat a payment as late if it was mailed before the due date, regardless of when it was received? What evidence should the consumer be required to provide? Should there be a required time frame in which the consumer must mail the payment at least a certain number of days before the due date, as well as a requirement that the creditor receive the payment within a certain number of days after the due date? If so, what should the time frame be?
  • What impact will these provisions have on the availability of credit?
• NCUA requests comment on the following questions in connection with the provisions as to how to allocate payments among balances with different interest rates:
  • Should other methods for allocating payments be listed in the rule?
  • Should creditors be permitted to first apply these payments to outstanding balances in which the rate cannot be increased as a result of provisions in this proposal that prohibit such increases?
  • Will the prohibition against applying these payments to the deferred interest balances prevent consumers from paying these balances in full before the date in which interest would be imposed?
  • Do you agree with the exception that payments may be applied first to deferred interest balances in the last two billing cycles of the deferred period? Would a different period of time be more appropriate?
  • Should consumers be permitted to instruct creditors on how to apply payments among the balances that are subject to different rates?
  • What would be the costs of implementing these provisions and how would they affect the availability of credit?
• NCUA requests comment on the following questions in connection with the provisions that prohibit increasing the interest rate on the outstanding balance:
  • Do you raise rates on outstanding balances?
  • Do you allow members to opt-out of the higher rate for outstanding balances and do they take advantage of this option?
  • What factors do you look at when deciding to increase rates, other than when members make late payments, bounce checks, or exceed the credit limit?
  • Will these proposed restrictions limit your ability to manage risks?
  • Do you agree with the 14-day period for determining the amount of the outstanding balance?
  • Are the exceptions that allow the rate to be increased for outstanding balances appropriate? Should there be other exceptions? Is the exception when the payment is 30 days late reflect an appropriate time period for considering a payment seriously delinquent?
  • Are there other approaches that should be considered with regard to the payment of outstanding balances?
• NCUA requests comment on the following questions in connection with the provisions that prohibit over-the-limit fees caused by credit holds:
  • Do you charge more than one fee per billing cycle if the limit is exceeded and the member then makes other purchases?
  • Do you vary the fee based on the number or dollar amount of transactions that are made when the credit limit is exceeded?
  • Do you continue to charge the fee when the transaction that exceeded the limit occurred in a prior billing cycle and the member did not make any purchases after that time?
• Do you charge fees and security deposits for credit cards issued to those with limited or damaged credit history? Do you agree with the proposal that will limit the amounts that can be charged to the credit card? Are there other restrictions that can or should be imposed? Do you agree that these provisions should apply for the 12-month period after the account is opened? Does disclosure of these fees and deposits help consumers understand how they affect the availability of credit? Are there other alternatives that should be considered, instead of or in addition to these proposed provisions?
  
  

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• For firm offers of credit with different rates and credit limits, the proposal will require a disclosure as to the criteria that will determine the rate or limit. Should there be a requirement that this be placed close to the first statement of the rate or limit or close to the most prominent statement of the rate or limit? Do consumers currently understand they may have no possibility of qualifying for the lowest rate or the highest credit limit and will the proposed disclosure help consumers understand that they may not receive the best rate or credit limit?
  
  

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• For overdraft protection plans, should the right for the consumer to opt-out only be required for overdrafts caused by ATM withdrawals and POS debit card transactions, while allowing creditors the option as to whether to provide this right for check and ACH transactions? What will be the costs and consumer benefits for providing this partial opt-out?
  
  

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• Certain creditors, including smaller financial institutions, may not be able to determine the consumer’s account balance in “real-time” and may not know if a certain transaction creates an overdraft. Are exceptions needed for the provisions in the proposal that will prohibit fees if the consumer has chosen to opt-out to address these or other circumstances? How can any such exception be narrowly tailored so as not to undermine the benefits of these provisions for consumers?
  
  

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• For overdraft protection plans, creditors will not be able to impose fees in connection with debit transactions if the overdraft is caused by a hold placed by the financial institution, unless the purchase itself would have resulted in the overdraft. What will be the costs or operational issues associated with implementing these provisions? NCUA and the other agencies are also considering a requirement that creditors pay smaller dollar items before larger dollar items when received on the same day for purposes of assessing overdraft fees. Under this approach, creditors could use an alternative clearing order, as long as this alternative is disclosed and the consumer agrees to this approach. How would such a requirement affect your ability to process transactions in “real-time?”
  
  

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• Should the effective date of the final rule be one year after the final rule is issued? If not, when should the rule be effective?
  
  

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