Reg Z and the CARD Act

Change-in-terms, late-fee provisions required clarification.

September 29, 2010

Sometimes, a literal reading of a particular Regulation Z (Truth in Lending) provision doesn’t disclose the full intent or meaning of that provision.

Sometimes the full meaning of a provision isn’t apparent until after it has been read more than once or until the Federal Reserve Board has clarified it.

That was the case with these two issues from the February and June 2010 Reg Z final rules:

1. Change-in-terms notices. Reg Z Section 226.9 (c)(2)(v) states all of the situations where no notice of change in terms is required. The following subparagraphs generally apply to all open-end loans except for home equity lines of credit (HELOC):

  • Paragraph A states that no notice is required when the change involves a reduction of any component of a finance charge, suspension of future credit privileges, termination of an account or plan, etc.
  • Paragraph B states that no notice is required for an increase in the annual percentage rate (APR) upon the expiration of an introductory or promotional period provided certain disclosures are given to the member before this period begins.
  • Paragraph D states that no notice is required for an increase in the APR or fee due to completion of a workout arrangement or the failure of the member to complete a workout arrangement, provided certain disclosures are given to the member before the workout arrangement begins.

However, paragraph C clearly states that no notice is required for an increase in the APR on a “credit card” account where the card agreement provides for changes in the rate according to the operation of an index that’s not under the control of the creditor and is available to the general public.

What about other open-end loans (except HELOCs)? This paragraph states that it only applies to credit card accounts.

Therefore, it seems that other open-end loans, such as lines of credit or overdraft lines of credit, require 45-day notice before increasing the APR on a variable-rate account even though all disclosures were properly provided at account opening.

A Federal Reserve attorney indicated recently that the limitation in paragraph C to just credit card accounts was a typographical error and the Fed had intended that the paragraph apply to all open-end loans (except HELOCs).

Therefore, neither credit card accounts nor other open-end loans require a 45-day advance notice for an increase in the APR when the increase is due to an increase in the index for a variable-rate plan. The Fed likely will issue a correction at some future date.

2. Late-payment fees. Generally, a credit union may only charge a penalty fee (e.g., late-payment fee) that doesn’t exceed the dollar amount of the violation. The dollar amount associated with a late payment is the amount of the required minimum periodic payment due immediately prior to assessment of the late-payment fee.

Say, for example, a required minimum periodic payment of $20 is due Sept. 25. When no payment has been received by Sept. 26, a late-payment fee not exceeding $20 may be charged.

This limitation is certainly understandable if the account balance exceeds the minimum payment amount. But what late fee is permitted when the account balance is less than the required minimum payment amount?

For example, when the account balance is only $12, can a credit union still charge a $20 late fee? Or may the late fee not exceed $12?

In this situation, when the account balance is less than the required minimum periodic payment of $20, a credit union would only be permitted to charge a late fee that doesn’t exceed the account balance. Compliance with this issue could be very costly in terms of data processing changes.

The only other option is for a credit union to not charge any late fee when the account balance falls below the minimum periodic payment amount, in this case $20.

MICHAEL McLAIN is assistant general counsel and senior compliance counsel for the Credit Union National Association. Contact him at 608-231-4185.