Banking Agencies Release Broad Proposal Targeting Credit Card Practices

On May 2, 2008, the Board of Governors of the Federal Reserve System (FRB), the Office of Thrift Supervision (OTS), and the National Credit Union Administration (NCUA) released an expansive proposal to prohibit or regulate a number of practices in credit card lending. The proposal is a dramatic and expansive exercise of the Agencies’ powers to issue regulations on unfair and deceptive acts and practices. Perhaps most significantly, the proposal (if finalized) would prohibit rate increases on outstanding balances,subject to very limited exceptions. This would likely substantially impact risk-based pricing strategies that are commonly used in the credit card industry today.

Regulation Z Amendments

The FRB has also proposed a series of amendments to Regulation Z’s rules for credit card lenders. This proposal does not replace last year’s proposed amendments to Regulation Z, but rather changes a few items from the earlier proposal (some for consistency with the unfair and deceptive practices proposal) and adds a few additional items. There are a number of important proposed changes to Regulation Z,including:

“Grace Period” Terminology. The FRB has proposed to eliminate the use of the term “grace period” in consumer disclosures,including in places where use of that term is currently mandatory under both Regulation Z and the Truth-in-Lending Act. The FRB believes that the term is not understood by consumers.

Minimum Finance Charge. The proposal would allow issuers to eliminate the disclosure of any minimum finance charge of $1 or less from Schumer box disclosures, and from the proposed new account opening disclosure table.

Prompt Crediting of Payments. The proposal would prohibit the use of any payment cut-off time for payments sent by mail that is earlier than 5 p.m. local time at the place where payments are received. In addition, the proposal would require that issuers consider as timely those payments received on the next business day if the due date falls on a day when the issuer does not actually receive payments.

Card Substitution. The proposal would preclude the issuance of an unsolicited credit card as a replacement for an existing card, if the new card can be used at a different
merchant base than the old card, and if the account has been inactive for 24 months or longer. The proposal is designed to limit the unsolicited substitution of a general purpose credit card for an inactive private label card.