Consumer Compliance Outlook: First Quarter 2009

The Regulation Z Amendments for Open-End Credit Disclosures

By Kenneth J. Benton, Consumer Regulations Specialist, Federal Reserve Bank of Philadelphia

In 2004, the Board of Governors of the Federal Reserve System (Board) initiated a comprehensive review of Regulation Z, the Board's implementing regulation for the Truth in Lending Act (TILA), with the principal goal of producing revised disclosures "that consumers will be more likely to pay attention to, understand, and use in their decisions, while at the same time not creating undue burdens for creditors."1 Because of the regulation's complexity, the Board divided the project into two phases: the open-end credit review (excluding home-secured open-end credit) followed by the reviews of home-secured open-end credit and closed-end credit.

After the Board completed its review and its revision of open-end credit disclosures, including extensive consumer testing, it published a rulemaking notice of the proposed amendments in the Federal Register. 2 The Board revised the proposal after reviewing numerous public comments and considering its effect on the May 2008 proposal to amend Regulation AA to define certain credit card practices as unfair or deceptive. On December 18, 2008, the Board's extensive work on this complex project came to fruition when it published final rules of the amendments to Regulation AA for prohibited credit card practices and to Regulation Z's open-end credit sections.3 The effective date for both final rules is July 1, 2010.

The Regulation Z amendments focus on five areas of open-end credit: (1) credit and charge card application and solicitation disclosures; (2) account-opening disclosures; (3) periodic statement disclosures; (4) change-in-terms notices; and (5) advertising provisions. To ensure that consumers understand the revised disclosures, the Board retained Macro International, Inc. (Macro), a research and testing consultant, to conduct extensive consumer testing of existing open-end credit disclosures and the Board's proposed changes.4 Many changes were made to the disclosures based on feedback from the testing.

The Regulation Z amendments will be reviewed in two installments. In this issue, we will discuss the extensive changes to credit card application and solicitation disclosures under §226.5a of the regulation. In the Second Quarter 2009 issue, we will discuss the remaining changes for account-opening disclosures, periodic statement disclosures, change-in-terms notices, and advertising.


Section 226.5a of Regulation Z requires credit and charge card issuers5 to provide information to consumers at application and solicitation about key costs and terms. The final rule contains significant changes for these disclosures. Regulation Z requires card issuers to disclose key costs and terms in a prominent table known as the Schumer box.6 The final rule changes the Schumer box requirements with respect to disclosures for penalty rates, fees, balance computation method, variable-rate information, grace period, and subprime credit cards. In addition, the final rule requires card issuers to make a reference in the Schumer box to the Board's consumer credit education website. These changes are discussed below.

Penalty Rates

Section 226.5a(b)(1) currently requires card issuers to disclose in the Schumer box annual percentage rates (APRs) applicable to the account for purchases, cash advances, and balance transfers. Many credit cards specify different APRs for different card transactions, such as a purchase APR, a cash advance APR, and a high-rate penalty APR that is triggered when a cardholder defaults. The current regulation does not require issuers to use specific terminology to identify a penalty APR. Many issuers use the term "default APR." The current regulation also requires that the circumstance triggering a penalty APR be disclosed outside the Schumer box. At their option, issuers may include outside the Schumer box an explanation of the period for which the penalty rate will remain in effect, such as "until you make three timely payments."

The final rule requires card issuers to identify inside the Schumer box (1) the penalty APR using the specific term "penalty APR," (2) a brief description of the circumstances that may trigger the penalty rate; and (3) a brief description of how long the penalty rate will remain in effect. These changes resulted from consumer testing, which revealed that many consumers do not understand the concept of a "penalty APR" when the term "default APR" is used to describe it but are able to comprehend it when the term "penalty APR" is used. Testing also revealed that many consumers do not read information outside the Schumer box because they do not believe it is important. As a result, the events triggering default pricing must now be disclosed inside the box. Also, the Board believed that information about how long the penalty rate may apply could help consumers better understand the consequences of triggering the penalty rate. Model form G-10(B) provides an example below.7

Example from Model Form G-10(B) for Credit Card Applications and Solicitations
Interest Rates and Interest Charges
Annual Percentage Rate (APR) for Purchases 8.99% to 19.99% when you open your account, based on your creditworthiness. After that, your APR will vary with the market based on the Prime Rate.
APR for Balance Transfers


This APR will vary with the market based on the Prime Rate.
APR for Cash Advances


This APR will vary with the market based on the Prime Rate.
Penalty APR and When it Applies


This APR may be applied to your account if you:
  1. Make a late payment;
  2. Go over your credit limit twice in a six-month period;
  3. Make a payment that is returned; or
  4. Do any of the above on another account that you have with us.
How Long Will the Penalty APR Apply?: If your APRs are increased for any of these reasons, the Penalty APR will apply until you make six consecutive minimum payments when due and do not exceed your credit limit during that time period.


Section 226.5a(a)(2)(ii) currently requires card issuers to disclose cash advance fees, late payment fees, over-the-limit fees, and balance transfer fees in solicitations and applications either in the Schumer box or clearly and conspicuously elsewhere in the application or solicitation. The final rule requires these fees to always appear inside the Schumer box because consumer testing revealed that consumers often did not notice fees disclosed outside the table. The amendment also requires disclosures for the following fees: returned payment fee, foreign transaction fee, and a fee for any required insurance, debt suspension, or debt cancellation coverage. See the example from model form G-10(B) below.

The June 2007 rulemaking proposal would have required card issuers that impose penalty fees and penalty rates to cross-reference disclosures about penalty rates with the disclosure for penalty fees. This proposal was not adopted in the final rule because consumer testing suggests that cross-references from penalty fees to the penalty APR did not improve consumers' understanding of the circumstances in which penalty pricing can be applied to their accounts. The Board was also concerned about information overload in light of the testing results.

Example from Model Form G-10(B) for Credit Card Applications and Solicitations
Annual Fee None

Transaction Fees

  • Balance Transfer

Either $5 or 3% of the amount of each transfer, whichever is greater (maximum fee: $100).

  • Cash Advance

Either $5 or 3% of the amount of each cash advance, whichever is greater.

  • Foreign Transaction

2% of each transaction in U.S. dollars.

Penalty Fees

  • Late Payment

$29 if balance is less than or equal to $1,000; $35 if balance is more than $1,000

  • Over-the-Credit Limit


  • Returned Payment


Other Fees

  • Required Account Protector Plan
$0.79 per $100 of balance at the end of each statement period. See back for details.

Balance Computation Method

Regulation Z currently requires issuers to disclose inside the Schumer box the name of the balance computation method used by the card issuer to calculate the balance for purchases on which finance charges are computed. In the final rule, issuers must now disclose this information directly below the box because testing revealed that consumers do not rely on this information when shopping for a credit card. The Board did not want to include information inside the box that is not important to consumers and that would detract from information that is important.

Variable-Rate Information

Section 226.5a(b)(1)(i) of the regulation and comment 5a(b)(1)-4 of the Official Staff Commentary currently require card issuers whose applications or solicitations include a variable APR to disclose inside the Schumer box that a variable APR is used, how it is determined, the index or formula used to make adjustments, and the amount of any margin added. Additional information about variable rates may be disclosed outside the box.

The final rule simplifies these disclosures based on consumer testing. Under the final rule, issuers must disclose in the box only that the APR varies and identify the index used to compute the APR, such as the prime rate. Issuers may not disclose the amount of the margin or index inside the box; however, they may disclose this information outside the box. In the consumer testing conducted by the Board, many consumers were confused by the variable-rate margins, often interpreting them erroneously as the actual rate being charged. In addition, very few participants indicated that they would use the margins in shopping for a credit card account. The Board's Model Form G-10(B), illustrated on page 5, shows disclosures for solicitations and applications for variable-rate credit card products.

Grace Period

Section 226.5a(b)(5) currently requires card issuers to disclose in the Schumer box the date or period within which credit extended for purchases may be repaid without incurring a finance charge. If the issuer does not offer a grace period, it must disclose this fact. Section 226.5a(a)(2)(iii) requires that issuers use the term "grace period."

Consumer testing prompted changes in how grace periods are described in the headings in the Schumer box. Testing revealed that consumers did not understand the phrase "grace period" to describe actions the consumer must take to avoid interest charges. Under the final rule, if a card issuer offers a grace period for all purchases, it must use the heading "How to Avoid Paying Interest on Purchases" to describe the grace period. But if an issuer does not offer a grace period, it must use the phrase "Paying Interest" in the heading to describe this. Model Form G-10(B) below provides the example for issuers that offer a grace period.

Example from Model Form G-10(B) for Credit Card Applications and Solicitations
How to Avoid Paying Interest on Purchases Your due date is at least 25 days after the close of each billing cycle. We will not charge you interest on purchases if you pay your entire balance by the due date each month.

Subprime Credit Cards

These cards are marketed to consumers with low credit scores or weak credit records. A typical card offers a low credit limit (for example $300) and a high amount of required fees to open the account. The fees are immediately billed at account opening and reduce the amount of the credit limit.8

Federal banking agencies frequently receive consumer complaints about offers for these cards. Consumers state that they did not understand when they applied for the cards that significant fees were required to open the account and that the cards have low credit limits. The Board cited an example of a subprime card with a $250 credit limit and $100 in required fees that left a credit limit of $150 at account opening.

The Board's final rule addresses this issue by requiring that when mandatory fees are equal to or greater than 15 percent of the minimum credit limit offered on the account, the card issuer must include an example in the Schumer box of the amount of available credit after paying the required fees based on the minimum credit limit. For example, if the minimum credit limit for a card was $300, and the card required start-up fees or a security deposit of $50 that is charged to the account, the disclosure would be triggered because the required fees exceed 15 percent of the minimum credit limit. The 15 percent trigger is limited to mandatory fees or security deposits that are charged to the account.

However, if the 15 percent threshold is triggered by the amount of mandatory fees,9 and the card issuer also had optional fees not necessary to open the account but which are billed to the account if selected (for example, a fee for an additional card), the issuer must make two disclosures in the Schumer box: the amount of available credit after deducting mandatory fees, and the amount of available credit after deducting both the mandatory and optional fees that are charged to the account. Model form G-10(C) below provides an example of how the available credit dual disclosure may be made.

Another important change is the treatment of a fee to apply for a card that is imposed regardless of whether the application is approved. Currently, the fee would not have to be disclosed in the Schumer box because it is not considered a fee imposed for the issuance or availability of credit. The final rule specifies that these application fees are fees imposed for the issuance or availability of credit and requires disclosure of the fee in the Schumer box because the Board believes consumers should be aware of it when shopping for credit.

Example from Model Form G-10(C) for Credit Card Applications and Solicitations

Set-up and Maintenance Fees

NOTICE: Some of these set-up and maintenance fees will be assessed before you begin using your card and will reduce the amount of credit you initially have available. For example, if you are assigned the minimum credit limit of $250, your initial available credit will be only about $187 (or about $172 if you choose to have an additional card).

  • Annual Fee


  • Account Set-up Fee

$30 (one-time fee)

  • Participation Fee

$30 annually ($2.50 per month)

  • Additional Card Fee

$15 annually (if applicable)

  • Account Maintenance Fee on Closed Accounts

$30 annually ($2.50 per month on closed accounts with an outstanding balance of $30 or more)

Reference to the Board's Website

All card issuers will now have to include a reference to the Board's website10 in the Schumer box for credit card applications and solicitations. The website provides resources and information about credit cards and consumer credit. During the rulemaking, several commenters recommended that the Board consider nonregulatory approaches to educating consumers about credit.


The Board's Regulation Z open-end credit final rule was a significant undertaking. This article provided a summary of the key changes to §226.5a for credit card application and solicitation disclosures. Readers interested in more details can consult the rulemaking notice. In the next quarter, we will review the remaining changes for account-opening disclosures, periodic statement disclosures, change-in-terms notices, and advertising.

With the open-end review completed, the Board is now working on reviews of home-secured lines of credit and closed-end credit, which will include revised mortgage loan disclosures. Like the open-end disclosures, the home equity lines of credit and closed-end disclosures will be subject to consumer testing to ensure that the disclosures are accomplishing their goal.

Because of the significant changes to the regulation, as well as the final rule for amendments to Regulation AA that was issued simultaneously, banks should begin to review the changes to these regulations and work on updating and testing their systems so that they are in compliance by the July 1, 2010, effective date for both rules. Specific issues and questions should be raised with the consumer compliance contact at your Reserve Bank or with your primary regulator.