Consumer Compliance Outlook: First Quarter 2010

An Overview of the Regulation Z Rules Implementing the CARD Act

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

On May 22, 2009, President Obama signed into law the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act).1 This law contains the most significant changes in credit card regulation since enactment of the Fair Credit and Charge Card Disclosure Act of 1988,2 which amended the Truth in Lending Act (TILA) to add specific requirements for credit and charge cards. Historically, the TILA relied on disclosures as its primary tool for consumer protection, assuming that if creditors fully, clearly, and conspicuously disclose the terms and conditions of their products, consumers could make informed credit decisions. But because of the growing complexity of credit card products,3 with voluminous disclosures often written in dense legal prose, this assumption has been questioned.4 Thus, the CARD Act relies heavily on substantive provisions that ban or restrict certain credit card practices as its primary mechanism for protecting consumers.

The CARD Act has three implementation dates: August 20, 2009, February 22, 2010, and August 22, 2010. On January 12, 2010, the Board of Governors of the Federal Reserve System (Board) published final rules5 under Regulation Z, TILA's implementing regulation, to implement phases 1 and 2 of the CARD Act.6 On March 5, 2010, the Board issued a rulemaking proposal under Regulation Z to implement phase 3.7 This article provides an overview of the changes to Regulation Z to implement the first two phases of the CARD Act.


§226.9(c)(2): 45-Day Change-in-Terms Notice

The CARD Act requires card issuers to provide written notice to consumers at least 45 days before the effective date of an increase in an annual percentage rate (APR) or any other "significant change."8 This requirement addresses the concern that some issuers were increasing APRs or adversely changing other account terms shortly before the changes became effective or sometimes with no notice at all. The 45-day advance notice rule is designed to provide consumers with sufficient time to respond to a change-in-terms notice. For example, a consumer notified of a rate increase might shop for a new card with lower APRs.

The Board implemented this provision in §226.9(c)(2)(i)(A) by requiring that when a significant change is made to a term required to be disclosed under §226.6(b)(3), (b)(4), or (b)(5) or the required minimum periodic payment is increased, a creditor must provide a written notice of the change at least 45 days before the date of the change. As detailed in footnote 8, the Board defined significant change broadly to capture credit account terms that are likely to be important to consumers.

Additional rules apply if a card's APRs or fees are increased because the consumer failed to make a minimum payment within 60 days of the due date. Under §226.9(g)(3)(B), the issuer must provide a notice stating the reason for the increase and stating that if the consumer makes six consecutive required minimum payments after the effective date of the change, the issuer will restore the rate or fee in effect before the change for previous transactions.

The CARD Act also allows the consumer to reject the change, subject to certain exceptions. Under §226.9(c)(2)(iv)(B), the change-in-terms notice must (1) notify the consumer of the right to reject the change before its effective date; (2) provide instructions for rejecting the change, and, if applicable, (3) contain a statement that if the consumer rejects the change, his ability to use the account for further advances will be terminated or suspended. However, the right to reject the change does not apply if the change is an increase in the minimum payment, a change or an increase in an APR, a change in the balance computation method because of the new rule in §226.54 banning double-cycle billing, or a change imposed because the consumer failed to make a minimum payment within 60 days of its due date.

If the consumer rejects a significant change, card issuers are subject to restrictions on the terms and conditions they may impose for repayment of the balance in effect when the consumer rejected the change, known as the protected balanced.9 To ensure that consumers have a reasonable period of time to repay the protected balance, §226.9(h)(2) specifies that the issuer cannot require its repayment by a method less beneficial than the following acceptable methods: (1) the repayment method that was in place before the effective date of the increase; (2) an amortization period of not less than five years, beginning no earlier than the effective date of the increase; or (3) a required minimum periodic payment that includes a percentage of the balance that is equal to no more than twice the percentage required before the effective date of the increase. These requirements ensure that a consumer's decision to reject a future change is not hampered by the burden of having to pay the protected balance in a short period of time.

§226.5(b)(2)(ii): 21-Day Rule for Delivery of Periodic Statements

Both the Board and Congress received comments from consumers that they often received their credit card statements with insufficient time to review the charges and mail a payment before the due date, taking into account the delay caused by using the mail. To ensure that cardholders have adequate time to review their bills and send payments, §226.5(b)(2)(ii) requires card issuers to establish reasonable procedures to ensure that periodic statements are delivered at least 21 days before the payment due date. In addition, an issuer cannot treat a required minimum periodic payment received within that period as late for any purpose (for example, imposing a penalty or reporting to the credit bureau).10


To implement phase two of the CARD Act, which contains most of the act's provisions, the Board amended certain existing sections of Regulation Z and added a new subpart G with eight new sections (§§226.51-.58). These new and amended sections are discussed below.

§226.5(a)(2)(iii), §226.16(f): Use of the Term 'Fixed' for APRs

Section 226.5(a)(2)(iii) addresses consumer protection issues that can arise when an APR is labeled fixed. For APRs that must appear in a tabular format (for example, APRs for charge and credit card advertisements and solicitations), §226.5(a)(2)(iii) prohibits a creditor from describing an APR as fixed unless the time period during which the rate will be fixed is specified, or the rate will not increase while the plan is open. This restriction applies to all open-end (not home-secured) credit. In addition, the Board amended the open-end credit advertising rules in §226.16 to impose an identical rule for credit advertising that describes an APR as fixed.

§226.7(b)(12): Repayment Disclosure

While the CARD Act relies primarily on substantive provisions, it also includes some new disclosures. Card issuers must include disclosures on consumers' periodic statements warning them that if they make only minimum payments on their accounts, they will pay more in interest, and it will take longer to pay off their account balance. Section 226.7(b)(12) also requires issuers to include a balance repayment table detailing repayment information specific to the account on each periodic statement. Also, if the minimum payment does not amortize the balance or results in negative amortization, this information must be disclosed.

§226.10: Cut-off Time for Crediting Payment

For all open-end credit, a consumer's payment must be credited on the date of receipt as long as it is received before 5 p.m. However, a creditor may impose reasonable payment requirements, such as specifying the address to which payments must be sent or that payment be made in U.S. dollars. Section 226.10(b)(3) also includes an additional restriction that applies only to credit card issuers that are financial institutions. If a consumer makes a card payment in person or at a branch of a financial institution before it is closed, the payment must be considered timely, and the issuer cannot specify a time earlier than the branch closing time.

§226.10(e): Limitations on Fees Related to Method of Payment

The CARD Act prohibits issuers from charging a fee for payments. Under §226.10(e), issuers cannot charge a fee for any payment method, including by mail, electronically, or by telephone. An exception is made for expedited service involving a customer service representative (for example, calling the issuer the day before the payment due date and speaking with a representative to make an expedited payment).

§226.11(c): Timely Settlement of Estate Debts

The CARD Act required the Board to write a regulation to ensure that estate administrators can resolve outstanding credit card balances in a timely manner. Under §226.11(c), issuers must adopt written policies and procedures that allow an estate administrator for a deceased cardholder to determine the amount owed and pay it in a timely manner. Issuers must also respond to a request from the administrator for the account balance in a timely manner, with a safe harbor if the information is provided within 30 days of the request. If the administrator pays the account balance within 30 days, the issuer must stop assessing fees and waive any accrued interest.

§226.51: Ability to Pay

The CARD Act prohibits card issuers from opening a credit card account or increasing the credit limit of an existing account without considering the consumer's ability to make the required payments. Section 226.51 requires issuers to consider repayment ability for the required minimum periodic payments under the terms of the account based on the consumer's income or assets and current obligations.

Issuers must establish reasonable policies and procedures that consider one of the following: the ratio of debt obligations to income; the ratio of debt obligations to assets; or the income the consumer will have after paying debt obligations. The underwriting must be based on the minimum periodic payments the consumer would be required to pay under the terms of the account. The rule includes a safe harbor if the issuer calculates the minimum payment based on the full credit limit, mandatory fees, and any expected interest rate.

Comment 226.51(a)(1)-4 of the Official Staff Commentary (OSC) includes examples (intended to be illustrative, not exhaustive) of the types of income and assets card issuers may consider, including information obtained through any empirically derived, demonstrably and statistically sound model that reasonably estimates a consumer's income or assets. The OSC clarifies that issuers may rely on information provided by the consumer.

Another important point is the compliance requirements when a card issuer considers increasing a cardholder's credit limit. Comment 226.51(a)(1)-3 of the OSC clarifies that repayment ability must be analyzed for a credit limit increase, regardless of whether the consumer or the card issuer initiates the request. The rule also clarifies that issuers must update a consumer's income and assets prior to considering a credit limit increase to prevent reliance on stale information.

Section 226.51 includes special rules for consumers under 21 years of age (young consumers), as determined on the date the application or request to increase a credit limit is submitted. A card issuer generally cannot issue a card to a young consumer unless the consumer has submitted information showing an independent ability to make the minimum payments, as determined in §226.51(a). As an alternative, an account can be opened for a young person if a person who is at least 21 years of age agrees to be secondarily or jointly liable with the young person for the account and provides financial information indicating the ability to make the required minimum periodic payments, as set forth in §226.51(a).

§226.52: Limitations on Fees

The CARD Act includes a provision regulating subprime credit cards. These cards are marketed to consumers with poor credit histories and are characterized by low credit limits (usually less than $300) and high fees to open the account. After required fees are charged to the card at account opening, the available credit for these cards can be less than $100. Section 226.52 addresses this issue by restricting the amount of required fees that can be billed during the first year a credit card account is opened (other than any late fee, over-the-limit fee, or fee for a payment returned for insufficient funds) to no more than 25 percent of the credit limit.

The 25 percent restriction applies to fees for the issuance or availability of credit but does not apply to discretionary fees. For example, if a card issuer charges an optional fee to obtain an extra credit card, the fee would not be included in the 25 percent calculation. If the issuer increases the credit limit during the first year an account is opened, the issuer cannot raise the amount of required fees. Similarly, if the issuer decreases the amount of credit during the first year, it must remove or waive any fees charged that exceed the 25 percent limit.

§226.53: Allocation of Payments

The CARD Act imposes a statutory payment allocation rule: When a consumer makes a payment that exceeds the issuer's minimum payment, the card issuer must first allocate the excess amount to the balance with the highest APR and any remaining portion to the other balances in descending order based on the APR. The Board has implemented this requirement in §226.53(a), subject to two exceptions related to deferred interest programs. First, payments above the minimum made during the final two months of a deferred interest program must first be allocated to the deferred interest balance. Second, if the consumer has a deferred interest program, a card issuer may allocate a payment in the manner requested by the consumer. To facilitate compliance, Comment 226.53-5 of the OSC includes payment allocation examples.

These requirements address the consumer protection concerns for payment allocation rules. Finance charges are maximized if a cardholder agreement specifies that when a consumer has multiple balances with different APRs and a payment is made for less than the entire balance, the payment is first applied to the balance with the lowest APR. This type of provision in a cardholder agreement can burden consumers. For example, if the cardholder obtains a cash advance with a high-rate APR and does not pay his balance in full each month (that is, he is a revolver), the cash advance balance will continue accruing high-rate finance charges indefinitely, unless the cardholder pays off the entire balance. For revolvers with large balances, paying the entire balance may not be feasible. Section 226.53 addresses this issue by requiring that high-rate balances be paid first.

§226.54: Limitations on the Imposition of Finance Charges

This new section of Regulation Z contains two limitations on assessing finance charges. First, §226.54(a)(i) bans double-cycle billing (also known as two-cycle billing). Under this balance computation method, card issuers charge interest from the date of each transaction during the two most recent billing cycles. In certain situations, this method results in consumers paying finance charges on a balance previously paid in full during the grace period. In particular, when a consumer pays the entire balance in one billing cycle on time, thus avoiding finance charges, but makes a partial payment on a balance in the next billing cycle, finance charges are being assessed in part on a balance the consumer already paid in full. Double-cycle billing does not harm consumers who avoid finance charges by always paying their bills in full each month or revolvers, who always incur finance charges because they make only partial payments on their bill each month.

To address this problem, §226.54 prohibits card issuers from assessing finance charges for balances based on days in billing cycles prior to the current billing cycle. Issuers are permitted to make adjustments to finance charges because of a resolved dispute under §§226.12 or .13 or because of a returned payment. Second, under §226.54(a)(ii), when a consumer makes a timely partial payment on a balance subject to a grace period, the card issuer cannot assess finance charges on the partial payment if the consumer satisfies the issuer's eligibility requirements for the grace period.11

§226.55: Limitations on Increasing APRs, Fees, and Charges

Congress heard testimony12 and received a report from the Congressional Research Service13 about the practices of repricing credit card APRs because of a hair-trigger default of the cardholder agreement or because of universal default. For card issuers, hairtrigger repricing refers to the practice of imposing penalty pricing shortly after a cardholder defaults, even if the default is minor. A good example is imposing penalty APRs because a payment is one day late. Universal default refers to the practice of a repricing to the default rate because a consumer defaults on another creditor's account.

These two practices were criticized during the CARD Act hearings. Default pricing for some issuers can exceed 30 percent. Repricing a consumer's existing balances can be particularly burdensome for cardholders with large balances. For example, if a cardholder had an existing balance of $25,000, and the predefault APR for purchases was 12 percent, with a 28 percent default APR, the change in pricing would increase the annual finance charges by approximately $4,000. When this occurs because of a relatively minor default (for example, exceeding the credit limit by a small amount), the penalty seems disproportionate. Indeed, some issuers do not impose default pricing unless a material default occurs. Similarly, with universal default, any minor default with any creditor can be invoked to apply the default pricing rate.

To address these concerns, the CARD Act prohibits card issuers from increasing rates for new balances during the first year an account is open and on existing card balances. However, §226.55(b) contains six exceptions to this rule.

§226.56: Requirements for Over-the-Limit Transactions

The practice of imposing fees for exceeding the credit limit raises consumer protection issues. For example, these fees can be confusing to consumers because some consumers assume that they have not exceeded their credit limit when a credit card transaction is approved. Moreover, issuers can define default to include exceeding the credit limit, which can trigger costly default pricing. Consumer advocates have suggested that if issuers do not want consumers to exceed a credit limit, the issuers should decline a transaction that would exceed it instead of permitting it and then imposing fees.

To address these concerns, the CARD Act prohibits issuers from imposing an over-the-limit fee for exceeding the credit limit unless the cardholders elected to participate or opt in to the program. In particular, the card issuer must satisfy these requirements for the opt-in:

  1. provide the consumer with an oral, written, or electronic notice that describes the consumer's right to consent to the issuer's payment of an over-the-limit transaction. The opt-in notice must disclose the fee for exceeding the credit limit, any increase in APRs that can result, and the procedure to opt in;
  2. provide a reasonable opportunity to consent;
  3. obtain the consumer's affirmative consent;14
  4. provide the consumer with confirmation of the consent; and
  5. provide the consumer with a notice in writing of the right to revoke that consent following the assessment of an over-the-limit fee or charge.

The issuer must also notify the consumer of the right to revoke an opt-in and republish the notice on the front of any page of a periodic statement showing the assessment of on over-the-limit fee.

Even when a cardholder opts in, the CARD Act places restrictions on the fees that can be assessed. A card issuer may not impose more than one over-the-limit fee per billing cycle. Also, the fee cannot be imposed for more than three billing cycles for the same over-the-limit transaction, in cases where the consumer has not reduced the account balance below the credit limit by the payment due date for either of the last two billing cycles. However, this last rule does not apply if another over-the-limit transaction occurs.

In addition, issuers cannot impose an over-the-limit fee if the only reason the cardholder exceeded the credit limit is fees or interest incurred during the billing cycle or because the issuer failed to promptly replenish the credit limit after crediting a payment. Finally, the issuer may not make the amount of a consumer's credit limit conditional on the consumer's agreeing to the issuer's payment of over-the-limit transactions if the card issuer assesses a fee for such service.

§226.57: Reporting and Marketing Rules for College Student Open-End Credit

The CARD Act prohibits card issuers from providing tangible inducements (such as a gift card, a t-shirt, or a magazine subscription) to college students to apply for or open an open-end consumer credit plan offered by the creditor either at a college campus, near it, or at a college-sponsored event. The OSC clarifies, however, in Comment 226.57(c)-2 that the regulation is not violated if the tangible item is offered regardless of whether a person applies or opens an openend consumer credit plan. Additionally, issuers must annually submit a report to Congress detailing any affinity agreements the issuer has with an institution of higher learning.

§226.58: Internet Posting of Credit Card Agreements

Because credit card accounts are open-ended, with no scheduled expiration, consumers often have accounts with card issuers over a long period of time. This can create a challenge for consumers who want to review their cardholder agreement. To provide easy access to cardholder agreements, §226.58 requires issuers to post cardholder agreements with current cardholders on their website and to submit to the Board all credit card agreements offered to the public as of December 31, 2009, followed by quarterly submissions thereafter, beginning August 2, 2010. The Board will make these agreements available to the public on its website.

The Board created three exceptions to these requirements, as permitted by the CARD Act:


The Regulation Z final rules not only implemented phases 1 and 2 of the CARD ACT but also made some changes to the Board's previous rulemaking on nonhome-secured open-end credit. This article focused only on the CARD Act requirements, which provide protections for consumers by banning or restricting certain credit card practices and requiring new credit card disclosures. Financial institutions should review these requirements carefully, including the additional guidance provided in the OSC, and test their systems to ensure compliance. Specific issues and questions should be raised with the consumer compliance contact at your Reserve Bank or with your primary regulator.