NEWS, EVENTS, PUBLICATIONS & EMERGING ISSUES

SW&M EMERGING ISSUE
September 11, 2009

FEDERAL RESERVE BOARD PROVIDES CLARIFICATION REGARDING REGULATION ''Z''

Over the last several months, our credit union clients have been diligently focusing their compliance efforts on the provisions of the Credit CARD Act of 2009 and the Federal Reserve Board’s (“Board”) July 22, 2009 Interim Final rule amending Regulation “Z” (effective August 20, 2009), particularly the provision that requires creditors to mail or deliver periodic statements on open-end loans to borrowers at least 21 days prior to the payment due date disclosed on the statement. If your credit union has any lingering questions or concerns regarding compliance with the 21-day rule, please contact us.

Once this compliance issue is resolved, it will be important for your credit union to turn its attention to the Board’s January 29, 2009 Final Rule amending Regulation “Z,” effective July 1, 2010 (“Final Rule”), which contains numerous other changes to and clarification of the open-end lending rules, which will in turn require substantial changes to written disclosures.

One important area of clarification provided by the Board is with regard to the definition of “finance charges” under Regulation “Z” § 226.4. Under the definition of “finance charge,” a charge specific to a credit transaction is ordinarily a “finance charge.” The Board recognized that there is uncertainty about proper disclosure of two specific types of transaction charges: charges for cash advances from ATMs and charges for purchases in a foreign currency or outside the U.S. Under the current rule, a fee charged by a card issuer for using an ATM to obtain a cash advance on a credit card account is not a finance charge to the extent that it does not exceed the charge imposed by the card issuer on its cardholders for using the ATM to withdraw cash from a consumer asset account, such as a checking or savings account. Foreign transaction fees, on the other hand, are not specifically addressed in the current rule. Some card issuers disclose the foreign transaction fee as a finance charge and include it in the effective APR, but others do not. Our credit union clients have not traditionally disclosed foreign transaction fees as finance charges; our FCU clients have previously expressed concern that including all transaction fees as finance charges might cause the effective APR to exceed the statutory interest rate limit of 18%.

The Board clarified this issue by replacing official Comment 4(a)-4 to Regulation “Z” § 226.4(a) with a new comment stating that any transaction charge imposed on a cardholder by a card issuer is a finance charge, regardless of whether the issuer imposes the same, greater, or lesser charge on withdrawals of funds from an asset account such as a checking or savings account. As such, ATM cash advance fees and foreign transaction fees will be considered finance charges on and after July 1, 2010. However, any concerns that inclusion of ATM cash advance fees and foreign transaction fees in the finance charge would cause the effective APR to exceed permissible rate ceilings are rendered somewhat moot because the Final Rule eliminates the requirement that these fees be included in the effective APR as to open-end (not home-secured) credit. In light of this clarification, the Board expects that ATM cash advance fees and foreign transaction fees (along with all other transaction fees such as balance transfer fees) will be disclosed more consistently; this expectation is reflected in the new model forms issued by the Board (e.g., Schumer Box and initial disclosure statement) which requires prominent disclosure of such fees.

If your credit union has any questions regarding how its current disclosures should be modified, please contact us.

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