NEWS, EVENTS, PUBLICATIONS & EMERGING ISSUES

SW&M EMERGING ISSUE
March 26, 2010

THE FED'S PROPOSED RULE ON ANOTHER ROUND OF REGULATION “Z” CREDIT CARD CHANGES

Many of our clients are aware that certain provisions of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (“Credit CARD Act”) are scheduled to take effect on August 22, 2010. Specifically, under the Credit CARD Act, the Board of Governors of the Federal Reserve System (“Fed”) was tasked with issuing regulations that (1) “establish standards for assessing whether the amount of any [credit card] penalty fee or charge… is reasonable and proportional”; and (2) address the Credit CARD Act’s requirement that card issuers evaluate rate increases implemented since January 1, 2009 based on the cardholder’s credit risk, market conditions, or other factors, and if such factors have changed, reduce the rate accordingly. The Fed issued proposed rules on March 15, 2010, which are open for comment until April 14, 2010.

Reduction of Credit Card Rates to Pre-January 1, 2009 Levels
As mentioned above, if a credit card issuer increased rates applied to credit card accounts on or after January 1, 2009, the proposed rule requires that the card issuer review the factors leading to the rate increase no less frequently than once each six (6) months to determine whether these factors have changed. The factors leading to a rate increase may be specific to a consumer (e.g., changes in the consumer’s creditworthiness), or factors such as changes in market conditions or the card issuer’s cost of funds. If the card issuer’s review indicates that the rate should be reduced, the card issuer must reduce the rate not later than thirty (30) days after completing its evaluation.

Credit Card Penalty Fees
In addition, the proposed rule requires that card issuers impose a fee for violating the terms or other requirements of a credit card account that is determined based on either:

• Fees based on cost. The card issuer determines its fee “represents a reasonable proportion of the total costs incurred by the card issuer as a result of that type of violation”; or
• Fees based on deterrence. The card issuer determines its fee “is reasonably necessary to deter that type of violation using an empirically derived, demonstrably and statistically sound model that reasonably estimates the effect of the amount of the fee on the frequency of the violations.”

Alternatively, a card issuer may impose a “safe harbor” penalty fee, which does not exceed the greater of either a flat dollar amount (which the Fed has not included in the proposed rule, but is currently soliciting comments as to the amount) or 5% of the dollar amount associated with the violation (subject to a cap that is not included in the proposed rule).

In addition, the proposed rule prohibits multiple fees based on a single fee or transaction and prohibits fees that exceed the dollar amount associated with the violation. To the extent that there is no dollar amount associated with the violation, the proposed rule prohibits imposing a fee for the violation; for example, the proposed rule states that there is no dollar amount associated with the following violations:

• Transactions that the card issuer declines to authorize;
• Account inactivity; and
• The closure or termination of an account.

Generally, it is our experience that credit unions do not impose the above fees on their credit card accounts; however, if your credit union imposes such fees, it should note that the proposed rule prohibits their imposition.

Given the above proposed changes, which we anticipate will be addressed in a final rule in the coming months, your credit union should keep in mind that it will likely need to revise its credit card disclosures, policies, and procedures to address the final rule’s requirements. Should your credit union have any questions regarding the proposed rule, or need assistance in analyzing potential courses of action, please contact our office for assistance.

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