Unfair or Deceptive Acts or Practices

Federal RegisterJan 29, 2009

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FEDERAL RESERVE SYSTEM

12 CFR Part 227

[Regulation AA; Docket No. R-1314]

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 535

[Docket ID. OTS-2008-0027]

RIN 1550-AC17

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 706

RIN 3133-AD47

Unfair or Deceptive Acts or Practices

AGENCIES:

Board of Governors of the Federal Reserve System (Board); Office of Thrift Supervision, Treasury (OTS); and National Credit Union Administration (NCUA).

ACTION:

Final rule.

SUMMARY:

The Board, OTS, and NCUA (collectively, the Agencies) are exercising their authority under section 5(a) of the Federal Trade Commission Act to prohibit unfair or deceptive acts or practices. The final rule prohibits institutions from engaging in certain acts or practices in connection with consumer credit card accounts. The final rule relates to other Board rules under the Truth in Lending Act, which are published elsewhere in today's

Federal Register

. Because the Board has proposed new rules regarding overdraft services for deposit accounts under the Electronic Fund Transfer Act elsewhere in today's

Federal Register

, the Agencies are not taking action on overdraft services at this time. A secondary basis for OTS's rule is the Home Owners' Loan Act.

DATES:

Effective Date:

The final rule is effective on July 1, 2010.

FOR FURTHER INFORMATION CONTACT:

Board:

Benjamin K. Olson, Attorney, or Ky Tran-Trong, Counsel, Division of Consumer and Community Affairs, at (202) 452-2412 or (202) 452-3667, Board of Governors of the Federal Reserve System, 20th and C Streets, NW., Washington, DC 20551. For users of Telecommunications Device for the Deaf (TDD) only, contact (202) 263-4869.

OTS:

April Breslaw, Director, Consumer Regulations, (202) 906-6989; Suzanne McQueen, Consumer Regulations Analyst, Compliance and Consumer Protection Division, (202) 906-6459; or Richard Bennett, Senior Compliance Counsel, Regulations and Legislation Division, (202) 906-7409, at Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.

NCUA:

Matthew J. Biliouris, Program Officer, Office of Examination and Insurance, (703) 518-6360; or Moisette I. Green or Ross P. Kendall, Staff Attorneys, Office of General Counsel, (703) 518-6540, National Credit Union Administration, 1775 Duke Street, Alexandria, VA 22314-3428.

SUPPLEMENTARY INFORMATION:

The Federal Reserve Board (Board), the Office of Thrift Supervision (OTS), and the National Credit Union Administration (NCUA) (collectively, the Agencies) are adopting several new provisions intended to protect consumers against unfair acts or practices with respect to consumer credit card accounts. These rules are promulgated pursuant to section 18(f)(1) of the Federal Trade Commission Act (FTC Act), which makes the Agencies responsible for prescribing regulations that prevent unfair or deceptive acts or practices in or affecting commerce within the meaning of section 5(a) of the FTC Act.

See

15 U.S.C. 57a(f)(1), 45(a). A secondary basis for OTS's rule is the Home Owners' Loan Act (HOLA), 12 U.S.C. 1461

et seq.

I. Background

A. The Board's June 2007 Regulation Z Proposal on Open-End (Non-Home Secured) Credit

On June 14, 2007, the Board requested public comment on proposed amendments to the open-end credit (not home-secured) provisions of Regulation Z, which implements the Truth in Lending Act (TILA), as well as proposed amendments to the corresponding staff commentary to Regulation Z. 72 FR 32948 (June 2007 Regulation Z Proposal). The purpose of TILA is to promote the informed use of consumer credit by providing disclosures about its costs and terms.

See

15 U.S.C. 1601

et seq.

TILA's disclosures differ depending on whether the consumer credit is an open-end (revolving) plan or a closed-end (installment) loan. The goal of the proposed amendments was to improve the effectiveness of the disclosures that creditors provide to consumers at application and throughout the life of an open-end (not home-secured) account.

As part of this effort, the Board retained a research and consulting firm (Macro International) to assist the Board in conducting extensive consumer testing in order to develop improved disclosures that consumers would be more likely to pay attention to, understand, and use in their decisions, while at the same time not creating undue burdens for creditors. Although the testing assisted the Board in developing improved disclosures, the testing also identified the limitations of disclosure, in certain circumstances, as a means of enabling consumers to make decisions effectively.

See

72 FR at 32948-32952.

As discussed below, the Agencies have relied in part on the Board's consumer testing in determining that certain practices are unfair under the FTC Act. The results of this consumer testing are set forth in the reports prepared by the Board's testing consultant. The initial report was posted on the Board's public website along with the June 2007 Regulation Z Proposal.

See

Design and Testing of Effective Truth in Lending Disclosures (May 16, 2007) (available at

http://www.federalreserve.gov/dcca/regulationz/20070523/Execsummary.pdf

). Two supplemental reports have been posted on the Board's public website along with the final rules under Regulation Z, which are published elsewhere in today's

Federal Register

See

Design and Testing of Effective Truth in Lending Disclosures: Findings from Qualitative Consumer Research (Dec. 15, 2008); Design and Testing of Effective Truth in Lending Disclosures: Findings from Experimental Study (Dec. 15, 2008).

In response to the June 2007 Regulation Z Proposal, the Board received more than 2,500 comments, including approximately 2,100 comments from individual consumers. Comments from consumers, consumer groups, a member of Congress, other government agencies, and some creditors were generally supportive of the proposed revisions to Regulation Z. A number of commenters, however, urged the Board to take additional action with respect to a variety of credit card practices, including late fees and other penalties resulting from perceived reductions in the amount of time consumers are given to make timely payments, allocation of payments first to balances with the lowest annual percentage rate, application of increased annual percentage rates to pre-existing balances, and the so-called two-cycle method of computing interest.

B. The OTS's August 2007 FTC Act Advance Notice of Proposed Rulemaking

On August 6, 2007, OTS issued an ANPR requesting comment on its rules under section 5 of the FTC Act.

See

72 FR 43570 (OTS ANPR). The purpose of OTS's ANPR was to determine whether OTS should expand on its current prohibitions against unfair and deceptive acts or practices in its Credit Practices Rule (12 CFR part 535).

OTS's ANPR discussed a very broad array of issues including:

• The legal background on OTS's authority under the FTC Act and HOLA;

• OTS's existing Credit Practices Rule;

• Possible principles OTS could use to define unfair and deceptive acts or practices, including looking to standards the Federal Trade Commission (FTC) and states follow;

• Practices that OTS, individually or on an interagency basis, has addressed through guidance;

• Practices that other federal agencies have addressed through rulemaking;

• Practices that states have addressed statutorily;

• Acts or practices OTS might target involving products such as credit cards, residential mortgages, gift cards, and deposit accounts; and

• OTS's existing Advertising Rule (12 CFR 563.27).

OTS received 29 comment letters on its ANPR. These comments were summarized in the Agencies' May 2008 proposed rule.

See

73 FR 28904, 28905-28906 (May 19, 2008) (May 2008 Proposal). In brief, financial industry commenters opposed OTS taking any further action beyond issuing guidance along those lines. They argued that OTS must not create an unlevel playing field for OTS-regulated institutions and that uniformity among the federal banking agencies and the NCUA is essential. They challenged the list of practices OTS had indicated it could consider targeting, arguing that the practices listed were neither unfair nor deceptive under the FTC standards.

In contrast, the consumer group commenters urged OTS to move ahead with a rule that would combine the FTC's principles-based standards with prohibitions on specific practices. They urged OTS to ban numerous practices, including several practices addressed in the final rule (such as “universal default” repricing, applying payments first to balances with the lowest interest rate, and credit cards marketed at subprime consumers that provide little available credit at account opening).

C. Related Action by the Agencies Preceding This Rulemaking

In addition to receiving information via comments, the Agencies have conducted outreach regarding credit card practices, including meetings and discussions with consumer group representatives, industry representatives, other federal and state banking agencies, and the FTC. On April 8, 2008, the Board hosted a forum on credit cards in which card issuers and payment network operators, consumer advocates, counseling agencies, and other regulatory agencies met to discuss relevant industry trends and identify areas that may warrant action or further study. In addition, the Agencies reviewed consumer complaints received by each of the federal banking agencies and several studies of the credit card industry.

The Agencies' understanding of credit card practices and consumer behavior was also informed by the results of consumer testing conducted on behalf of the Board in connection with its June 2007 Regulation Z Proposal.

See, e.g.

, Am. Bankers Assoc.,

Likely Impact of Proposed Credit Card Legislation: Survey Results of Credit Card Issuers

(Spring 2008); Darryl E. Getter, Cong. Research Srvc.,

The Credit Card Market: Recent Trends, Funding Cost Issues, and Repricing Practices

(Feb. 2008); Tim Westrich & Christian E. Weller, Ctr. for Am. Progress,

House of Cards: Consumers Turn to Credit Cards Amid the Mortgage Crisis, Delaying Inevitable Defaults

(Feb. 2008) (available at

http://www.americanprogress.org/issues/2008/02/pdf/house_of_cards.pdf

); Jose A. Garcia, Demos,

Borrowing to Make Ends Meet: The Rapid Growth of Credit Card Debt in America

(Nov. 2007) (available at

http://www.demos.org/pubs/stillborrowing.pdf

); Nat'l Consumer Law Ctr.,

Fee-Harvesters: Low-Credit, High-Cost Cards Bleed Consumers

(Nov. 2007) (available at

http://www.consumerlaw.org/issues/credit_cards/content/FEE-HarvesterFinal.pdf

); Jonathan M. Orszag & Susan H. Manning, Am. Bankers Assoc.,

An Economic Assessment of Regulating Credit Card Fees and Interest Rates

(Oct. 2007) (available at

http://www.aba.com/aba/documents/press/regulating_creditcard_fees_interest_rates92507.pdf

); Cindy Zeldin & Mark Rukavia, Demos,

Borrowing to Stay Healthy: How Credit Card Debt Is Related to Medical Expenses

(Jan. 2007) (available at

http://www.demos.org/pubs/healthy_web.pdf

); U.S. Gov't Accountability Office,

Credit Cards: Increased Complexity in Rates and Fees Heightens Need for More Effective Disclosures to Consumers

(Sept. 2006) (“GAO Credit Card Report”) (available at

http://www.gao.gov/new.items/d06929.pdf

); Board of Governors of the Federal Reserve System, Report to Congress on Practices of the Consumer Credit Industry in Soliciting and Extending Credit and their Effects on Consumer Debt and Insolvency (June 2006) (available at

http://www.federalreserve.gov/boarddocs/rptcongress/bankruptcy/bankruptcybillstudy200606.pdf

); Demos & Ctr. for Responsible Lending,

The Plastic Safety Net: The Reality Behind Debt in America

(Oct. 2005) (available at

http://www.demos.org/pubs/PSN_low.pdf

Finally, the Agencies gathered information from a number of Congressional hearings on consumer protection issues regarding credit cards.

In these hearings, members of Congress heard testimony from individual consumers, representatives of consumer groups, representatives of financial and credit card industry groups, and others. Consumer and community group representatives generally testified that certain credit card practices (including those discussed above) unfairly increase the cost of credit after the consumer has committed to a particular transaction. These witnesses further testified that these practices should be prohibited because they lead consumers to underestimate the costs of using credit cards and that disclosure of these practices under Regulation Z is ineffective. Financial services and credit card industry representatives agreed that consumers need better disclosures of credit card terms but testified that substantive restrictions on specific terms would lead to higher interest rates for all borrowers as well as reduced access to credit for some.

See, e.g.

The Credit Cardholders' Bill of Rights: Providing New Protections for Consumers: Hearing before the H. Subcomm. on Fin. Instits. & Consumer Credit,

110th Cong. (2007);

Credit Card Practices: Unfair Interest Rate Increases: Hearing before the S. Permanent Subcomm. on Investigations,

110th Cong. (2007);

Credit Card Practices: Current Consumer and Regulatory Issues: Hearing before H. Comm. on Fin. Servs.,

110th Cong. (2007);

Credit Card Practices: Fees, Interest Rates, and Grace Periods: Hearing before the S. Permanent Subcomm. on Investigations,

110th Cong. (2007).

On September 23, 2008, the U.S. House of Representatives passed the Credit Cardholders' Bill of Rights Act of 2008 (H.R. 5244), which addresses consumer protection issues regarding credit cards.

see also

S. Rep. 103-130, at 13 (1994),

reprinted in

1994 U.S.C.C.A.N. 1776, 1788 (“In determining whether a substantial consumer injury is outweighed by the countervailing benefits of a practice, the Committee does not intend that the FTC quantify the detrimental and beneficial effects of the practice in every case. In many instances, such a numerical benefit-cost analysis would be unnecessary; in other cases, it may be impossible. This section would require, however, that the FTC carefully evaluate the benefits and costs of each exercise of its unfairness authority, gathering and considering reasonably available evidence.”).

See

FTC Public Comment on OTS-2007-0015, at 6 (Dec. 12, 2007) (available at

http://www.ots.treas.gov/docs/9/963034.pdf

See

FTC Public Comment on OTS-2007-0015, at 8 (citing Preservation of Consumers' Claims and Defenses, Statement of Basis and Purpose, 40 FR 53506, 53523 (Nov. 18, 1975) (codified at 16 CFR 433));

see also

FTC Policy Statement on Deception, Letter from the FTC to the Hon. John H. Dingell, H. Comm. on Energy & Commerce (Oct. 14, 1983) (FTC Policy Statement on Deception) (available at

http://www.ftc.gov/bcp/policystmt/ad-decept.htm

) (“Deceptive practices injure both competitors and consumers because consumers who preferred the competitor's product are wrongly diverted.”).

Public policy.

As noted above, the FTC may consider established public policy in making an unfairness determination, but public policy may not serve as the primary basis for such a determination.

For purposes of the unfairness analysis, public policy is generally embodied in a statute, regulation, or judicial decision.

As discussed below, the Agencies have considered various authorities cited by commenters as evidence of public policy.

At no point, however, have the Agencies used public policy as the primary basis for a determination that a practice was unfair.

See

15 U.S.C. 45(n); Board and FDIC, Unfair or Deceptive Acts or Practices by State-Chartered Banks at 3-4 (“Public policy, as established by statute, regulation, or judicial decisions may be considered with all other evidence in determining whether an act or practice is unfair.”).

See, e.g.

, FTC Policy Statement on Unfairness at 5 (stating that public policy “should be clear and well-established” and “should be declared or embodied in formal sources such as statutes, judicial decisions, or the Constitution as interpreted by the court * * *”).

Several commenters urged the Agencies to consider the safety and soundness of financial institutions either under the countervailing benefits prong or as public policy. To the extent that these commenters raised specific safety and soundness concerns, those concerns are addressed below.

Some commenters argued that section 18(f)(1) of the FTC Act prevents the Board from issuing final rules that would seriously conflict with the Board's essential monetary and payments systems policies. The language cited by the commenters, however, does not apply to this rulemaking. Instead, this language creates an exception to the general requirement that the Board promulgate

regulations substantially similar to those issued by the FTC if the Board “finds that implementation of similar regulations with respect to banks, savings and loan institutions or Federal credit unions would seriously conflict with essential monetary and payments systems policies of such Board, and publishes any such finding, and the reasons therefore, in the

Federal Register

.”

Nevertheless, to the extent a commenter has cited a specific monetary or payments systems policy that may conflict with one of these rules, the Agencies have considered that potential conflict below.

15 U.S.C. 57a(f)(1) (third sentence).

C. Standards for Deception Under the FTC Act

The FTC has also adopted standards for determining whether an act or practice is deceptive under the FTC Act.

Under the FTC's standards, an act or practice is deceptive where: (1) There is a representation or omission of information that is likely to mislead consumers acting reasonably under the circumstances; and (2) that information is material to consumers.

Although these standards have not been codified, they have been applied by numerous courts.

Accordingly, in proposing rules under section 18(f)(1) of the FTC Act, the Agencies applied the standards articulated by the FTC for determining whether an act or practice is deceptive.

FTC Policy Statement on Deception.

Id.

at 1-2. The FTC views deception as a subset of unfairness but does not apply the full unfairness analysis because deception is very unlikely to benefit consumers or competition and consumers cannot reasonably avoid being harmed by deception.

Id.

See, e.g.

FTC

Tashman,

318 F.3d 1273, 1277 (11th Cir. 2003);

FTC

Gill,

265 F.3d 944, 950 (9th Cir. 2001);

FTC

QT, Inc.,

448 F. Supp. 2d 908, 957 (N.D. Ill. 2006);

FTC

Think Achievement,

144 F. Supp. 2d 993, 1009 (N.D. Ind. 2000);

FTC

Minuteman Press,

53 F. Supp. 2d 248, 258 (E.D.N.Y. 1998).

As noted above, the Board, FDIC, and OCC have issued guidance generally adopting these standards for purposes of enforcing the FTC Act's prohibition on unfair or deceptive acts or practices. As with the unfairness standard, comments on OTS's ANPR addressing this issue overwhelmingly urged the OTS to adopt the same deception standard as the FTC.

A representation or omission is deceptive if the overall net impression created is likely to mislead consumers.

The FTC conducts its own analysis to determine whether a representation or omission is likely to mislead consumers acting reasonably under the circumstances.

When evaluating the reasonableness of an interpretation, the FTC considers the sophistication and understanding of consumers in the group to whom the act or practice is targeted.

If a representation is susceptible to more than one reasonable interpretation, and if one such interpretation is misleading, then the representation is deceptive even if other, non-deceptive interpretations are possible.

See, e.g.

FTC

Cyberspace.com,

453 F.3d 1196, 1200 (9th Cir. 2006);

Gill,

265 F.3d at 956;

Removatron Int'l Corp.

FTC,

884 F.2d 1489, 1497 (1st Cir. 1989).

See FTC

Kraft, Inc.,

970 F.2d 311, 319 (7th Cir. 1992);

QT, Inc.,

448 F. Supp. 2d at 958.

FTC Policy Statement on Deception at 3.

Id.

A representation or omission is material if it is likely to affect the consumer's conduct or decision regarding a product or service.

Certain types of claims are presumed to be material, including express claims and claims regarding the cost of a product or service.

Id.

at 2, 6-7.

See

FTC Public Comment on OTS-2007-0015, at 21; FTC Policy Statement on Deception at 6;

see also

15 U.S.C. 57a(a)(1)(B), 45(a)(1).

See

12 CFR part 227, subpart B (Board); 12 CFR 535 (OTS); 12 CFR 706 (NCUA).

As part of this rulemaking, the Agencies proposed to reorganize aspects of their respective Credit Practices Rules. Although the Agencies have approached these revisions differently in some respects, the Agencies do not intend to create any substantive difference among their respective rules and believe that these rules remain substantially similar to the FTC's Credit Practices Rule. Except as otherwise stated below, the Agencies did not receive comments on this portion of the proposal.

Subpart A—General Provisions

Subpart A contains general provisions that apply to the entire part. As discussed below, there are some differences among the Agencies' proposals.

Section _.1 Authority, purpose, and scope

The Board, OTS, and NCUA have placed these rules in, respectively, parts 227, 535, and 706 of title 12 of the Code of Federal Regulations. For each reference, the discussion in this

SUPPLEMENTARY INFORMATION

uses the shared numerical suffix of each agency's rule. For example, § _.1 will be codified at 12 CFR 227.1 by the Board, 12 CFR 535.1 by OTS, and 12 CFR 706.1 by NCUA.

The provisions in proposed § _.1 were largely drawn from the current authority, purpose, and scope provisions in the Agencies' respective Credit Practices Rules. As discussed below, § _.1 is generally adopted as proposed.

Section _.1(a) Authority

Proposed § _.1(a) provided that the Agencies issued this part under section 18(f) of the FTC Act. Section _.1(a) is adopted largely as proposed.

One commenter urged that OTS should use safety and soundness authority as the legal basis for this rule, including its authority under HOLA. While OTS disagrees with this commenter to the extent that it argued that OTS should use its safety and soundness authority instead of its FTC Act authority, OTS agrees that HOLA serves as an appropriate secondary basis for OTS's portion of the rule. Accordingly, OTS is inserting express references to HOLA in its rule (including § 535.1(a)) to reflect that HOLA serves as an independent secondary basis for OTS's final rule.

HOLA provides authority for both safety and soundness and consumer protection regulations. Consequently, HOLA serves as a secondary,

independent basis for OTS's rule. Using HOLA as a basis for this rulemaking was discussed in the

SUPPLEMENTARY INFORMATION

that accompanied the OTS's August 6, 2007 ANPR (72 FR at 43572-43573), was reflected in the preamble to the proposed rule and proposed rule text (73 FR at 28910 and 28948), and is also discussed further in the section-by-section analysis of § 535.26 in this

SUPPLEMENTARY INFORMATION

With regard to safety and soundness, HOLA section 4(a) (12 U.S.C. 1463(a)) authorizes the Director of OTS to issue regulations governing savings associations that the Director determines to be appropriate to carry out his responsibilities, including providing for the examination, safe and sound operation, and regulation of savings associations. The Director of OTS has used HOLA authority to issue regulations requiring savings associations to operate safely and soundly.

Existing OTS rules also allow the agency to impose limits on credit card lending, if a savings association's concentration in such lending presents a safety and soundness concern.

All of the practices addressed in the rule will advance the safety and soundness of consumer credit card lending by savings associations such as by reducing reputation risk, as well as the risk of litigation under state contract laws and, where applicable, state laws prohibiting unfair or deceptive acts or practices.

See, e.g.

, 12 CFR 563.161(a) (OTS management and financial policies rule).

See 12 CFR 560.30 and Endnote 6.

With regard to consumer protection, HOLA section 5(a) (12 U.S.C. 1464(a)) authorizes the Director of OTS to regulate federal savings associations giving primary consideration to the best practices of thrift institution in the United States. As courts have consistently and repeatedly recognized for decades, HOLA empowered OTS and its predecessor agency, the Federal Home Loan Bank Board (FHLBB), to adopt comprehensive rules and regulations governing the operations of federal savings associations.

Consequently, OTS has a history of using HOLA as the legal basis for consumer protection regulations. Examples include the OTS Advertising Rule,

OTS rules that limit home loan late charges, prepayment penalties, and adjustments to the interest rate, payment, balance, or term to maturity,

as well as the portions of the OTS Nondiscrimination Rule that exceed Equal Credit Opportunity Act and Fair Housing Act requirements.

All of the practices addressed in the rule will help protect consumers.

As stated in

Fid. Fed. Sav. & Loan Ass'n

de la Cuesta

, 458 U.S. 141, 144-45 (1982):

The [FHLBB], an independent federal regulatory agency, was formed in 1932 and thereafter was vested with plenary authority to administer [HOLA] * * *. Section 5(a) of the HOLA * * * empowers the Board, “under such rules and regulations as it may prescribe, to provide for the organization, incorporation, examination, operation, and regulation of associations to be known as `Federal Savings and Loan Associations.' ” Pursuant to this authorization, the [FHLBB] has promulgated regulations governing “the powers and operations of every Federal savings and loan association from its cradle to its corporate grave.”

People

Coast Federal Savings and Loan Ass'n

, 98 F. Supp. 311, 316 (S.D. Cal. 1951).

Accord Conference of Federal Savings and Loan Associations

Stein

, 604 F.2d 1256, 1260 (9th Cir. 1979),

aff'd mem.

, 445 U.S. 921 (1980) (recognizing the “pervasive” and “broad” regulatory control of the FHLBB over federal savings associations granted by HOLA).

12 CFR 563.27.

12 CFR 560.33, 12 CFR 560.34, and 12 CFR 560.35.

12 CFR part 528.

Section _.1(b) Purpose

Proposed § _.1(b) provided that the purpose of the part is to prohibit unfair or deceptive acts or practices in violation of section 5(a)(1) of the FTC Act, 15 U.S.C. 45(a)(1). It further provided that the part contains provisions that define and set forth requirements prescribed for the purpose of preventing specific unfair or deceptive acts or practices. In May 2008, the Agencies noted that these provisions define and prohibit specific unfair or deceptive acts or practices within a single provision, rather than setting forth the definitions and remedies separately. Finally, proposed § _.1(b) clarified that the prohibitions in subparts B, C, and D do not limit the Agencies' authority to enforce the FTC Act with respect to other unfair or deceptive acts or practices.

The Agencies have revised proposed § _.1(b) to reflect their decision not to take action on proposed subpart D at this time. Also, OTS has added an express reference to HOLA in § 535.1(b). Otherwise, this provision is adopted as proposed.

Section _.1(c) Scope

Proposed § _.1(c) described the scope of each agency's rules. The Agencies each tailored this paragraph to describe those entities to which their part applies.

The Board's proposed provision stated that the Board's rules would apply to banks and their subsidiaries, except savings associations as defined in 12 U.S.C. 1813(b). It further explained that enforcement of the Board's rules is allocated among the Board, the OCC, and the FDIC, depending on the type of institution. This provision was updated to reflect intervening changes in law. The Board also proposed to revise its Staff Guidelines to the Credit Practices Rule to remove questions 11(c)-1 and 11(c)-2, to update the substance of its answers to those questions, and to publish those answers as commentary to proposed § 227.1(c).

See

proposed Board comments 227.1(c)-1 and -2. As proposed, the remaining questions and answers in the Board's Staff Guidelines would remain in place. The Board has adopted these proposals without alteration.

OTS's proposed provision stated that its rules apply to savings associations and subsidiaries owned in whole or in part by a savings association. OTS also enforces compliance with respect to these institutions. As proposed, the entire OTS part would have the same scope. In May 2008, OTS noted that this scope is somewhat different from the scope of its existing Credit Practices Rule. Prior to today's revisions, OTS's Credit Practices Rule applied to savings associations and service corporations that were wholly owned by one or more savings associations, which engaged in the business of providing credit to consumers. Since the proposed rules would cover more practices than consumer credit, the proposal deleted the reference to engaging in the business of providing credit to consumers. The proposal also updated the reference to wholly owned service corporations to refer instead to subsidiaries in order to reflect the current terminology used in OTS's Subordinate Organizations Rule.

12 CFR part 559. OTS has substantially revised this rule since promulgating its Credit Practices Rule.

See, e.g.

, Subsidiaries and Equity Investments: Final Rule, 61 FR 66561 (Dec. 18, 1996).

Only one commenter addressed the scope of OTS's proposed rule. It supported applying the rule to savings associations and subsidiaries as proposed. Another commenter requested clarification of which entities the rule refers to as “you.” OTS is finalizing the scope as proposed but clarifying through a parenthetical in § 535.1(c) that the term “you” refers to savings associations and subsidiaries owned in whole or in part by a savings association.

The NCUA's proposed provision stated that its rules would apply to federal credit unions. This provision is adopted as proposed.

Section 227.1(d) Definitions

Proposed § _.1(d) of the Board's rule would have clarified that, unless

otherwise noted, terms used in the Board's proposed § _.1(c) that are not defined in the FTC Act or in section 3(s) of the Federal Deposit Insurance Act (12 U.S.C. 1813(s)) have the meaning given to them in section 1(b) of the International Banking Act of 1978 (12 U.S.C. 3101). This provision is adopted as proposed.

OTS and NCUA did not have a need for a comparable subsection so none was included in their proposed rules.

Section 227.2 Consumer-Complaint Procedure

In order to accommodate the revisions discussed above, the Board proposed to consolidate the consumer complaint provisions previously located in 12 CFR 227.1 and 227.2 in proposed § 227.2. The Board has revised the proposal for clarity and to include an e-mail address and Web site where consumers can submit complaints. Otherwise, this provision is adopted as proposed.

OTS and NCUA do not have and did not propose to add comparable provisions.

Longstanding OTS and NCUA complaint procedures are available to consumers and the public at

http://www.ots.treas.gov

and

http://www.ncua.gov.

Subpart B—Credit Practices

Each agency has placed the substantive provisions of their Credit Practices Rule in Subpart B. In order to retain the current numbering in its Credit Practices Rule, the Board has reserved 12 CFR 227.11, which previously contained the Board's statement of authority, purpose, and scope. The other provisions of the Board's Credit Practices Rule (§§ 227.12 through 227.16) have not been revised.

As discussed below, OTS proposed several notable changes to its version of Subpart B. Except as otherwise stated, these sections have been adopted as proposed.

Section 535.11 Definitions (Previously § 535.1)

OTS received no comments on its proposed changes to this section and is finalizing it as proposed. OTS has deleted the definitions of “Act,” “creditor,” and “savings association” as unnecessary. It has substituted the term “you” for “savings association” or “creditor” in the definitions of “consumer credit” and “obligation” as applicable. For the convenience of the user, OTS has also incorporated the definition of “consumer credit” into this section, instead of using a cross-reference to a definition contained in a different part of OTS's rules. OTS has moved the definition of “cosigner” to the section on unfair or deceptive cosigner practices. OTS has also merged the definition of “debt” into the definition of “collecting a debt” contained in the section on late charges. Finally, OTS has moved the definition of “household goods” to the section on unfair credit contract provisions.

Section 535.12 Unfair Credit Contract Provisions (Previously § 535.2)

OTS received no comments on its proposed changes to this section and is finalizing it as proposed. OTS has revised the title of this section to reflect its focus on credit contract provisions. OTS has also deleted the obsolete reference to extensions of credit after January 1, 1986.

Section 535.13 Unfair or Deceptive Cosigner Practices (Previously § 535.3)

OTS received no comments on its proposed changes to this section and is finalizing it as proposed. OTS has deleted the obsolete reference to extensions of credit after January 1, 1986. OTS has substituted the term “substantially similar” for the term “substantially equivalent” in referencing a document that equates to the cosigner notice for consistency with the Board's rule and to avoid confusion with the term of art “substantial equivalency” used in the Board's section on state exemptions. OTS has also clarified that the date that may be stated on the cosigner notice is the date of the transaction. NCUA has made similar amendments to its rule in § 706.13 (previously § 706.3).

Section 535.14 Unfair Late Charges (Previously § 535.4)

OTS received no comments on its proposed changes to this section and is finalizing it as proposed. OTS has revised the title of this section to reflect its focus on unfair late charges. OTS has deleted the obsolete reference to extensions of credit after January 1, 1986. Similarly, NCUA has made similar revisions to § 706.14 (previously § 706.4).

Section 535.15 State Exemptions (Previously § 535.5)

OTS proposed to revise the subsection on delegated authority to update the current title of the OTS official with delegated authority to make determinations under this section. As discussed below, however, OTS has removed § 535.5 from codification and has not replaced it with proposed § 535.15.

The FTC's Credit Practices Rule included a provision allowing states to seek exemptions from the rule if state law affords a greater or substantially similar level of protection.

See

16 CFR 444.5. The Agencies adopted similar provisions in their respective Credit Practices Rules.

See

12 CFR 227.16; 12 CFR 535.5; 12 CFR 706.5. The May 2008 Proposal did not extend this provision to the proposed rules for consumer credit card accounts and overdraft services because there was no legal requirement to do so.

The Agencies noted that only three states have been granted exemptions under the Credit Practices Rule.

The Agencies stated that, because the exemption is available when state law is “substantially equivalent” to the federal rule, an exemption may provide little relief from regulatory burden while undermining the uniform application of federal standards. Accordingly, the Agencies requested comment on whether states should be permitted to seek exemption from the proposed rules on consumer credit card accounts and overdraft services if state law affords a greater or substantially similar level of protection. In addition, OTS requested comment on whether the state exemption provision in its Credit Practices Rule should be retained.

The provision requiring consideration of requests for exemption from rules promulgated under the FTC Act applies only to the FTC.

See

12 U.S.C. 57a(g).

The Board and the FTC have granted exemptions to Wisconsin, New York, and California. 51 FR 24304 (July 3, 1986) (FTC exemption for Wisconsin); 51 FR 28238 (Aug. 7, 1986) (FTC exemption for New York); 51 FR 41763 (Nov. 19, 1986) (Board exemption for Wisconsin); 52 FR 2398 (Jan. 22, 1987) (Board exemption for New York); 53 FR 19893 (June 1, 1988) (FTC exemption for California); 53 FR 29233 (Aug. 3, 1988) (Board exemption for California). The Federal Home Loan Bank Board (“FHLBB”), OTS's predecessor agency, granted an exemption to Wisconsin. 51 FR 45879 (Dec. 23, 1986). The NCUA has not granted any exemptions.

The Agencies received only a few comments on state exemptions. One consumer advocacy organization urged the Agencies to expand the opportunity for state exemptions to the final rule as a way to ensure a consumer private right of action under state law and to enable states to develop new protections. In contrast, several financial institutions opposed allowing states to seek exemption from practices addressed in the final rule. They argued that allowing such exemptions would provide no meaningful regulatory burden relief and would interfere with consistent implementation of the final rule.

The Agencies have decided not to extend the opportunity for state exemptions to the final rule. First, as noted above, the FTC Act does not require the Agencies to provide such an opportunity. Second, requiring all

institutions under the Agencies' jurisdiction to comply with the final rule will enhance consumer protections nationwide and facilitate uniformity in examinations.

OTS received a few comments on whether it should retain the existing state exemption provision in its Credit Practices Rule. The comments on this issue largely tracked those discussed above concerning whether to expand the availability of state exemptions to new practices addressed in the final rule. In addition, one organization representing state banking interests supported preserving state laws that afford more protection to consumers than the federal rule.

A few comments reflect confusion about how the availability or unavailability of state exemptions would affect federal savings associations. Eliminating the availability of exemptions under the OTS Credit Practices Rule will have no direct effect on federal savings associations. Apparently, the only state exemption granted by OTS or its predecessor is to the State of Wisconsin for substantially equivalent provisions of the Wisconsin Consumer Act. That exemption only applied to state-chartered savings associations; it specifically did not extend to federal savings associations.

See

Prohibited Consumer Credit Practices; Request for Exemption by State of Wisconsin, 51 FR 45879 (Dec. 23, 1986) (“It is well established that the [FHLBB] has exclusive authority to regulate all aspects of the operations of federally chartered associations under section 5 of [HOLA].

See, e.g.

, 12 CFR 545.2. Federally chartered associations will therefore continue to be subject to the rule rather than the Wisconsin Act, and the [FHLBB] will continue to examine them for compliance with the Rule.”).

For the same reasons the Agencies are not extending the opportunity for state exemptions to apply to new practices addressed in the final rule, OTS is removing § 535.5 and eliminating the existing state exemption authority under its rule. Accordingly, the exemption granted to Wisconsin and any other exemptions which may have been granted by OTS or its predecessor with respect to its Credit Practices Rule will cease to be in effect as of this rule's effective date.

V. Section-by-Section Analysis of the Consumer Credit Card Practices Subpart

Pursuant to their authority under 15 U.S.C. 57a(f)(1), the Agencies adopt rules prohibiting specific unfair acts or practices with respect to consumer credit card accounts. A secondary basis for OTS's rule is HOLA. These rules are located in a new Subpart C to the Agencies' respective regulations under the FTC Act.

Section _.21—Definitions

Section _.21 defines certain terms used in Subpart C.

Section _.21(a) Annual Percentage Rate

Proposed § _.21(a) defined “annual percentage rate” as the product of multiplying each periodic rate for a balance or transaction on a consumer credit card account by the number of periods in a year. This definition corresponded to the definition of “annual percentage rate” in 12 CFR 226.14(b). As discussed in the Board's official staff commentary to 12 CFR 226.14(b), this computation does not reflect any particular finance charge or periodic balance.

See

12 CFR 226.14 comment 226.14(b)-1. This definition also incorporated the definition of “periodic rate” from Regulation Z.

See

12 CFR 226.2.

The Agencies did not receive any significant comments on this definition. Accordingly, it is adopted as proposed.

Section _.21(b) Consumer

Proposed § _.21(b) defined “consumer” as a natural person to whom credit is extended under a consumer credit card account or a natural person who is a co-obligor or guarantor of a consumer credit card account. The Agencies did not receive any significant comments on this definition. Accordingly, it is adopted as proposed.

Section _.21(c) Consumer Credit Card Account

Proposed § _.21(c) defined “consumer credit card account” as an account provided to a consumer primarily for personal, family, or household purposes under an open-end credit plan that is accessed by a credit or charge card. This definition incorporated the definitions of “open-end credit,” “credit card,” and “charge card” from Regulation Z.

See

12 CFR 226.2. Under the proposed definition, a number of accounts would have been excluded consistent with exceptions to disclosure requirements for credit and charge card applications and solicitations.

See

12 CFR 226.5a(a)(5). For example, home-equity plans accessible by a credit card and lines of credit accessible by a debit card are not covered by proposed § _.21(c).

One consumer group requested that this definition be expanded to cover debit cards with a linked credit card feature. The Agencies do not believe any change is necessary because, to the extent such cards meet the definition of “credit card” under 12 CFR 226.2, they are covered. Accordingly, this definition is adopted as proposed.

Proposed Section _.21(d) Promotional Rate

Proposed § _.21(d) defined “promotional rate.” This definition was similar to the definition of “promotional rate” proposed by the Board in 12 CFR 226.16(e)(2) in the May 2008 Regulation Z Proposal.

See

73 FR at 28892. As discussed in greater detail below, the provisions in proposed §§ _.23 and _.24 utilizing this definition have been revised such that a definition of “promotional rate” is no longer necessary for purposes of this subpart. Accordingly, this definition and its accompanying commentary have not been included in the final rule.

Section _.22—Unfair Acts or Practices Regarding Time To Make Payment

Summary.

In May 2008, the Agencies proposed § _.22(a), which would have prohibited institutions from treating payments on a consumer credit card account as late for any purpose unless the institution has provided a reasonable amount of time for consumers to make payment.

See

73 FR at 28912-28914. The Agencies also proposed a safe harbor in § _.22(b) for institutions that adopt reasonable procedures designed to ensure that periodic statements specifying the payment due date are mailed or delivered to consumers at least 21 days before the payment due date. Finally, to avoid any potential conflict with section 163(a) of TILA (15 U.S.C. 1666b(a)), the Agencies expressly stated in proposed § _.22(c) that the rule would not apply to any time period provided by an institution within which the consumer may repay any portion of the credit extended without incurring an additional finance charge. As discussed below, based on the comments and further analysis, the Agencies have adopted § _.22 as proposed except that proposed § _.22(b) has been revised to clarify that institutions must be able to establish that they have complied with § _.22(a).

Background.

Section 163(a) of TILA requires creditors to send periodic statements at least 14 days before expiration of any period during which consumers can avoid finance charges on purchases by paying the balance in full (in other words, the “grace period”). 15 U.S.C. 1666b(a). TILA does not, however, mandate a grace period, and grace periods generally do not apply when consumers carry a balance from month to month. Regulation Z requires that creditors mail or deliver periodic

statements 14 days before the date by which payment is due for purposes of avoiding additional finance charges or other charges, such as late fees.

See

12 CFR 226.5(b)(2)(ii); 12 CFR 226.5 comment 5(b)(2)(ii)-1.

In its June 2007 Regulation Z Proposal, the Board noted anecdotal evidence of consumers receiving statements relatively close to the payment due date, with little time remaining to mail their payments in order to avoid having those payments treated as late. The Board observed that it may take several days for a consumer to receive a statement after the close of a billing cycle. The Board also observed that consumers who pay by mail may need to mail their payments several days before the due date to ensure that the payment is received on or before that date. Accordingly, the Board requested comment on whether it should recommend to Congress that the 14-day requirement in section 163(a) of TILA be increased.

See

72 FR at 32973.

In response to the June 2007 Regulation Z Proposal, individual consumers, consumer groups, and a member of Congress stated that consumers were not being provided with a reasonable amount of time to pay their credit card bills. These commenters indicated that, because of the time required for periodic statements to reach consumers by mail and for consumers' payments to reach creditors by mail, consumers had little time in between to review their statements for accuracy before making payment. This situation can be exacerbated if the consumer is traveling unexpectedly or otherwise unable to give the statement immediate attention when it is delivered or if the consumer needs to compare the statement to receipts or other records. In addition, some commenters indicated that consumers are unable to accurately predict when their payment will be received by a creditor due to uncertainties about how quickly mail is delivered. Some commenters argued that, because of these difficulties, consumers' payments were received after the due date, leading to finance charges as a result of loss of the grace period, late fees, rate increases, and other adverse consequences.

Industry commenters, however, generally stated that consumers currently receive ample time to make payments, particularly in light of the increasing number of consumers who receive periodic statements electronically and make payments electronically or by telephone. These commenters also stated that providing additional time for consumers to make payments would be operationally difficult and would reduce interest revenue, which would have to be recovered by raising the cost of credit for all consumers.

Comments on the Agencies' May 2008 Proposal were generally consistent with those on the Board's June 2007 Regulation Z Proposal. Individual consumers, consumer groups, members of Congress, the FDIC, and state attorneys general largely supported the proposed rule. Some of these commenters stated that institutions have reduced the amount of time for consumers to make payment while increasing the late payment fees, penalty rates, and other costs imposed on consumers as a result of late payment.

In contrast, although some industry groups and credit card issuers supported the proposal, most industry commenters opposed the proposed rule, stating that consumers have more time to make payment than ever before because of alternative means for receiving statements and making payments. Some industry commenters also stated that complying with the proposed safe harbor would be impossible without making costly operational changes. To the extent that commenters addressed specific aspects of the proposal or its supporting legal analysis, those comments are discussed below.

See

Testimony of Adam J. Levitin, Assoc. Prof. of Law, Georgetown Univ. Law Ctr. before the H. Subcomm. on Fin. Instits. & Consumer Credit at 13-14 (Mar. 13, 2008) (cited by several commenters).

Legal Analysis

The Agencies conclude that, based on the comments received and their own analysis, it is an unfair act or practice under 15 U.S.C. 45(n) and the standards articulated by the FTC to treat a payment on a consumer credit card account as late for any purpose (other than expiration of a grace period) unless the consumer has been provided a reasonable amount of time to make that payment.

Substantial consumer injury.

In the May 2008 Proposal, the Agencies stated that an institution's failure to provide consumers a reasonable amount of time to make payment appeared to cause substantial monetary and other injury. The Agencies noted that, when a payment is received after the due date, institutions may impose late fees, increase the annual percentage rate on the account as a penalty, or report the consumer as delinquent to a credit reporting agency.

Several industry commenters stated that consumers are not harmed by the lack of a reasonable amount of time to pay because a significant majority of consumers pay on or before the due date, indicating that they currently receive sufficient time to make payment. Other commenters, however, noted that the GAO Report found that, in 2005, 35 percent of active accounts were assessed at least one late fee and that the average late fee assessment per active account was $30.92.

In addition, the Chairman of the Senate Permanent Subcommittee on Investigations cited case histories of consumers who received periodic statements shortly before the due date, making it difficult for them to avoid a late fee and, in some cases, a rate increase. This comment also cited instances in which consumers submitted payments 10 to 14 days in advance of the due date, only to have the payment treated as late. Individual consumers described similar experiences in their comments. Thus, the Agencies conclude that the failure to provide a reasonable amount of time to make payment causes or is likely to cause substantial monetary injury to a significant number of consumers.

See

GAO Report at 32-33.

Injury is not reasonably avoidable.

The Agencies stated in the May 2008 Proposal that it appeared consumers could not reasonably avoid the injuries caused by late payment unless they were provided a reasonable amount of time to pay. The Agencies observed that it could be unreasonable to expect consumers to make a timely payment if they are not given a reasonable amount of time to do so after receiving a periodic statement, although what constitutes a reasonable amount of time may vary based on the circumstances. The Agencies noted that TILA and Regulation Z provide consumers with the right to dispute transactions or other items that appear on their periodic statements. Accordingly, the Agencies reasoned that, in order to exercise certain of these rights, consumers must have a reasonable opportunity to review their statements.

See

15 U.S.C. 1666i; 12 CFR 226.12(c).

The Agencies further stated that, in some cases, travel or other circumstances may prevent the consumer from reviewing the statement immediately upon receipt. Finally, as discussed above, the Agencies recognized that, because consumers cannot control when a mailed payment will be received by the institution, a payment mailed well in advance of the due date may nevertheless arrive after that date.

Some industry commenters stated that consumers should know the due date

and minimum payment before receiving a periodic statement and should therefore be prepared to make payment immediately. As an initial matter, however, the consumer's due date and minimum payment may vary from month to month depending on the institution's practices. For example, some institutions use a 30-day billing cycle, which results in due dates that vary with the length of the month. Similarly, a consumer would not necessarily know how much to pay without the periodic statement because the amount of the required minimum payment may vary depending on the percentage of the total balance included and whether interest charges and fees are included. Furthermore, a consumer who pays the balance in full each month may not know how much to pay until receiving a periodic statement stating the total amount owed.

Furthermore, this argument fails to recognize, as discussed above, that consumers must have a reasonable opportunity to review their statement in order to exercise their dispute rights under TILA and Regulation Z. Finally, travel or other circumstances may prevent the consumer from reviewing the statement immediately. Accordingly, the Agencies conclude the injuries caused by late payment are not reasonably avoidable unless the consumer is provided a reasonable amount of time to make payment.

Injury is not outweighed by countervailing benefits.

The May 2008 Proposal stated that the injury does not appear to be outweighed by any countervailing benefits to consumers or competition. At the proposal stage, the Agencies were not aware of any direct benefit to consumers from receiving too little time to make their payments. The Agencies observed that, although a longer time to make payment could result in additional finance charges for consumers who do not receive a grace period, the consumer would have the choice whether to wait until the due date to make payment. The Agencies also acknowledged that, as a result of the proposed rule, some institutions could be required to incur costs to alter their systems and would, directly or indirectly, pass those costs on to consumers. The Agencies stated, however, that it did not appear that these costs would outweigh the benefits to consumers of receiving a reasonable amount of time to make payment.

Some industry commenters stated that, because their practices are already consistent with the proposed safe harbor in § _.22(b), the costs of complying with the proposed rule would be minimal. Other industry commenters indicated that complying with the proposed safe harbor would require significant changes to their processes for generating and delivering periodic statements. As discussed below, the Agencies have adopted the safe harbor as proposed.

See

§ _.22(b)(2). Assuming that the cost of altering practices to comply with a 21-day safe harbor will be passed on to consumers, this cost will be spread among thousands or hundreds of thousands of consumers and will not outweigh the benefits to consumers of avoiding late fees and increased annual percentage rates. Thus, the Agencies conclude that the injury to consumers is not outweighed by any countervailing benefits to consumers or competition.

Public policy.

Some industry commenters stated that the proposed 21-day safe harbor was contrary to public policy and the Board's established payment systems policy as set forth in section 163(a) of TILA and section 226.5(b)(2)(ii) of Regulation Z, which, as discussed above, provide that periodic statements must be mailed at least 14 days in advance of the expiration of the grace period. The Agencies, however, have expressly provided that § _.22 does not apply to the mailing or delivery of periodic statements with respect to the expiration of grace periods.

See

§ _.22(c). In the May 2008 Proposal, the Agencies recognized that, in enacting section 163(a) of TILA, Congress set the minimum amount of time between sending the periodic statement and expiration of any grace period offered by the creditor at 14 days. Because most creditors currently offer grace periods and use a single due date for expiration of the grace period and the date after which a payment will be considered late for other purposes (such as the assessment of late fees), the Board requested comment in its June 2007 Regulation Z Proposal on whether it should request that Congress increase the mailing requirement with respect to grace periods.

Based on the comments received, the Agencies concluded in May 2008 that, because many consumers carry a balance from month to month and therefore do not receive a grace period, a separate rule might be needed to specifically address harms other than loss of the grace period when institutions do not provide a reasonable amount of time for consumers to make payment (such as late fees and rate increases as a penalty for late payment). However, in order to avoid any conflict with the statutory requirement regarding grace periods, proposed § _.22(c) specifically provided that the rule would not affect the requirements of section 163(a) of TILA. Accordingly, because § _.22(c) has been adopted as proposed, the Agencies conclude that § _.22 is not contrary to public policy generally or any established payment systems policy of the Board.

Final Rule

Section _.22(a) General Rule

Proposed § _.22(a) would have prohibited institutions from treating a payment as late for any purpose unless the consumer has been provided a reasonable amount of time to make that payment. For the reasons discussed above, the Agencies have adopted § _.22(a) as proposed.

Proposed comment 22(a)-1 clarified that treating a payment as late for any purpose includes increasing the annual percentage rate as a penalty, reporting the consumer as delinquent to a credit reporting agency, or assessing a late fee or any other fee based on the consumer's failure to make a payment within the amount of time provided under this section. One industry commenter stated that the failure to provide a reasonable amount of time to pay is unlikely to cause a consumer to be reported as delinquent to a credit reporting agency, citing the policy of credit reporting agencies to consider an account delinquent only when it is 30 days past due.

Although the Agencies agree that the failure to provide a reasonable amount of time to pay is unlikely to cause injury in the form of a delinquency notation on a credit report, allowing institutions that fail to provide a reasonable amount of time to pay to treat payments as late for purposes of credit reporting but not for other purposes would be anomalous. Accordingly, comment 22(a)-1 is adopted as proposed.

See

Consumer Data Industry Ass'n,

Credit Reporting Resource Guide

6-6 (2006).

Proposed comment 22(a)-2 stated that whether an institution had provided a reasonable amount of time to pay would be evaluated from the perspective of the consumer, not the institution. Some industry commenters requested that the Agencies establish standards for determining whether a particular amount of time is reasonable. The Agencies, however, have adopted a flexible reasonableness analysis rather than a set of fixed standards because whether a particular amount of time is sufficient for consumers to make payment will depend on the facts and circumstances. In addition, in order to remove uncertainty and facilitate compliance, the Agencies have, as discussed below, provided a means for complying with § _.22(a) in § _.22(b)

and its accompanying commentary. Accordingly, comment 22(a)-2 is adopted as proposed.

Section _.22(b) Compliance With General Rule

As proposed, § _.22(b) provided a safe harbor for institutions that have adopted reasonable procedures designed to ensure that periodic statements specifying the payment due date are mailed or delivered to consumers at least 21 days before the payment due date. As explained in the May 2008 Proposal, the 21-day safe harbor was intended to ensure that consumers received at least a week to review their statement and make payment. Compliance with this safe harbor would allow seven days for the periodic statement to reach the consumer by mail, seven days for the consumer to review the statement and make payment, and seven days for that payment to reach the institution by mail. The Agencies noted that, although increasing numbers of consumers are receiving periodic statements and making payments electronically, a significant number still utilize mail. The Agencies further noted that, while first class mail is often delivered within three business days, in some cases it can take significantly longer.

Furthermore, some large credit card issuers already recommend that consumers allow up to seven days for their payments to be received by the issuer via mail.

See, e.g.

, Testimony of Jody Berenblatt, Senior Vice President—Postal Strategy, Bank of America, before the S. Subcomm. on Fed. Fin. Mgmt., Gov't Info., Fed. Srvs., and Int'l Security (Aug. 2, 2007).

The Agencies requested comment on whether the proposed 21-day safe harbor provided a reasonable amount of time for consumers to review their periodic statements and make payment. Consumer groups and others stated that a longer period of 28 or 30 days was needed. Some industry commenters stated that they currently mail or deliver periodic statements 21 days in advance of the due date. Most industry commenters, however, raised the following objections to the proposed 21-day safe harbor.

First, many industry commenters stated that allowing seven days for receipt of mailed periodic statements was excessive because, in most cases, statements are generally delivered two to four days after mailing. These commenters, however, provided only the average delivery time or the delivery time for the great majority of consumers, not the outer range of delivery times. For example, as one consumer group noted, mailing times are often significantly longer for consumers in sparsely populated rural areas. Thus, while the Agencies agree that seven days may be more time than is needed for most consumers to receive a periodic statement by mail, a safe harbor based solely on average mailing times would not adequately protect the small but significant number of consumers whose delivery times are longer than average. Furthermore, because many institutions use practices that reduce delivery times for periodic statements (such as pre-sorting statements by ZIP code prior to delivery to the U.S. Postal Service), delivery times for periodic statements mailed by institutions to consumers likely are not representative of delivery times for payments mailed by consumers to institutions.

Second, several industry commenters stated that allowing seven days for mailing time was excessive for the additional reason that many consumers receive their statements electronically and make payment electronically or by telephone. These commenters, however, also confirmed that a significant number of consumers receive statements and make payments by mail. While many consumers at larger institutions have the ability to review statements online, it is unclear how many actually do so since most also receive statements by mail. Furthermore, the percentage of consumers paying by mail varied significantly by the type of institution. For example, some larger institutions reported that less than half of their consumers use mail to submit payments, while an industry group reported that 70 to 80 percent of community bank consumers mail their payments. In addition, one consumer group cited a study indicating that internet usage is not evenly distributed among the population.

Thus, a safe harbor based on the assumption that consumers use alternative means to receive statements or make payments would not protect a significant number of consumers.

See

Public Policy Institute of Cal.,

California's Digital Divide

(June 2008) (“Whites, blacks, and Asians currently have similarly high rates of computer and Internet use. Latinos have the lowest rates by far (computers 58%, Internet 48%).”) (available at

http://www.ppic.org/content/pubs/jtf/JTF_DigitalDivideJTF.pdf

In addition, multiple safe harbors providing longer or shorter periods of time depending on how the consumer receives periodic statements or makes payments would not be operationally feasible because an institution will not know in advance what method a consumer will use. For example, a consumer might review their periodic statement online one month but wait for the statement to arrive by mail the next. Similarly, a consumer might pay electronically one month and by mail the next.

Third, many industry commenters stated that complying with the 21-day safe harbor would require significant and costly changes to institutions' practices for generating and mailing periodic statements. As discussed above, however, the Agencies have concluded that these costs are outweighed by the benefits to consumers of receiving a reasonable amount of time to pay.

Finally, some commenters stated that adjusting to the 21-day safe harbor could lead to consumer confusion because the institution would not have sufficient time to reflect timely payments on the subsequent periodic statement. This concern, however, depends on a number of variables, including the number of days in the month, whether the institution uses billing cycles that vary with the length of the month (as opposed to a fixed 30-day billing cycle), and whether the institution processes payments on weekends or holidays. Although it is possible that, in some narrow set of circumstances, an institution may not be able to reflect a timely payment on the periodic statement, the Agencies conclude that any resulting confusion does not warrant a reduction in the proposed safe harbor. Accordingly, the 21-day safe harbor is adopted as proposed except that, for the reasons discussed below, this provision has been retitled and, for reasons discussed below, moved to § _.22(b)(2).

In order to minimize burden and facilitate compliance, proposed comment 22(b)-1 clarified that an institution with reasonable procedures in place designed to ensure that statements are mailed or delivered within a certain number of days from the closing date of the billing cycle may utilize the safe harbor by adding that number to the 21-day safe harbor for purposes of determining the payment due date on the periodic statement. Proposed comment 22(b)-1 is adopted as proposed. Accordingly, if, for example, an institution had reasonable procedures in place designed to ensure that statements are mailed or delivered within three days of the closing date of the billing cycle, the institution could comply with the safe harbor by stating a payment due date on its periodic statements that is 24 days from the close of the billing cycle (in other words, 21 days plus three days). Similarly, if an institution's procedures reasonably ensured that payments would be sent within five days of the close of the billing cycle, the institution could comply with the safe harbor by setting the due date 26 days from the close of the billing cycle.

Proposed comment 22(b)-2 further clarified that the payment due date is

the date by which the institution requires the consumer to make payment in order to avoid being treated as late for any purpose (except with respect to expiration of a grace period). Comment 22(b)-2 is adopted as proposed.

The Agencies also received requests from industry for clarification that compliance with the safe harbor is not the only means of complying with the requirement that consumers be provided a reasonable amount of time to make the payment. Accordingly, the Agencies have restructured § .22(b) to provide additional clarity regarding compliance with § _.22(a). The Agencies have added a new § _.22(b)(1), which clarifies that institutions are responsible for establishing that they have complied with § _.22(a). The 21-day safe harbor, which the Agencies have moved to § _.22(b)(2), provides one method of compliance. Finally, the Agencies have added comment 22(b)-3, which provides an example of an alternative compliance method. In this example, because an institution only provides periodic statements and accepts payments electronically, the institution could deliver statements for those accounts less than 21 days before the payment due date and still satisfy the general rule in § _.22(a) because those consumers would need less time to receive their statements or make their payments by mail.

Section _.22(c) Exception for Grace Periods

In order to avoid any potential conflict with section 163(a) of TILA, proposed § _.22(c) provided that proposed § _.22(a) would not apply to any time period provided by the institution within which the consumer may repay the new balance or any portion of the new balance without incurring finance charges (in other words, a grace period).

Several industry commenters argued that, notwithstanding proposed § _.22(c), institutions would essentially be required to use a single date for the payment due date and for expiration of the grace period because consumers would be confused by different dates. Consumer groups also raised concerns about the potential for consumer confusion. One consumer group requested that the Board use its authority under section 1604(a) of TILA to require that the expiration of the grace period coincide with the payment due date. Because the mailing or delivery of periodic statements in relation to expiration of the grace period is specifically addressed by section 163(a) of TILA, the Agencies believe that deviating from the statutory requirement would be inappropriate and unnecessary in this case, particularly because Regulation Z would require an institution that elected to use separate dates to disclose both dates on the periodic statement.

See

12 CFR 226.6(b), adopted elsewhere in today's

Federal Register

. An institution that chooses to use separate dates, however, must ensure that consumers understand the implications if payment is not received on or before each date.

Other Issues

Implementation.

As discussed in section VII of this

SUPPLEMENTARY INFORMATION

, the effective date for § _.22 is July 1, 2010. As of that date, this provision applies to existing as well as new consumer credit card accounts. Thus, institutions must provide consumers with a reasonable amount of time to make any payment due on or after the effective date.

Alternatives to proposed rule.

The Agencies requested comment on two potential alternatives to the proposed rule. First, the Agencies asked for comment on whether to adopt a rule that would prohibit institutions from treating a payment as late if received within a certain number of days after the due date and, if so, the number of days that would be appropriate. Consumer groups and some institutions that currently provide such a period of time were supportive, but most industry commenters stated that this requirement would be operationally burdensome. The Agencies have concluded that requiring institutions to provide a period of time after the due date during which payments must be treated as timely could create consumer confusion regarding when payment is actually due and undermine the Board's efforts elsewhere in today's

Federal Register

to ensure that consumers' due dates are meaningful.

See

12 CFR 226.10(b)(2)(ii) (providing that a reasonable cut-off time for payments received by mail would be 5 p.m. on the payment due date at the location specified by the creditor for the receipt of such payments); 12 CFR 226.10(d) (providing that, if the due date for payments is a day on which the creditor does not receive or accept payments by mail, the creditor may not treat a payment received by mail the next business day as late for any purpose).

Second, the Agencies sought comment on whether to adopt a rule that would require institutions, upon the request of a consumer, to reverse a decision to treat a payment mailed before the due date as late and, if so, what evidence the institution could require the consumer to provide (for example, a receipt from the U.S. Postal Service or other common carrier) and what time frame would be appropriate (for example, payment mailed at least five days before the due date, payment received no more than two business days' late). Although some commenters supported such a requirement, the Agencies also received comments from both industry and a consumer group opposing the requirement on the grounds that it would be burdensome for consumers to obtain proof of mailing and for institutions to establish systems for accepting such proof. Furthermore, the Agencies note that some institutions stated that they will generally waive any late payment fee when a consumer produces proof that a payment was mailed sufficiently in advance of the due date.

Supplemental Legal Basis for This Section of the OTS Final Rule

As discussed above, HOLA provides authority for both safety and soundness and consumer protection regulations. Section 535.22 supports safety and soundness by reducing reputational risk that would result from providing consumers an unreasonably short period of time to make payment. Section 535.22 also protects consumers by providing sufficient time to make payment. It is somewhat akin to OTS's late charge provision for home loans, which prohibits federal savings associations from imposing a late charge as to any payment received within 15 days of the due date.

Section 535.22 is consistent with the best practices of thrift institutions nationwide. Most savings associations, including the ten largest, generally mail or deliver periodic statements to their customers at least 20 days before the due date. Consequently, HOLA serves as an independent basis for § 535.22.

12 CFR 560.33.

Section _.23—Unfair Acts or Practices Regarding Allocation of Payments

Summary.

In May 2008, the Agencies proposed § _.23 in response to concerns that institutions were applying consumers' payments in a manner that inappropriately maximized interest charges on consumer credit card accounts with balances at different annual percentage rates. Specifically, most institutions allocate consumers' payments first to the balance with the lowest annual percentage rate, resulting in the accrual of interest at higher rates on other balances (unless all balances are paid in full).

See

73 FR at 28914-28917. Proposed § _.23(a) would have addressed this practice by requiring institutions to allocate payments in excess of the required minimum periodic payment (“excess payments”)

using one of three permitted methods or a method equally beneficial to consumers. The permitted methods were allocating the excess payment first to the balance with the highest annual percentage rate, allocating equal portions of the excess payment to each balance, and allocating the excess payment pro rata among the balances.

In addition, because the Agencies were concerned that existing payment allocation practices were especially harmful when an account had a balance at a discounted promotional rate or a balance on which interest was deferred, proposed § _.23(b) would have placed more stringent requirements on those accounts. Proposed § _.23(b)(1)(i) would have prohibited institutions from allocating excess payments to promotional rate and deferred interest balances unless all other balances had been paid in full. Proposed § _.23(b)(1)(ii), however, created an exception for the existing practice by some institutions of allocating excess payments first to a deferred interest balance during the last two billing cycles of the deferred interest period so that consumers could pay off that balance and avoid assessment of deferred interest. Finally, proposed § _.23(b)(2) would have prohibited institutions from denying consumers a grace period solely because an account had a promotional rate or deferred interest balance.

Based on the comments received and further analysis, the Agencies have revised the general payment allocation rule in proposed § _.23(a) to require institutions either to apply excess payments first to the balance with the highest annual percentage rate or to allocate excess payments pro rata among the balances. The final version of § _.23 prohibits the current practice of applying payments to the lowest rate balance first while also responding to concerns raised by commenters that the number of allocation methods permitted by the proposed rule would have increased the complexity of payment allocation, making the practice and its effects on interest charges even less transparent for consumers.

In addition, the Agencies have not included proposed § _.23(b) in the final rule. First, because current practices regarding assessment of deferred interest are not permitted under the final version of § _.24, the provisions regarding deferred interest plans are no longer necessary. Second, due to concerns that proposed § _.23(b) could significantly reduce or eliminate promotional rate offers that provide substantial benefits to consumers, the Agencies have not included the provisions regarding promotional rate balances. Instead, the Agencies believe that applying the general allocation rule in § _.23 in all circumstances strikes the appropriate balance by preserving promotional rate offers that provide substantial benefits to consumers while prohibiting the most harmful payment allocation practices.

Background.

In its June 2007 Regulation Z Proposal, the Board discussed the practice among some creditors of allocating payments first to balances that are subject to the lowest interest rate. 72 FR at 32982-32983. Because many creditors offer different rates for purchases, cash advances, and balance transfers, this practice can result in consumers who do not pay the balance in full each month incurring higher finance charges than they would under any other allocation method. The Agencies were also concerned that, when the consumer has responded to a promotional rate or deferred interest offer, the allocation of payments to balances with the lowest interest rate often prevents the consumer from receiving the full benefit of the promotional rate or deferred interest plan if the consumer uses the credit card account for other transactions.

For example, assume that a consumer credit card account charges annual percentage rates of 12% on purchases and 20% on cash advances. Assume also that, in the same billing cycle, the consumer uses the account for purchases totaling $3,000 and cash advances totaling $300. If the consumer makes an $800 excess payment, most creditors would apply the entire payment to the purchase balance and the consumer would incur interest charges on the more costly cash advance balance. Under these circumstances, the consumer is effectively prevented from paying off the balance with the higher interest rate (cash advances) unless the consumer pays the total balance (purchases and cash advances) in full.

This outcome is exacerbated if the consumer uses the card in reliance on a promotional rate or deferred interest offer. For example, assume the same facts as above but that, during the same billing cycle, the consumer also transfers to the account a balance of $3,000 in response to a promotional rate offer of 5% for six months. In this case, most creditors would apply the consumer's $800 excess payment to the promotional rate balance and the consumer would incur interest charges on the more costly purchase and cash advance balances. Under these circumstances, the consumer would effectively be denied the benefit of the 5% promotional rate for six months if the card is used for purchase or cash advance transactions because the consumer must pay off the entire transferred balance in order to avoid paying a higher rate on other transactions. Indeed, the only way for the consumer to receive the full benefit of the 5% promotional rate is not to use the card for purchases, which would effectively require the consumer to use an open-end credit account as a closed-end installment loan.

Deferred interest plans raise similar—but not identical—concerns. Currently, some creditors offer deferred interest plans under which interest accrues on purchases at a specified rate but is not charged to the account for a period of time. If the balance is paid in full by the end of the period, the consumer generally will not be charged any interest. If, however, the balance is not paid in full by the end of the period, all interest accrued during that period will be charged to the account. With respect to payment allocation, a consumer whose payments are applied to a deferred interest balance instead of balances on which interest is not deferred will incur additional finance charges during the deferred interest period.

In addition, creditors typically provide consumers who pay their balance in full each month a grace period for purchases but not for balance transfers or cash advances. Because payments generally will be allocated to the transferred balance first, a consumer typically cannot take advantage of both a promotional rate on balance transfers or cash advances and a grace period on purchases. Under these circumstances, the only way for a consumer to avoid paying interest on purchases would be to pay off the entire balance, including the transferred balance or cash advance balance subject to the promotional rate.

In preparing its June 2007 Regulation Z Proposal, the Board sought to address issues regarding payment allocation by developing disclosures explaining payment allocation methods on accounts with multiple balances at different annual percentage rates so that consumers could make informed decisions about card usage, particularly with regard to promotional rates. For example, if consumers knew that they would not receive the full benefit of a promotional rate on a particular credit card account if they used that account for purchases during the promotional period, they might use a different account for purchases and pay that second account in full every month to take advantage of the grace period. The Board conducted extensive consumer testing in an effort to develop

disclosures that would enable consumers to understand typical payment allocation practices and make informed decisions regarding the use of credit cards for different types of transactions. In this testing, many participants did not understand that they could not take advantage of the grace period on purchases and the discounted rate on balance transfers at the same time. Model forms were tested that included a disclosure notice attempting to explain this to consumers. Testing, however, showed that a significant percentage of participants still did not fully understand how payment allocation can affect their interest charges, even after reading the model disclosures.

In the June 2007 Regulation Z Proposal, the Board acknowledged these results and stated that it would conduct further testing to determine whether the disclosure could be improved to communicate more effectively to consumers how payment allocation can affect their interest charges. The Board also solicited comment on a proposed amendment to Regulation Z that would have required creditors to explain payment allocation to consumers. Specifically, the Board proposed that creditors explain how payment allocation would affect consumers' interest charges if an initial discounted rate was offered on balance transfers or cash advances but not purchases. The Board proposed that creditors must disclose to consumers that: (1) The initial discounted rate applies only to balance transfers or cash advances, as applicable, and not to purchases; (2) that payments will be allocated to the balance transfer or cash advance balance, as applicable, before being allocated to any purchase balance during the time the initial discounted rate is in effect; and (3) that the consumer will incur interest on the purchase balance until the entire balance is paid, including the transferred balance or cash advance balance, as applicable. 72 FR at 33047-33050.

In response to the June 2007 Regulation Z Proposal, several commenters recommended that the Board test a simplified payment allocation disclosure that covered situations other than low rate balance transfers. One credit card issuer, however, stated that, even if an effective disclosure could be developed, consumers could not shop for a better payment allocation method because creditors almost uniformly apply payments to the balance with the lowest annual percentage rate. Furthermore, consumer and consumer group commenters urged the Board to go further and prohibit payment allocation methods that applied payments to the lowest rate balance before other balances.

In consumer testing conducted for the Board prior to the May 2008 Proposal, the Board tested a revised payment allocation disclosure. This disclosure was not effective in improving consumers' understanding. The majority of participants understood from earlier experience that creditors typically will apply payments to lower rate balances first and that this method causes them to incur higher interest charges. However, for those participants that did not know about payment allocation methods from earlier experience, the disclosure tested was not effective in communicating payment allocation methods.

The Board also tested whether, given the opportunity, consumers could select how amounts paid in excess of the minimum would be allocated using a payment coupon. Most participants, however, were not able to understand the effects of payment allocation sufficiently to apply payments in a manner that minimized interest charges.

Accordingly, because the Board's testing indicated that disclosure was not effective in allowing consumers to avoid the common practice of allocating payments first to the balance with the lowest rate, the Agencies proposed in May 2008 to address concerns regarding payment allocation in proposed § _.23 by placing limitations on allocation of excess payments.

The Agencies also solicited comment on whether the exception regarding deferred interest balances was needed. 73 FR 28916.

After the May 2008 Proposal, the Board conducted additional testing of consumers' ability to understand payment allocation disclosures and select how excess payments would be allocated. This testing, however, produced similar results to those discussed above.

The Agencies received comments in support of proposed § ._23 from individual consumers, consumer groups, members of Congress, the FDIC, state attorneys general, a state consumer protection agency, and others. Nevertheless, many of these commenters criticized the proposed rule as overly complex, arguing that—if consumers cannot understand the effects of the current low-to-high allocation method on interest charges—increasing the number and complexity of allocation methods would only make the cost of credit less transparent. These commenters urged the Agencies to revise the proposed rule to require that excess payments be applied first to the balance with the highest rate in all circumstances. Some consumer advocates urged the Agencies to ban deferred interest balances rather than create an exception for them.

In contrast, credit card issuers and industry groups strongly opposed the proposal, particularly the special requirements regarding accounts with promotional rate and deferred interest balances. These commenters generally argued that disclosure would enable consumers to avoid any harm caused by payment allocation, that the proposed restrictions regarding promotional rate and deferred interest balances would ultimately harm consumers by reducing or eliminating promotional rate and deferred interest offers, and that complying with the proposed rule would require burdensome systems changes.

To the extent that commenters addressed specific aspects of the proposal or its supporting legal analysis, those comments are discussed below.

Legal Analysis

When different annual percentage rates apply to different balances on a consumer credit card account, the Agencies conclude that, based on the comments received and their own analysis, it is an unfair act or practice under 15 U.S.C. 45(n) and the standards articulated by the FTC to allocate amounts paid by the consumer in excess of the required minimum periodic payment in a manner that does not apply a significant portion of the amount to the balance with the highest annual percentage rate.

In the May 2008 Proposal, the Agencies considered whether other practices specifically related to promotional rate and deferred interest balances were unfair. As discussed below, based on the comments and further analysis, § _.23 does not include the provisions specifically addressing those practices. To the extent that specific practices raise concerns regarding unfairness or deception under the FTC Act, the Agencies plan to address those practices on a case-by-case basis through supervisory and enforcement actions.

Substantial consumer injury.

In the May 2008 Proposal, the Agencies stated that allocating excess payments first to the balance with the lowest rate appeared to cause substantial monetary injury to consumers in the form of higher interest charges than would be incurred if some or all of the excess payment were applied to balances with higher rates.

In response, the Agencies received an analysis of credit card data purporting to represent approximately 70 percent of outstanding consumer credit card balances (the Argus Analysis). Although the Agencies are not able to verify the accuracy of the Argus Analysis or the data supporting it, the Agencies note that this analysis estimated that consumers are charged an additional

$930 million annually as a result of the practices addressed by proposed § _.23.

In addition, a state consumer protection agency stated that the practice of allocating payments first to the balance with the lowest rate is particularly harmful to low-income consumers, citing its own study finding that a quarter of low-income cardholders surveyed used a credit card for a cash advance (which generally accrues interest at a higher rate than other transactions) every few months.

See

Exhibit 1, Table 1 to Comment from Oliver I. Ireland, Morrison Foerster LLP (Aug 7, 2008) (“Argus Analysis”) (presenting results of analysis by Argus Information & Advisory Services, LLC of historical data for consumer credit card accounts believed to represent approximately 70 percent of all outstanding consumer credit card balances).

See

N.Y. City Dept. of Consumer Affairs,

Neighborhood Financial Services Study: An Analysis of Supply and Demand in Two N.Y. City Neighborhoods

at 6 (June 2008) (available at

http://www.nyc.gov/html/ofe/downloads/pdf/NFS_ExecSumm.pdf

One industry commenter asserted that allocating payments first to the balance with the lowest interest rate could not cause an injury for purposes of the FTC Act merely because other, less costly allocation methods exist. It is well established, however, that monetary harm constitutes an injury under the FTC Act.

This comment did not provide any legal authority distinguishing interest charges assessed as a result of current payment allocation practices from other monetary harms, nor are the Agencies aware of any such authority.

See

Statement for FTC Credit Practices Rule, 49 FR at 7743; FTC Policy Statement on Unfairness at 3.

Another industry commenter stated that assessing interest consistent with a contractual provision to which the consumer has agreed cannot constitute an injury under the FTC Act. This argument, however, is inconsistent with the FTC's application of the unfairness analysis in support of its Credit Practices Rule, where the FTC determined that otherwise valid contractual provisions injured consumers.

See

Statement for FTC Credit Practices Rule, 49 FR at 7740

et seq.; see also Am. Fin. Servs. Assoc.,

767 F.2d at 978-83 (upholding the FTC analysis).

Accordingly, the Agencies conclude that the failure to allocate a significant portion of an excess payment to the balance with the highest rate causes or is likely to cause substantial monetary injury to consumers.

Injury is not reasonably avoidable.

In May 2008, the Agencies cited several factors that appeared to prevent consumers from reasonably avoiding the injury. First, consumers generally have no control over the institution's allocation of payments. Second, the Board's consumer testing indicated that disclosures do not enable consumers to understand sufficiently the effects of payment allocation. Furthermore, the Agencies stated that, even if disclosures were effective, it appeared consumers still could not avoid the injury by selecting a credit card account with more favorable terms because institutions almost uniformly apply payments first to the balance with the lowest rate.

Third, although a consumer could avoid the injury by paying the balance in full each month, this may not be a reasonable expectation as many consumers are unable to do so.

See

Statement for FTC Credit Practices Rule, 48 FR at 7746 (“If 80 percent of creditors include a certain clause in their contracts, for example, even the consumer who examines contract[s] from three different sellers has a less than even chance of finding a contract without the clause. In such circumstances relatively few consumers are likely to find the effort worthwhile, particularly given the difficulties of searching for contract terms * * *” (footnotes omitted)).

The Agencies conclude that these factors support a determination that the injury caused by the failure to allocate a significant portion of an excess payment to the highest rate balance is not reasonably avoidable. In particular, the Agencies note that additional consumer testing has further confirmed that disclosure is not an effective alternative to the proposed rule.

For this reason, the Board has removed the proposed disclosure regarding payment allocation under Regulation Z, as discussed elsewhere in today's

Federal Register

Furthermore, although one industry commenter argued that consumers could reasonably avoid the injury by paying their balance in full each month, one of the intended purposes of a credit card (as opposed to a charge card) is to finance purchases over multiple billing cycles. Thus, it is unreasonable to expect consumers to avoid the harm caused by current payment allocation practices by paying their balances in full each month.

Injury is not outweighed by countervailing benefits.

In the May 2008 Proposal, the Agencies stated that the prohibited practices did not appear to create benefits for consumers or competition that outweighed the injury. The Agencies noted that, if implemented, the proposal could reduce the revenue that institutions receive from interest charges, which could in turn lead institutions to increase rates generally. The Agencies stated, however, that this effect should be muted because the proposal prohibited only the practices that are most harmful to consumers and leaves institutions with considerable flexibility. Specifically, the proposed rule permitted institutions to choose between three specified allocation methods or any other method that was no less beneficial to the consumer. In addition, the proposed rule did not apply to the allocation of minimum payments.

Furthermore, the Agencies stated that the proposal would enhance transparency and enable consumers to better assess the costs associated with using their credit card accounts at the time they engage in transactions. The Agencies noted that, to the extent that upfront costs have been artificially reduced because many consumers cannot reasonably avoid paying higher interest charges later, the reduction does not represent a true benefit to consumers as a whole. Finally, the Agencies stated that it appeared the proposal would enhance rather than harm competition because institutions offering rates that reflect the institution's costs (including the cost to the institution of borrowing funds and operational expenses) would no longer be forced to compete with institutions offering rates that are artificially reduced based on the expectation that interest will accrue on higher rate balances until the promotional rate balance is paid in full.

Based on the comments and further analysis, the Agencies conclude that these rationales support a determination that the injury to consumers when institutions do not allocate a significant portion of the excess payment to the balance with the highest annual percentage rate outweighs any benefits of this practice for consumers and competition. Industry commenters generally argued that the restrictions in proposed § _.23 would reduce interest revenue and force institutions to compensate by increasing the interest rates or fees charged to consumers, decreasing the amount of available credit, or using some combination of the two. For example, the Argus Analysis stated that, as a result of proposed § _.23, institutions could lose 0.125 percent of their annual interest revenue on revolving credit card accounts (in other words, accounts where interest is charged because the balance is not paid in full each billing cycle).

Again, as noted above, the Agencies are unable to verify the accuracy of the conclusions reached by the Argus Analysis or its supporting data. Furthermore, the Argus Analysis did not estimate the potential

impact of proposed § _.23 on the cost and availability of credit.

Nevertheless, assuming for the sake of discussion that the data and assumptions underlying the Argus Analysis are accurate, it appears that institutions might respond by increasing interest rates approximately 0.15 percentage points or by decreasing credit limits approximately $155.

Accordingly, if, for example, an institution charges its consumers an interest rate of 15% on a credit line of $9,000, the Argus Analysis appears to indicate that the institution might respond to proposed § _.23 by increasing the rate to 15.15% or by decreasing the credit limit to $8,850.

See

Exhibit 1, Table 1 to Argus Analysis (combining the predictions for “Revolvers” in the rows labeled “Change in Payment Allocation” and “Grace Period Requirement for Retail Transactions”).

As discussed in greater detail below, the Argus Analysis assumes that institutions will adjust to the restrictions in the proposed rules by increasing interest rates, decreasing credit limits, eliminating credit for consumers with low credit scores, or some combination of the three. This analysis ignores other potential adjustments, such as increasing fee revenue (including the assessment of annual fees) and developing improved underwriting techniques that will reduce losses and the need to engage in repricing when a consumer violates the account terms.

The Argus Analysis estimated that proposed § _.23 will reduce interest revenue by 0.125 percent. Accordingly, for purposes of this discussion, the Agencies assumed that, consistent with the Argus Analysis, the increase in interest rates attributable to proposed § _.23 would be 120 percent of the reduction in interest revenue (0.125 × 1.2 = 0.15). The Agencies also assumed that the reduction in credit limits attributable to proposed § _.23 would be proportionate to the overall reduction predicted by the Argus Analysis. Thus, because the estimated revenue loss attributable to proposed § _.23 (0.125) is 7.6% of the overall estimated revenue loss predicted by the Argus Analysis (1.637), the Agencies assumed that the reduction in credit limits attributable to proposed § _.23 would be 7.6% of the overall reduction of $2,029 predicted by the Argus Analysis ($2,029 × 0.076 = $155). The Agencies were not able to estimate the potential impact on credit availability for consumers with FICO scores below 620 but, given the limited estimated impact of proposed § _.23 on rates and credit limits, it appears this impact would not be substantial.

As discussed in greater detail in section VII of this

SUPPLEMENTARY INFORMATION

, the Agencies anticipate that, prior to the effective date, some institutions may respond to the restrictions in § _.23 by, for example, adjusting interest rates on existing balances or reducing credit limits.

The Argus Analysis also stated that more than three quarters of revolving accounts do not carry multiple balances, meaning that the estimated $930 million in interest revenue is currently generated from only one quarter of all revolving accounts.

Thus, even if the Agencies were to accept the Argus Analysis and its underlying data at face value, it appears that the restrictions in proposed § _.23 will result in significantly reduced interest charges for one quarter of consumer credit card accounts, while potentially resulting in a smaller increase in interest charges for all other accounts or a small reduction in available credit for all accounts. Furthermore, the Argus Analysis was based on the proposed rule. Although the final rule permits only two allocation methods, the Agencies' decision to omit from the final rule the more restrictive rules for accounts with promotional rate balances in proposed § _.23(b) should significantly reduce the estimated impact.

The Agencies therefore conclude that, based on the available information, the injury to consumers as a result of the current practice of applying excess payments in a manner that maximizes interest charges outweighs the potential increase in interest rates or reduction in available credit as a result of prohibiting that practice. Even if the shifting of costs from one group of consumers to another, much larger group is viewed as neutral from a cost-benefit perspective, the less quantifiable benefits to consumers and competition of more transparent upfront pricing weigh in favor of the proposed rule.

See

Exhibit 4a, Table 3b to Argus Analysis.

As noted above, the Argus Analysis stated that, as a result of proposed § _.23, institutions could lose 0.125 percent of their annual interest revenue on revolving credit card accounts.

See

Exhibit 1, Table 1 to Argus Analysis. This figure appears to be based on the equal share method, which—according to the Argus Analysis—would have the least impact of any of the proposed methods on interest revenue.

See

Exhibit 1, Table 3a to Argus Analysis (column labeled “New Payment Allocation Method,” row labeled “Equal”). Although the final rule does not permit use of the equal share method, the Argus Analysis estimates that the impact of the pro rata method (which is permitted) would only be two one-hundredths of a percent (0.002) higher.

See id.

(column labeled “New Payment Allocation Method,” row labeled “Proportional”). Furthermore, the 0.125 figure also includes an estimated 0.014 loss in interest revenue attributable to proposed § _.23(b)(2), which the Agencies have not adopted.

See

Exhibit 1, Table 1 to Argus Analysis. Thus, assuming the Argus Analysis is accurate, the overall impact of the final rule on interest revenue should be less than the proposal.

Some industry commenters also argued that compliance with proposed § _.23 would require extensive changes to payment allocation systems, the cost of which would be passed on to consumers. One systems provider estimated the cost of developing systems to allocate payments among different balances at tens of thousands of dollars per institution. Another systems provider, however, stated that these systems currently exist. Again, because the Agencies have simplified the payment allocation rule by permitting only two payment allocation methods and by omitting the special allocation requirements for promotional rate balances, the burden associated with systems changes should be reduced. Furthermore, if the cost of altering practices to comply with § _.23 is passed on to consumers, that cost will be spread among thousands, hundreds of thousands, or millions of consumers and will not outweigh the benefits to consumers of avoiding additional interest charges and more transparent upfront pricing.

As discussed below, the Agencies have revised the proposed remedy for this unfair practice by allowing only two allocation methods for excess payments: high-to-low and pro rata allocation. Unlike the proposal, the final rule would not permit institutions to split excess payments equally among the balances or to allocate using a method that is no less beneficial to consumers than one of the listed methods because the Agencies have determined that these methods would not provide benefits to consumers that outweigh the injury addressed by this final rule.

Public policy.

Some industry commenters argued that the proposed rule was contrary to public policy as set forth in statements by another federal banking agency. Specifically, these commenters pointed to statements in Congressional testimony and an advisory letter by the OCC suggesting that concerns regarding payment allocation should be addressed through disclosure rather than substantive regulation.

See

Testimony of Julie L. Williams, Chief Counsel & First Senior Deputy Controller, OCC before H. Subcomm. on Fin. Instits. & Consumer Credit at 10-11 (Apr. 17, 2008) (available at

http://www.house.gov/apps/list/hearing/financialsvcs_dem/williams041708.pdf

);

see also

OCC Advisory Letter 2004-10 (Sept. 14, 2004) (available at

http://www.occ.treas.gov/ftp/advisory/2004-10.doc

While public policy may be considered as part of the unfairness analysis under the FTC Act, it is not a required element of that analysis and cannot serve as the primary basis for determining that an act or practice is unfair.

For purposes of the unfairness analysis, public policy is generally embodied in a statute, regulation, or judicial decision.

Nevertheless, to the extent that the OCC's statements constitute public policy, the Agencies find that those statements (which the Agencies have not adopted) do not preclude a determination that allocating excess payments in a manner that does not apply a significant portion to the balance with the highest rate is an unfair practice. The May 2008 Proposal explained that extensive consumer testing conducted by the Board indicated that disclosure was not effective in enabling consumers to avoid the harm caused by current payment allocation practices. The Agencies also note that the OCC statements cited by

the commenters were made prior to the May 2008 Proposal and were not repeated in the OCC's comment on that proposal.

15 U.S.C. 45(n).

See, e.g.

Final Rule

As proposed, § _.23(a) would have established a general rule governing payment allocation on accounts that have balances with different annual percentage rates but do not have a promotional rate or deferred interest balance. Proposed § _.23(b) would have established special rules for accounts with balances at different rates that do have a promotional rate or deferred interest balance. As discussed below, however, the final rule eliminates the special rules in proposed § _.23(b) and applies a revised version of the general rule in proposed § _.23(a) to all types of balances.

As an initial matter, industry commenters and a member of Congress criticized proposed § _.23 as overly complex. They stated that, rather than making payment allocation practices easier for consumers to understand, the proposed rule would make payment allocation harder to disclose and increase consumer confusion. The Agencies reemphasize that the Board's consumer testing indicates that, regardless of the complexity of the method, payment allocation methods cannot be effectively disclosed. The proposed restrictions on payment allocation were not intended to ease disclosure but instead to protect consumers from unfair practices that cannot be effectively addressed by disclosure. Nevertheless, as discussed below, the Agencies have greatly simplified the final rule.

Section _.23 Allocation of Excess Payments

When an account has balances with different annual percentage rates, proposed § _.23(a) would have required institutions to allocate any amount paid by the consumer in excess of the required minimum periodic payment among the balances in a manner that is no less beneficial to consumers than one of three listed methods. First, proposed § _.23(a)(1) would have allowed an institution to apply the excess payment first to the balance with the highest annual percentage rate and any remaining portion to the balance with the next highest annual percentage rate and so forth. Second, proposed § _.23(a)(2) would have allowed an institution to allocate equal portions of the excess payment to each balance. Third, proposed § _.23(a)(3) would have allowed an institution to allocate the excess payment among the balances in the same proportion as each balance bears to the total balance (in other words, pro rata).

As discussed above, some consumer group commenters argued that—because the Board's consumer testing indicates that disclosure does not enable consumers to understand the effects of payment allocation on interest charges—providing institutions with the ability to choose between different allocation methods would only make payment allocation more complex and the associated costs less transparent. Because this result would be contrary to the intended purpose of proposed § _.23, the final rule allows only two allocation methods for excess payments: Applying the excess payment first to the balance with the highest annual percentage rate and any remaining amount to the other balances in descending order based on the applicable annual percentage rate; and allocating the excess payment pro rata.

Although consumer groups and others argued that the Agencies should require allocation to the highest rate balance first in all circumstances because this method would minimize interest charges, the Agencies believe that the final version of § _.23 strikes the appropriate balance between institutions and consumers. It prohibits institutions from using the allocation method that maximizes interest charges but does not require use of the method that minimizes interest charges. The Agencies expect that most institutions will use the pro rata method, which will standardize payment allocation practices and focus competition on more transparent costs of credit (such as interest rates). Although permitting a second allocation method creates the potential for increased complexity, the Agencies believe that the allocation of excess payments first to the highest rate balance should be permitted because, even if few institutions will do so, this method minimizes interest charges for consumers.

The Agencies have not included the proposed methods allowing allocation of equal portions of the excess payment to each balance and allowing institutions to allocate excess payments in a manner that is no less beneficial to the consumer than one of the listed methods in order to reduce complexity and promote transparency. In addition, because information received during the comment period indicates that, as a general matter, consumers have approximately 25 percent of their total balance at a discounted promotional rate,

it appears that the equal share method would generally be less beneficial to consumers than the pro rata method because—unless the account has four or more balances—the equal share method would apply more of the excess payment to the discounted promotional rate balance (and therefore less to balances with higher interest rates) than the pro rata method.

Finally, because an allocation method would have been no less beneficial to a consumer than a listed method only if it resulted in the same or lesser interest charges,

institutions were unlikely to take advantage of this option because it would require individualized determinations based on each consumer's balances and rates.

See

Exhibit 7, Table 1c to Argus Analysis (column labeled “Overall”).

The Agencies note that, according to the Argus Analysis, the pro rata method will result in a greater loss in annual interest revenue than the equal share method.

See

Exhibit 1, Table 3a to Argus Analysis (column labeled “New Payment Allocation Method,” rows labeled “Proportional” and “Equal”). Thus, assuming these data are accurate, the pro rata method will result in lower interest charges for consumers than the equal share method.

See

proposed comment 23(a)-1, 73 FR at 28944.

The Agencies note that several industry commenters argued that institutions should be permitted to allocate payments first to the oldest transactions on the account, which would often be transactions on which the institution is prohibited from increasing the annual percentage rate pursuant to proposed § _.24. These commenters stated that this method (which is sometimes referred to as “first in, first out” or “FIFO”) would pay down those transactions faster, thereby reducing the burden to institutions of carrying balances at rates that no longer reflect market rates or the consumer's risk. However, the Agencies believe that concerns related to proposed § _.24 are better addressed through revisions to that proposal (as discussed below), rather than through payment allocation. In addition, permitting FIFO allocation would, in some circumstances, allow institutions to allocate excess payments first to the balance with the lowest rate. For example, if a consumer opened an account by transferring a balance in reliance on a discounted promotional rate, that balance would be the oldest balance on the account. Consequently, FIFO allocation could perpetuate the current practice of using payment allocation to maximize interest charges.

Although some industry commenters stated that their payment allocation systems could allocate excess payments pro rata or in equal portions, others stated that their systems could not and

that they would be forced instead to allocate payments first to the balance with the highest interest rate. The Agencies note that neither the proposal nor the final rule require institutions to allocate first to the balance with the highest interest rate. Accordingly, if an institution's payment allocation system cannot currently allocate excess payments pro rata, the institution must make the determination whether to adjust that system or allocate to the highest rate balance first and forego the additional interest charges. As discussed below in section VII of this

SUPPLEMENTARY INFORMATION

, institutions will be provided with 18 months in which to adjust their systems.

The Agencies proposed commentary to clarify how proposed § _.23 would be applied. Proposed comment 23-1 clarified that § _.23 would not limit or otherwise address the institution's ability to determine the amount of the required minimum periodic payment or how that payment is allocated. Consumer groups urged the Agencies to apply proposed § _.23 to the entire payment. In contrast, one industry commenter stated that excluding the minimum payment was not helpful because such payments are kept small for competitive reasons. Another industry commenter urged the Agencies to remove the distinction between minimum and excess payments in order to reduce the rule's complexity.

The Agencies, however, believe that proposed § _.23 strikes the appropriate balance by providing institutions flexibility regarding the minimum amount consumers must pay while ensuring that, when consumers voluntarily pay more than the minimum, those payments are not allocated in a manner that maximizes interest charges.

In response to comments from institutions whose systems cannot distinguish between minimum and excess payments when allocating and comments objecting to the complexity created by the distinction, the Agencies clarify in comment 23-1 that institutions may apply the entire payment consistent with § _.23 (unless doing so would be inconsistent with applicable law and regulatory guidance). The Agencies have also clarified that the amount and allocation of the required minimum periodic payment must be determined consistent with applicable law and regulatory guidance. Otherwise, proposed comment 23-1 is adopted as proposed.

One commenter requested that proposed § _.23 be revised to permit excess payments to be allocated first to interest and fees. The Agencies do not believe such a change is necessary because, to the extent that an institution wishes to recover interest and fees, those amounts can (and often are) included in the required minimum periodic payment.

In order to simplify the allocation process and reduce the operational burden on institutions, proposed comment 23-2 permitted institutions to make small adjustments of one dollar or less when allocating payments. One industry commenter requested that institutions also be permitted to make adjustments equal to or less than one percent of the total balance. This is not, however, the type of small adjustment envisioned by the Agencies. For example, one percent of a $5,000 balance would be $50. Accordingly, comment 23-2 is adopted as proposed.

Because proposed § _.23 would have required institutions to allocate payments based on the balances and annual percentage rates on the account, some industry commenters requested guidance regarding the point in time at which the various determinations required by proposed § _.23 would be made. For example, because transactions are commonly made between the close of a billing cycle and the date on which payment for that billing cycle is received, the balances on the account on the day the payment is applied will often be different than the balances on the periodic statement for the billing cycle. Similarly, the annual percentage rates may have changed in the interim. One industry commenter stated that payment allocation should be based on the balances and rates on the preceding periodic statement, while two other industry commenters stated that the balances and rates at the time the payment is credited should be used. The Agencies believe that, because the benefit to consumers of one approach or the other will depend on the consumer's individual circumstances, there is no need to require a particular approach. Accordingly, the Agencies adopt comment 23-3, which clarifies that an institution may allocate based on the balances and annual percentage rates on the date the preceding billing cycle ends (which will typically be the balances and rates reflected on the periodic statement), on the date the payment is credited to the account, or on any day in between those two dates.

Some commenters requested that the Agencies prohibit institutions from varying the allocation method on an account from billing cycle to billing cycle or from account to account, while others requested that this be expressly permitted. The Agencies are not prohibiting institutions from moving from one permissible allocation method to another or from using one permissible method on some accounts and a different permissible method on other accounts. Because, under the final rule, the only alternative to allocating pro rata is allocating to the highest rate balance first, the Agencies do not believe there is a significant danger that institutions will be able to manipulate the payment allocation process to their advantage by switching from one method to another. Accordingly, the Agencies adopt comment 23-4, which acknowledges that § _.23 does not restrict an institution's ability to shift between permissible allocation methods or to use different permissible allocation methods for different accounts.

One industry commenter noted that the commentary to Regulation Z, 12 CFR 226.12(c) sets forth specific payment allocation requirements when a consumer asserts a claim or defense under that section that could be inconsistent with those in proposed § _.23. Because the payment allocation requirements in the commentary to § 226.12(c) are intended to prevent extinguishment of claims or defenses, the Agencies adopt comment 23-5, which clarifies that, when a consumer has made a claim or defense pursuant to 12 CFR 226.12(c), an institution must allocate payments consistent with 12 CFR 226.12 comment 226.12(c)-4, as adopted elsewhere in today's

Federal Register

An industry commenter requested clarification regarding allocation of payments when an account has multiple balances with the same annual percentage rate. As an initial matter, because § _.23 applies only “when different annual percentage rates apply to different balances on a consumer credit card account,” this section does not apply if all balances in the account have the same rate. If, however, an account has multiple balances with the same annual percentage rate and another balance with a different rate, the benefit to the consumer of allocating between the balances with the same rate in a particular manner will depend on the circumstances and the allocation method chosen by the institution. Accordingly, the Agencies have adopted comment 23-6, which clarifies that, in these circumstances, the institution may allocate between balances with the same rate in the manner that the institution determines is appropriate. This comment also clarifies that institutions may treat balances with the same annual percentage rate as separate balances or as a single balance.

The Agencies have also revised the proposed commentary and adopted new commentary in response to comments

regarding specific allocation methods.

Proposed comment 23(a)(1)-1 provided examples of allocating excess payments to the highest rate balance first. In response to requests from commenters, the Agencies have added examples illustrating application of this method to accounts with balances on which the annual percentage rate cannot be increased pursuant to § _.24 and accounts with multiple balances at the same rate and at least one

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