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Regulation Z changes effective Aug. 20, 2009

Regulation Z – Open-End Consumer Credit Changes


The Credit Card Accountability Responsibility and Disclosure Act of 2009 amends the Truth in Lending Act (TILA) and several other statutes and gives responsibility to the Board of Governors of the Federal Reserve System (FRB) to promulgate regulations. The Fed initially did so by adopting an interim rule on July 15. (click here to read the interim rule -http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090715a1.pdf - PDF (PDF Help)).

This rule implements provisions of the new Act that take effect August 20, 2009. Separate regulations to implement the provisions that take effect on February 22, 2010, and August 22, 2010 will be issued at a later date.

A summary of the Act's key provisions with immediate impact on credit card issuers:


A. Interest Rate Reduction. New requirements are established for changes in interest rates on credit cards under open-end consumer credit plans.

  1. Any interest rate increases that have occurred – or will occur – since January 1, 2009, will be subject to a mandatory "look back" review at least once every six months, beginning 15 months after enactment.
  2. Creditors are required to assess the same risk factors used to justify an interest rate increase – using a "reasonable methodology" – to determine whether a corresponding decrease in the interest rate is justified.


Note: The FDIC expects institutions it supervises to demonstrate regular meaningful progress in preparing for full compliance with these new restrictions and requirements.


B. Changes Effective on August 20, 2009


  1. Advance Notice of Rate Increase and Other Changes Required: Section 101(a) of the Credit CARD Act amends Section 127 of TILA to add a subsection that will require a creditor to provide at least 45 days advance written notice of:


a. an increase in any APR other than:

b. a properly disclosed introductory rate;

c. in the case of a variable rate, a change in the index; or

d. the cardholder's failure to comply with the terms of a workout agreement; or

e. other significant changes in the terms of the agreement (such as increases in fees or finance charges).


2. Notice of Right to Cancel: The 45-day advance notice must be clear and conspicuous and contain a statement of the consumer's right to cancel the account before the effective date of the change. (Note: The Federal Reserve is drafting rules to implement this section).


a. Creditors should be aware that exercising the right to close or cancel an account by a consumer cannot be deemed to be an event of default and cannot trigger the imposition of any other penalty or fee.

b. It also cannot trigger an immediate obligation to pay the outstanding balance in full or through a method that is less beneficial than either:


i. a five-year amortization period, beginning on the effective date of the increase; or

ii. a required minimum periodic payment that includes a percentage of the outstanding balance equal to no more than twice the percentage required on the date on which the creditor was notified of the rejection.


3. Time to Pay: TILA is amended to prohibit a creditor from treating a payment on an open-end consumer credit plan as late for any purpose unless the creditor has adopted reasonable procedures designed to ensure periodic statements are mailed or delivered no later than 21 days before the payment due date.


4. Special rules for accounts with grace periods. If a creditor offers a grace period (a period within which consumers may repay an outstanding balance without incurring any additional finance charge), any additional finance charge(s) may not be imposed unless the creditor mails or delivers a statement reflecting the charge(s) at least 21 days before the payment is due to avoid that finance charge.

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