Reg CC Update: All Checks Are Local Effective 2/26/2010
Taking Cashier’s Checks for Deposit in Today’s Environment of Fraud
Revisions to Reg Z for Higher Education Opportunity Act Have Compliance Deadline of 2/14/2010
Provisions of Credit Card Act Effective 2/22/2010
HOEPA Fee Trigger Lowered For 2010
Reg CC Update: All Checks Are Local Effective 2/26/2010
On December 17, 2009, the Federal Reserve issued the expected announcement concerning the final consolidation of all paper check processing to the Federal Reserve Bank of Cleveland. Effective February 26, 2010, all paper checks will be processed through the Cleveland branch. Thus, as more fully discussed in the December 2009 Legal Update, all checks will be considered local for purposes of funds availability under Reg CC by February 26, 2010.
If you need to give new disclosures to your customers because your existing disclosures have become inaccurate due to these changes, you have up to 30 days FOLLOWING February 26, 2010. Because any change here will be to expedite availability, banks are not required to give any notice of change until 30 days after the change goes into effect.
Taking Cashier’s Checks for Deposit in Today’s Environment of Fraud
Byron’s Quick Hit: Fraud is rampant. Banks are often the necessary conduit for a fraud scheme to succeed. Many fraudsters are located overseas. They attempt to victimize whoever they can. However in order to get funds out of the country, the fraudsters must get a U.S. bank to wire funds out (or sometimes issue a cashier’s check). Once funds are wired out, they are almost always unrecoverable. As a result, check fraud has become one of the preferred means of fraud. This is especially true for cashier’s checks. Fraudsters have become adept at producing very authentic-looking cashier’s checks. This puts your bank accepting these checks for deposit (and your customer) at a severe risk of loss. Banks should carefully consider what they can do to minimize their own risk and that of their customers. If the proper steps are taken, banks can minimize the risk of this type of fraud succeeding. This is to the bank’s benefit and can also cement the relationship between the bank and a customer when a bank’s actions save its customer a lot of money and heartache.
It used to be that cashier’s checks were considered as good as cash. However, if you subscribe to the FDIC’s email updates (or just watch the news) you know that there are numerous fraudulent cashier’s check schemes that come to light on a daily or weekly basis. Where it may have been the case in years past that cashier’s checks were taken without question, banks must now be very careful when dealing with these instruments, for their own good and for the good of their customers.
A cashier’s check is a check that is issued by a bank, and sold to its customer or another purchaser. It is a direct obligation of the bank. For purposes of this article, I will discuss only “cashier’s checks.” However, this discussion will also encompass “official checks,” which are treated similarly. Historically, a cashier’s check has been considered a valid means to make a final payment, as a stop payment cannot be placed on a cashier’s check. However, in recent years, cashier’s checks have become an attractive vehicle for fraudsters. When deposited, the amount of the cashier’s check quickly becomes available for withdrawal by the consumer. But, if the check proves to be fraudulent, the depositor will owe the money back to the depositing bank. In addition to being an obvious problem for the depositor, it frequently presents a large risk to the depositing bank, both in terms of the collecting any advanced funds from the depositor and the continuing relationship with the customer.
Although the possibilities for fraud schemes are endless, common themes emerge. First, a customer is asked to deposit a cashier’s check and to turn around and take all or a large portion of the money back out. Second, these scams frequently involve requests to wire funds out of the depositor’s account, most often to an account overseas. Once the funds are wired overseas, it is for all practical purposes impossible to retrieve the funds. Third, the amounts involved in these schemes are more and more very large. Amounts in the hundreds of thousands of dollars have become common. These scams frequently fall within some broad categories:
Selling Goods – a customer sells goods in exchange for payment via cashier’s checks. This frequently appears in relation to online sales, including auction websites. However, this can also occur in larger dollar items, like automobile sales. Sometimes a scammer will attempt to get even more than the purchase price out of the seller by sending a cashier’s check in excess of the purchase price while asking the seller to refund the difference, often by wire out.
Unexpected Windfall – a customer receives a letter or email that he has the right to receive a substantial sum of money. He can get access to the money if he will pay a transfer/processing fee. A cashier’s check will be enclosed to cover the processing fee. The customer just has to wire the funds out, usually to a foreign country. This is commonly referred to as a “Nigerian scam,” as many of these scams originated in Nigeria early on, although these are common elsewhere around the world now.
Mystery Shopping – a customer receives a letter or email informing him he has been chosen to act as a mystery shopper. The letter includes a cashier’s check, which he is instructed to deposit into his account, and use a portion of the funds for shopping (which he gets to keep), while wiring a fee to a third party, often in a foreign country.
New Twists on Old Themes – Although many of these scams have been around for long enough for most to be generally aware of them, the fraudsters are constantly evolving. For example, most of us wouldn’t think twice if we were told we won the lottery in Nigeria (although I personally know someone I consider to be very smart who was defrauded by this type of scheme), but how about this twist on the “unexpected windfall” theme: a lawyer gets a phone call from a new out-of-town potential client, who has a cause of action against XYZ, Inc. The client is a fraudster. However, as a former attorney in private practice, I can tell you it is not at all unusual to deal with out-of-town clients that you may never meet. In this scheme, the lawyer may either write a demand letter to XYZ, Inc., or may even go so far as to file a lawsuit. Miraculously, XYZ sees the error of its ways and sends a large cashier’s check payable to the lawyer in settlement for the client’s claims. Lawyer deposits the cashier’s check in his firm’s trust account. After a couple days, the client asks him to wire the funds (less the lawyer’s sizeable fee) out. The cashier’s check from XYZ is fraudulent.
Legal Framework Surrounding Cashier’s Checks
The legal framework surrounding the rights and obligations of the customer, the depositing bank and the paying bank involve the intersection of Reg CC, the Uniform Commercial Code, and to a much lesser extent, common law claims that a customer may have against the depositing bank. Each of these is discussed below.
Reg CC and Funds Availability
Reg CC governs when banks must make deposited funds available to their customers. Generally, a bank must make funds deposited by cashier’s check available within one business day of deposit. See 12 C.F.R. § 229.10(c)(1)(v)—NOTE: This assumes (i) the cashier’s check is deposited into an account of the check’s payee; (ii) it is deposited in person; and (iii) if required by the bank, a special deposit slip for next day availability is used. Even if next day availability is not required, a bank must make a local cashier’s check (after February 26, 2010, all checks will be local) available within two business days after deposit. See 12 C.F.R. § 229.12(b). In either case, if a cashier’s check is fraudulent, it is unlikely that it will be returned to the depositing bank before funds are made available to the customer, unless the bank is able to place a hold on the deposited funds.
Reg CC contains several exceptions that may allow a bank to delay funds availability by placing a hold on the deposited funds. Banks should realize that in any instance in which it suspects that a customer is being defrauded, when it can, placing a hold on the funds may be the best thing that ever happened to your customer, as this may be what saves your customer a lot of money. Types of holds that may be available include new account holds, large deposit holds, and reasonable cause to doubt collectability.
1. New Account Hold (12 C.F.R. § 229.13(a))—For Reg CC purposes, an account is considered a new account for 30 calendar days after the account is established (unless all account holders are existing account holders). When next-day availability is required under 12 C.F.R. § 229.10(c)(1)(v), a bank may place a hold on a new account for the amount of a cashier’s check in excess of $5,000. In this instance, the remaining amount of the cashier’s check must be made available by the ninth business day following the day of deposit. Thus, if a new account was opened with a $100,000 cashier’s check, the bank would have to make $5,000 available the next business day, but could place a hold on the remainder of the deposit for up to 2 weeks. If Section 220.10(c)(1)(v) did not apply because, for example, the cashier’s check was not payable solely to the payee, or a required next day deposit ticket was not used, the bank WOULD NOT be required to give availability for the funds within 2 business days, as Section 229.12 does not apply to new accounts. Thus, in the example above, if Section 229.10(c)(1)(v) does not apply, the bank could place a hold on the full $100,000 deposit so long as the account is a new account (up to 30 days).
2. Large Deposit Hold (12 C.F.R. § 229.13(b))—A bank may place a hold on all funds deposited by a customer in excess of $5,000 in any one day. For purposes of this hold, a bank may aggregate multiple deposits made by a customer, even where they are made into separate accounts, and even if the customer is not the sole holder of the accounts and not all the holders of the accounts are the same. A bank may place such a hold for “a reasonable period of time,” which will generally be up to seven business days. A longer hold may be reasonable, but the bank has the burden of so establishing. See 12 C.F.R. § 229.13(h).
3. Reasonable Cause to Doubt Collectibility (12 C.F.R. §229.13(e))—A bank may place a hold as to any check if it has “reasonable cause to believe that the check is uncollectible from the paying bank.” The regulation states that there is reasonable cause if facts exist “that would cause a well-grounded belief in the mind of a reasonable person.” Importantly, the bank may not base its reasonable cause determination upon the fact that a check is of a particular class or has been deposited by a particular class of person. In this context, a bank MAY NOT place a hold on all cashier’s checks. Again, a bank may place such a hold for “a reasonable period of time,” which will generally be up to seven business days. A longer hold may be reasonable, but the bank has the burden of so establishing. Further, a bank must spell out the facts that are a basis for the reasonable cause for collectability in the required notice to customer.
4. Repeated Overdrafts (12 C.F.R. § 229.13(d))—When a customer has an account or combination of accounts at a bank that has been repeatedly overdrawn, a bank may place a hold on an incoming deposit. An account can be considered “repeatedly overdrawn” if (i) the customer’s account was negative (or would have become negative had the bank paid all checks or other charges) on six or more banking days within the preceding six months; or (ii) the customer’s account was negative in the amount of at least $5,000 (or would have become so if all presented items been paid) on two or more banking days within the preceding six months. The same “reasonable period of time” provisions of Section 229.13(h) apply.
The Uniform Commercial Code
The great majority of the rights and liabilities of the depositor, the depositing bank, and the paying bank are established under Articles 3 and 4 of the Uniform Commercial Code (UCC).
Rights as Between Payor Bank and Depositing Bank under the UCC. An oft-stated rule in interpreting the UCC is that the UCC attempts to put the risk of loss upon the party that is in the best position to stop it. Applying this rule in the context of a fraudulent cashier’s check, often there is nothing whatsoever that the payor bank could do to preemptively stop such a fraud. Thus, the UCC puts the payor bank in the most preferred position. Generally, the Payor Bank will not suffer a loss in the context of a bogus cashier’s check issued in its name or with its routing number, so long as the payor bank acts expeditiously in giving notice to the depository bank that it intends to dishonor the cashier’s check. In this regard, UCC § 3-418 provides as follows:
(a) Except as provided in subsection (c) of this section, if the drawee of a draft pays or accepts the draft and the drawee acted on the mistaken belief that (i) payment of the draft had not been stopped pursuant to Section 12A-4-403 of this title or (ii) the signature of the drawer of the draft was authorized, the drawee may recover the amount of the draft from the person to whom or for whose benefit payment was made or, in the case of acceptance, may revoke the acceptance. Rights of the drawee under this subsection are not affected by failure of the drawee to exercise ordinary care in paying or accepting the draft.
(b) Except as provided in subsection (c) of this section, if an instrument has been paid or accepted by mistake and the case is not covered by subsection (a) of this section, the person paying or accepting may, to the extent permitted by the law governing mistake and restitution, (i) recover the payment from the person to whom or for whose benefit payment was made or (ii) in the case of acceptance, may revoke the acceptance.
Although return of an item by the payor bank is normally accomplished in a matter of a few days, it will usually be after the funds have been made available to the depositor. This is why fraudsters often pressure their victims to wire the funds out immediately. If the depositing bank gets notice of the dishonor before the funds are transferred out, the fraudsters are not going to get anything.
Rights as Between the Depositing Bank and Its Customer under the UCC. Once a fraudulent cashier’s check is charged back to the depositing bank by the paying bank, the UCC gives the depository bank the right to charge back to its customer the amount of the returned items. UCC § 4-214(a) states:
If a collecting bank has made provisional settlement with its customer for an item and fails by reason of dishonor, suspension of payments by a bank, or otherwise to receive settlement for the item which is or becomes final, the bank may revoke the settlement given by it, charge back the amount of any credit given for the item to its customer’s account, or obtain refund from its customer…
Also, the UCC provides that the bank’s right to charge back an item to its customers is not affected by an argument that the customer “detrimentally relied” upon the bank’s having given credit to his account. See UCC § 4-214(d)(1). In addition, a bank may provide in its deposit agreement for the right to charge back any item, regardless of when the item is returned to it.
However, just because you may have the right to charge back a depositor’s account for a fraudulent cashier’s check does not mean the depositing bank is “out of the woods.” Obviously, if the money is gone from the depositor’s account, the bank may be at a substantial risk of loss because the obligation now owed by the bank’s customer may not be collectible. Further, as discussed below, attorneys for deposit holders have recently made some headway in holding the depositing bank liable for the loss on legal theories resting outside of the UCC.
Depositor’s Recovery from Depositing Bank Under Common Law Theories
In the context of a fraudulent cashier’s check, as between the depository bank and its customer, the UCC appears to stand firmly in the corner of the depositing bank. This is consistent with the UCC’s stated goal of placing the risk of loss with the party that is best suited to stop the fraud. As between the depositing bank and the depositor, the depositor will almost always be the only party that has any contact with the fraudster. So, as banks are admonished to “know thy customer”, the public must be equally admonished to know the party with whom it is doing business. That said, plaintiffs lawyers are adept at advancing legal theories in the face of hostile statutes, to the potential benefit of their clients.
Here, depositors who have been defrauded, have attempted to expand the liability of the depositing bank based upon common law theories, such as negligent misrepresentation by the bank. These attempts have generally (but not completely) failed. At least one state supreme court (Montana) has held that a depositor may recover from a depositing bank for loss based upon the bank’s negligent misrepresentation. In Valley Bank v. Hughes, 147 P.3d 185 (Mont. 2006), the Montana Supreme Court AGREED with the depositing bank that a customer’s claim that the bank breached its duty of “ordinary care” in regard to its processing of a fraudulent official check (an official check is similar to a cashier’s check, except that it is drawn by one bank on another bank instead of itself). This included the bank’s actions in terms of wiring the funds out of the customer’s account. However, the Montana Supreme Court also held that a bank customer’s common law claims arising from the bank’s alleged misrepresentations about the check settlement process were not preempted by the UCC. Although the court did not decide on the merits of the case, it did allow the plaintiff to proceed on the legal theory of negligent misrepresentation by the bank, allowing the case to go to trial. Here, the plaintiff alleged that upon inquiring about the validity of multiple ultimately bogus official checks, the teller stated, “official checks, same as cash. You can do whatever you want.” The plaintiff further stated that “everybody at the bank assured him that the checks would be good.”
While the Hughes decision is not typical of most of the cases out there (further, I believe it unlikely an Oklahoma court would come to the same conclusion), it does at least give plaintiffs “a leg to stand on” when a customer suffers a financial loss because of a fraudulent check scheme. As a result, as discussed below, banks should exercise diligence when describing what a cashier’s check is (and is not).
Recommendations for Minimizing Risk to Your Bank
Don’t Take the Deposit (or send it for collection). One essential point to remember is that other than an on-us check, a bank is not required to take a particular deposit from its customer. As discussed below related to the need for training of staff, if a bank has any suspicion that a deposit may involve fraudulent cashier’s checks, the bank may refuse to accept the checks for deposit. Another option is for the bank to take the checks and to send them for collection to the payor bank. In this context, if the payor bank pays on the checks, they have finally settled on the check and there will be no risk that the funds will later be recalled.
Develop Procedures for Processing and Cashing Cashier’s Checks. Depository banks should have appropriate procedures for processing and cashing cashier’s checks that include identification of potentially suspicious items and criteria for placing holds on deposits. Developing criteria for placing holds is important, as a bank is prohibited by Reg CC from simply implementing a blanket policy of placing holds on all cashier’s checks (to the extent they are greater than $5,000).
Training for Tellers and Managers. At a minimum, banks should act to make sure that tellers and managers are informed about the risks to the bank and its customers associated with cashier’s checks. Tellers should be trained to examine large-dollar checks more closely to identify suspicious cashier’s checks. In this situation, it is imperitive for the teller to engage the depositor in a discussion. A term that I have heard used in this respect is “politely nosey.” Although it may seem nosey, the teller should know that he or she is not only acting in the interests of the bank, but also the customer by asking some questions. Some common red flags that will appear with just a question or two are a depositor’s desire to wire all or a large portion of the funds back out as quickly as possible (or to get a cashier’s check from your bank). In addition, just talking this through with a customer will often give someone who has never heard of these types of scams a clue and may stop the process dead in its tracks. Any manager that can possibly have any input on a decision whether to take a cashier’s check for deposit must be trained as well. We have had real stories come to us at the OBA of instances where a teller did not want to take a check for deposit, but was overridden by a manager on the basis that it was a “good customer,” to the detriment of the bank.
Take Steps to Verify the Validity of a Cashier’s Check. A bank can contact the issuing bank to verify that a cashier’s check is valid. Some banks are more cooperative than others, and there is no guarantee that you will find the right person. However, in the context of cashier’s checks, an issuing bank may be more cooperative, as they normally will have all the information they need to advise another bank as to whether a cashier’s check is valid. Two important points about contacting the issuing bank: (i) do not assume that the name of the bank on the cashier’s check matches the routing number that appears on the check; and (ii) never use the contact information that appears on a check to verify the validity of the check.
Call Elaine Dodd at the OBA. I have consulted Elaine extensively in relation to this important area of risk for our member banks. Elaine is an excellent resource and often will be able to get information that may identify a cashier’s check as fraudulent, where the information may not be accessible to others. Elaine authorized me to say this: Please don’t hesitate to call her if you have an issue arise.
Use Holds. To the extent that any red flag or suspicion appears in relation to a cashier’s check, or as may otherwise be allowed for new accounts, or otherwise, a hold is a powerful tool in the fight to stop fraudulent checks. Often, fraudulent cashier’s checks are caught by the payor bank very quickly. Bogus cashier’s checks are easier for the payor bank to catch, because they do not have to wait on their customer to verify the validity of a check. They will normally be able to find that a cashier’s check was either not issued by them or has been altered very quickly.
Review Deposit Agreements. Keeping in mind that it preventing a fraud is better than cleaning up one, a bank should review their deposit agreements to ensure that they address returned items and mitigate the risks related to fraudulent checks.
Communicate with the Customer. Bank employees should be prepared to communicate with the customer about the status of deposits. Particularly, most customers are not aware the funds availability is not the same thing as an item clearing. Furthermore, customers may be under the common misimpression that a bank receives notice that an item has “cleared.” In the context of cashier’s checks, where the tradition has been to view these items as the “same as cash”, this need is especially important.
In light of plaintiffs’ lawyers’ attempts to use theories such as “negligent misrepresentation” against a depositing bank (and especially in light of court decisions like Valley Bank v. Hughes discussed above), banks should consider providing any customer that asks “whether a check is good” or “whether a check has cleared” a written disclaimer explaining the nature of the check clearing system, including the facts that (i) just because funds are made available does not mean that an item has “cleared”; (ii) any item that is returned may be charged back against the depositor’s account; and (iii) it is the customer’s responsibility to know who it is doing business with. If such an inquirey is made by telephone, the bank should mail such a notice out to the customer. In addition to being a good hedge against a customer later stating that your teller told him these were good funds, such a notice may provide an opportunity to discuss a fraudulent transaction.
In addition, banks should consider more wide-spread attempts to educate their customers about the fraud schemes that are so prevalent. Again, do not hesitate to contact to Elaine Dodd if you are interested in innovative ways to enlighten your customers in this area.
Revisions to Reg Z for Higher Education Opportunity Act Have Compliance Deadline of 2/14/2010
The Higher Education Opportunity Act (the “Act”) amends the Truth in Lending Act as it applies to lenders making private education loans. On August 14, 2009, the Federal Reserve issued a final rule amending Reg Z as provided under the Act, adding 12 C.F.R. §§ 226.46 – 226.48. Compliance with the new provisions of Reg Z is mandatory effective February 14, 2010.
What Loans Are Affected?
The revisions to Reg Z apply to “private education loans”, which are loans made expressly for postsecondary educational expenses. Expressly EXCLUDED from this definition are (i) open-end credit, (ii) loans secured by real estate, and (iii) loans that are guaranteed under title IV of the Higher Education Act of 1965. See 12 C.F.R. § 226.46(b)(5).
The revised Reg Z requires three sets of “clear and conspicuous” disclosures to consumer-borrowers for private education loans. Importantly, Appendix H provides model forms for such disclosures (Forms H-21, H-22, and H-23). I would highly advise using such model forms as the description of the disclosures is quite convoluted. The required disclosures are as follows:
1. On or With the Application (or solicitations that require no application) (12 C.F.R. § 226.47(a))—the disclosures that must accompany or be shown on an application include (a) Interest Rate Information, including the rate(s) applicable to the loan, whether the interest rate is fixed or variable, if the interest rate may increase after consummation, including information on limits to rate adjustments or lack thereof, and whether the interest rate will typically be higher if the loan is not co-signed or guaranteed; (b) Loan Fees and Late Payment Costs; (c) Repayment Terms; (d) Estimates of the Total Loan Costs; (e) any Age or School Enrollment Eligibility Requirements; (f) a description of Alternatives to Private Education Loans; (g) a statement regarding rights of the consumer (loan terms will not change if approval is given, with certain exceptions); and (h) a statement that the loan may not be consummated until the consumer completes a Self-Certification Form.
2. Approval Disclosures (12 C.F.R. § 226.47(b))—On or with any notice of approval provided to the consumer must disclose all of the information required under 12 C.F.R. § 226.18, PLUS (a) interest rate information; (b) fees and default or late payment costs; (c) repayment terms; (d) alternatives to private education; and (e) a statement regarding the rights of the consumer.
3. Final Disclosures (12 C.F.R. § 226.47(c))—After the borrower has accepted the loan, the lender must disclose all of the information required under 12 C.F.R. § 226.18, PLUS (a) interest rate information; (b) fees and default or late payment costs; (c) repayment terms; and (d) a statement regarding the consumer’s right to cancel the loan (See discussion of Right of Cancellation below).
Prohibition of Co-Branding (12 C.F.R. § 226.48(a) and (b))
Unless a lender has reached a written agreement with a educational institution to do so, Reg Z explicitly prohibits a lender from using the name, emblem, mascot or logo of a covered educational institution in any marketing of its loans, in a way that would imply that the educational institution endorses the lender’s loans.
Consumer’s Right to Accept (12 C.F.R. § 226.48(c))
A consumer has the right to accept a loan that is approved by the lender at any time within 30 days following his receipt of the required approval notice. With certain limited exceptions, the terms of the approved loan may not change during that 30 day period. Exceptions include where an interest rate is tied to an index rate or where the interest rate is changed to the benefit of the consumer.
Consumer’s Right to Cancel (12 C.F.R. § 226.48(d))—Reg Z gives the consumer the right to cancel the loan within 3 business days following delivery of the final disclosures required under 12 C.F.R. § 226.47(c). The lender must wait to fund the loan until the 3 day waiting period has expired.
Self-Certification Form (12 C.F.R. § 226.48(e))—For loans to be used while the student/borrower is attending an institution of higher education, the lender must obtain from either the borrower or the institution a self-certification form. For a copy of the form, go to http://www.nasfaa.org/PDFs/2009/SelfCertificationDraft.pdf.
Provisions of Credit Card Act Effective 2/22/2010
You may recall that we discussed the Credit Card Act of 2009 in the August 2009 Legal Update. This Act was signed into law by President Obama in May of 2009. Two of the important provisions of the law went into effect in August, 2009: (i) a requirement that card holders be given 45 days notice prior to any changes to the card holder agreement, including APR changes, fee changes or other significant changes and effectively giving cardholders the right to reject such changes by canceling their account, while prohibiting the card issuer from requiring that the card holder repay the outstanding balance upon the card holder’s exercise of the right to cancel; and (ii) a requirement that issuers of open end consumer credit (not just credit card issuers) get statements to their borrowers at least 21 days prior to the due date before a late fee can be charged.
Most of the remaining provisions of the Act are effective February 22, 2010. These provisions are summarized below:
Limitations on Fees and Interest Rates
1. The Act prohibits over-the-limit fees unless the customer explicitly authorizes the particular transactions causing balance to become over-the-limit.
2. Where cardholders maintain balances subject to differing interest rates, any payments over the minimum amount must be first applied to the balance with the highest APR.
3. Increases in interest rates will only apply to new balances, with limited exceptions. Exceptions include: if the rate is disclosed at account opening, promotional rates, or when cardholder becomes more than 60 days late on a payment.
4. Interest rate increases cannot occur during the first 12 months of opening a credit card account (subject to exception for indexed variable rate accounts) and promotional rates must last for at least 6 months.
5. Double cycle billing is prohibited (occurs when finance charges are calculated considering interest owed on previously paid balances).
6. Prohibits use of the term “fixed rate” unless interest rate will not vary for any reason for the specified period.
7. Prohibits early morning deadlines for credit card payments.
8. Requires payments received at local branches to be credited on the same day.
9. Prohibits charging fee to pay credit card by mail, telephone or electronic transfer, unless relates to live person assisting to make expedited payment.
10. Requires penalty fees to be reasonable. (Effective August 22, 2010).
11. If grace periods are offered, they must extend to partial payments.
12. Payment due dates must be the same day each month.
13. Billing statements must state the number of months to repay the outstanding balance, the total credit costs if only monthly minimum payments are made and the amount that is necessary to repay the balance in 36 months.
Safeguards for Young Borrowers
1. In order to issue credit card to borrowers under 21, requires a co-signer over 21 or proof that borrower has the means to repay the credit.
2. Consumers under 21 will have to opt in for pre-screened credit offers.
Gift Card Restrictions
1. Prepaid cards (e.g., gift cards) must be usable for at least five years. (Effective August 22, 2010)
2. Practice of declining values/hidden fees for gift cards not used within certain period of time prohibited. (Effective August 22, 2010)
Increased Government Oversight and Additional Requirements
1. The Act requires credit card issuers to consider consumer’s ability to pay when issuing credit cards or increasing credit limits.
2. The Act requires credit card issuers who increase a cardholder’s interest rate to periodically review the account and decrease the rate when appropriate. (Effective August 22, 2010)
3. Requires credit card issuers to post credit card agreements on the Internet and provide agreements to the Federal Reserve Board to post on its website.
HOEPA Fee Trigger Lowered For 2010
A refinance transaction will be subject to HOEPA if either (i) the annual rate of interest exceeds the yield on U.S. Treasury securities having a comparable maturity to the term of the loan by 8% for a first mortgage or 10% for subordinate liens, OR (ii) for which total points and fees on the loan will exceed the greater of 8% of the total loan amount or a maximum amount that causes HOEPA coverage. See generally, 12 C.F.R. § 226.32.
The HOEPA trigger is indexed for inflation. In 2009, the HOEPA trigger was $583. On August 10, 2009, the Federal Reserve announced that the HOEPA trigger has been LOWERED to $579 for 2010. Banks should note that the HOEPA trigger adjustment does not affect the new rules for “higher-priced mortgage loans.” HPML coverage is calculated using a different trigger. For more information on HPMLs, consult the September 2009 and October 2009 Legal Update.