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Federal Register / Vol. 74, No. 18 / Thursday, January 29, 2009 / Rules and Regulations

C. Adequate spacing between paragraphs
when several pieces of information were
included in the same row of the table, as
appropriate. For example, in the samples in
the row of the tables with the heading ‘‘APR
for Balance Transfers,’’ the forms disclose
two components: the applicable balance
transfer rate and a cross reference to the
balance transfer fee. The samples show these
two components on separate lines with
adequate space between each component. On
the other hand, in the samples, in the
disclosure of the late-payment fee, the forms
disclose two components: the late-payment
fee, and the cross reference to the penalty
rate. Because the disclosure of both these
components is short, these components are
disclosed on the same line in the tables.
D. Standard spacing between words and
characters. In other words, the text was not
compressed to appear smaller than 10-point
type.
E. Sufficient white space around the text of
the information in each row, by providing
sufficient margins above, below and to the
sides of the text.
F. Sufficient contrast between the text and
the background. Generally, black text was
used on white paper.
vi. While the Board is not requiring issuers
to use the above formatting techniques in
presenting information in the table (except
for the 10-point and 16-point font
requirement), the Board encourages issuers to
consider these techniques when deciding
how to disclose information in the table, to
ensure that the information is presented in a
readable format.
vii. Creditors are allowed to use color,
shading and similar graphic techniques with
respect to the table, so long as the table
remains substantially similar to the model
and sample forms in Appendix G.
6. Model G–11. Model G–11 contains
clauses that illustrate the general disclosures
required under § 226.5a(e) in applications
and solicitations made available to the
general public.
7. Models G–13(A) and G–13(B). These
model forms illustrate the disclosures
required under § 226.9(f) when the card
issuer changes the entity providing insurance
on a credit card account. Model G–13(A)
contains the items set forth in § 226.9(f)(3) as
examples of significant terms of coverage that
may be affected by the change in insurance
provider. The card issuer may either list all
of these potential changes in coverage and
place a check mark by the applicable
changes, or list only the actual changes in
coverage. Under either approach, the card
issuer must either explain the changes or
refer to an accompanying copy of the policy
or group certificate for details of the new
terms of coverage. Model G–13(A) also
illustrates the permissible combination of the
two notices required by § 226.9(f)—the notice
required for a planned change in provider
and the notice required once a change has
occurred. This form may be modified for use
in providing only the disclosures required
before the change if the card issuer chooses
to send two separate notices. Thus, for
example, the references to the attached
policy or certificate would not be required in
a separate notice prior to a change in the

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insurance provider since the policy or
certificate need not be provided at that time.
Model G–13(B) illustrates the disclosures
required under § 226.9(f)(2) when the
insurance provider is changed.
8. Samples G–18(A)–(E). For home-equity
plans subject to the requirements of § 226.5b,
if a creditor chooses to comply with the
requirements in § 226.7(b), the creditor may
use Samples G–18(A) through G–18(E) to
comply with these requirements, as
applicable.
9. Samples G–18(D) and (E). Samples G–
18(D) and G–18(E) illustrate how creditors
may comply with proximity requirements for
payment information on periodic statements.
Creditors that offer card accounts with a
charge card feature and a revolving feature
may change the disclosure to make clear to
which feature the disclosures apply.
10. Forms G–18(F)–(G). Forms G–18(F) and
G–18(G) are intended as a compliance aid to
illustrate front sides of a periodic statement,
and how a periodic statement for open-end
(not home-secured) plans might be designed
to comply with the requirements of § 226.7.
The samples contain information that is not
required by Regulation Z. The samples also
present information in additional formats
that are not required by Regulation Z.
i. Creditors are not required to use a certain
paper size in disclosing the § 226.7
disclosures. However, Forms G–18(F) and G–
18(G) are designed to be printed on an 8 x
14 inch sheet of paper.
ii. The due date for a payment, if a latepayment fee or penalty rate may be imposed,
must appear on the front of the first page of
the statement. See Samples G–18(D) and G–
18(E) that illustrate how a creditor may
comply with proximity requirements for
other disclosures. The payment information
disclosures appear in the upper right-hand
corner on Samples G–18(F) and G–18(G), but
may be located elsewhere, as long as they
appear on the front of the first page of the
periodic statement. The summary of account
activity presented on Samples G–18(F) and
G–18(G) is not itself a required disclosure,
although the previous balance and the new
balance, presented in the summary, must be
disclosed in a clear and conspicuous manner
on periodic statements.
iii. Additional information not required by
Regulation Z may be presented on the
statement. The information need not be
located in any particular place or be
segregated from disclosures required by
Regulation Z, although the effect of proximity
requirements for required disclosures, such
as the due date, may cause the additional
information to be segregated from those
disclosures required to be disclosed in close
proximity to one another. Any additional
information must be presented consistent
with the creditor’s obligation to provide
required disclosures in a clear and
conspicuous manner.
iv. Model Forms G–18(F) and G–18(G)
demonstrate two examples of ways in which
transactions could be presented on the
periodic statement. Model Form G–18(G)
presents transactions grouped by type and
Model Form G–18(F) presents transactions in
a list in chronological order. Neither of these
approaches to presenting transactions is

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required; a creditor may present transactions
differently, such as in a list grouped by
authorized user or other means.
11. Model Form G–19. See § 226.9(b)(3)
regarding the headings required to be
disclosed when describing in the tabular
disclosure a grace period (or lack of a grace
period) offered on check transactions that
access a credit card account.

*

*

*

*

*

By order of the Board of Governors of the
Federal Reserve System, December 18, 2008.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. E8–31185 Filed 1–28–09; 8:45 am]
BILLING CODE 6210–01–P

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.

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Federal Register / Vol. 74, No. 18 / Thursday, January 29, 2009 / Rules and Regulations
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.

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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

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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 closedend (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
32948–32952.1
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.
1 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).

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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).

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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.2 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.
Finally, the Agencies gathered
information from a number of
Congressional hearings on consumer
protection issues regarding credit
2 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., FeeHarvesters: 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).

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cards.3 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.4
D. The Agencies’ May 2008 Proposal
In May 2008, the Agencies proposed
rules under the FTC Act addressing
unfair or deceptive acts or practices in
connection with consumer credit card
accounts and overdraft services for
deposit accounts. See 73 FR 28904 (May
2008 Proposal). These proposals were
accompanied by complementary
proposals by the Board under
Regulation Z with respect to consumer
credit card accounts and Regulation DD
with respect to deposit accounts. See 73
FR 28866 (May 19, 2008) (May 2008
Regulation Z Proposal); 73 FR 28739
(May 19, 2008) (May 2008 Regulation
DD Proposal).
3 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).
4 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 The Credit Card Accountability,
Responsibility and Disclosure Act, S. 3252, 110th
Cong. (July 10, 2008); The Credit Card Reform Act
of 2008, S. 2753, 110th Cong. (Mar. 12, 2008); The
Stop Unfair Practices in Credit Cards Act of 2007,
H.R. 5280, 110th Cong. (Feb. 7, 2008); The Stop
Unfair Practices in Credit Cards Act of 2007, S.
1395, 110th Cong. (May 15, 2007); The Universal
Default Prohibition Act of 2007, H.R. 2146, 110th
Cong. (May 3, 2007); The Credit Card
Accountability Responsibility and Disclosure Act of
2007, H.R. 1461, 110th Cong. (Mar. 9, 2007).

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In order to best ensure that all entities
that offer consumer credit card accounts
and overdraft services on deposit
accounts are treated in a like manner,
the Board, OTS, and NCUA joined
together to issue the May 2008 Proposal.
This interagency approach is consistent
with section 303 of the Riegle
Community Development and
Regulatory Improvement Act of 1994.
See 12 U.S.C. 4803. Section 303(a)(3), 12
U.S.C. 4803(a)(3), directs the federal
banking agencies to work jointly to
make uniform all regulations and
guidelines implementing common
statutory or supervisory policies. Two
federal banking agencies—the Board
and OTS—are primarily implementing
the same statutory provision, section
18(f) of the FTC Act, as is the NCUA
(although HOLA serves as a secondary
basis for OTS’s rule). Accordingly, the
Agencies endeavored to propose rules
that are as uniform as possible. Prior to
issuing the proposed rules, the Agencies
also consulted with the two other
federal banking agencies, the Office of
the Comptroller of the Currency (OCC)
and the Federal Deposit Insurance
Corporation (FDIC), as well as with the
FTC.
In an effort to achieve a level playing
field, the May 2008 Proposal focused on
unfair and deceptive acts or practices
involving credit cards and overdraft
services, which are generally provided
only by depository institutions such as
banks, savings associations, and credit
unions. The Agencies recognized that
state-chartered credit unions and any
entities providing consumer credit card
accounts independent of a depository
institution fall within the FTC’s
jurisdiction and therefore would not be
subject to the proposed rules. The
Agencies noted, however, that FTCregulated entities appear to represent a
small percentage of the market for
consumer credit card accounts and
overdraft services.5 For OTS, addressing
certain deceptive credit card practices
in the May 2008 Proposal, rather than
through an interpretation or expansion
5 Some commenters on the May 2008 Proposal
expressed concern that the proposed rules would
place institutions subject to the final rule at a
competitive disadvantage in relation to FTCregulated entities. As discussed in detail below, the
Board has published elsewhere in today’s Federal
Register a proposal regarding overdraft services
using its authority under the Electronic Fund
Transfer Act (EFTA) and Regulation E. These
proposed rules would apply to state-chartered
credit unions providing overdraft services.
Furthermore, because FTC-regulated entities
represent a small percentage of the market for
consumer credit card accounts, the Agencies
believe that any competitive disadvantage is
unlikely to be significant. In addition, although the
final rule does not apply to FTC-regulated entities,
those entities are still subject to the FTC Act.

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of its Advertising Rule, also fosters
consistency because the other Agencies
do not have comparable advertising
regulations.

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Credit Practices Rule
The Agencies proposed to make nonsubstantive, organizational changes to
the Credit Practices Rule. Specifically,
in order to avoid repetition, the
Agencies proposed to move the
statement of authority, purpose, and
scope out of the Credit Practices Rule
and revise it to apply not only to the
Credit Practices Rule but also to the
proposed rules regarding consumer
credit card accounts and overdraft
services. OTS and NCUA proposed
additional, non-substantive changes to
the organization of their versions of the
Credit Practices Rule. OTS also solicited
comment on whether to retain the state
exemption provision in its Credit
Practices Rule.
Consumer Credit Card Accounts
The Agencies proposed seven
provisions under the FTC Act regarding
consumer credit card accounts. These
provisions were intended to ensure that
consumers have the ability to make
informed decisions about the use of
credit card accounts without being
subjected to unfair or deceptive acts or
practices.
First, institutions would have been
prohibited from treating a payment as
late for any purpose unless consumers
had been provided a reasonable amount
of time to make that payment. The
proposed rule would have created a safe
harbor for institutions that adopt
reasonable procedures designed to
ensure that periodic statements (which
provide payment information) are
mailed or delivered at least 21 days
before the payment due date.
Second, when different annual
percentage rates apply to different
balances, institutions would have been
required to allocate amounts paid in
excess of the minimum payment using
one of three specified methods or a
method that is no less beneficial to
consumers. Furthermore, when an
account has a discounted promotional
rate balance or a balance on which
interest is deferred, institutions would
have been required to allocate amounts
in excess of the minimum payment first
to balances on which the rate is not
discounted or interest is not deferred
(except, in the case of a deferred interest
plan, for the last two billing cycles
during which interest is deferred).
Institutions would also have been
prohibited from denying consumers a
grace period on purchases (if one is
offered) solely because they have not

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paid off a balance at a promotional rate
or a balance on which interest is
deferred.
Third, institutions would have been
prohibited from increasing the annual
percentage rate on an outstanding
balance. This prohibition would not
have applied, however, where a variable
rate increases due to the operation of an
index, where a promotional rate expired
or was lost (provided the rate was not
increased to a penalty rate), or where
the minimum payment was not received
within 30 days after the due date.
Fourth, institutions would have been
prohibited from assessing a fee if a
consumer exceeds the credit limit on an
account solely due to a hold placed on
the available credit. If, however, the
actual amount of the transaction would
have exceeded the credit limit, then a
fee could have been assessed.
Fifth, institutions would have been
prohibited from imposing finance
charges based on balances for days in
billing cycles that precede the most
recent billing cycle. The proposed rule
would have prohibited institutions from
reaching back to earlier billing cycles
when calculating the amount of interest
charged in the current cycle, a practice
that is sometimes referred to as two- or
double-cycle billing.
Sixth, institutions would have been
prohibited from financing security
deposits or fees for the issuance or
availability of credit (such as accountopening fees or membership fees) if
those deposits or fees utilized the
majority of the available credit on the
account. The proposal would also have
required security deposits and fees
exceeding 25 percent of the credit limit
to be spread over the first year, rather
than charged as a lump sum during the
first billing cycle.
Seventh, institutions making firm
offers of credit advertising multiple
annual percentage rates or credit limits
would have been required to disclose in
the solicitation the factors that
determine whether a consumer will
qualify for the lowest annual percentage
rate and highest credit limit advertised.
Overdraft Services
The Agencies also proposed two
provisions prohibiting unfair acts or
practices related to overdraft services in
connection with consumer deposit
accounts. The proposed provisions were
intended to ensure that consumers
understand the terms of overdraft
services and have the choice to avoid
the associated costs where such services
do not meet their needs.
The first provision provided that it
would be an unfair act or practice for an
institution to assess a fee or charge on

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a consumer’s account for paying an
overdraft unless the institution provided
the consumer with the right to opt out
of the institution’s payment of
overdrafts and a reasonable opportunity
to exercise the opt out, and the
consumer did not opt out. The proposed
opt-out right would have applied to all
transactions that overdraw an account
regardless of whether the transaction is,
for example, a check, an ACH
transaction, an ATM withdrawal, a
recurring payment, or a debit card
purchase at a point of sale.
The second proposal would have
prohibited certain acts or practices
associated with assessing overdraft fees
in connection with debit holds.
Specifically, the proposal would have
prohibited an institution from assessing
an overdraft fee if the overdraft was
caused solely by a hold placed on funds
that exceeded the actual purchase
amount of the transaction, unless this
purchase amount would have caused
the overdraft.
Comments on the May 2008 Proposal
The comment period for this proposal
closed on August 4, 2008. The Board
received more than 60,000 comments on
the May 2008 Proposal, more than for
any other regulatory proposal in its
history. OTS received approximately
5,200 comments. NCUA received
approximately 1,000 comments. The
overwhelming majority of these
comments came from individual
consumers. A substantial majority of
individual consumers expressed
support for the proposed rules, and
many urged the Agencies to go further
in protecting consumers. The remaining
comments came from credit card
issuers, banks, savings associations,
credit unions, trade associations,
consumer groups, members of Congress,
other federal banking agencies, state and
local governments, and others. These
commenters expressed varying views on
the May 2008 Proposal. In preparing
this final rule, the Agencies considered
the comments and the accompanying
information. To the extent that
commenters addressed specific aspects
of the proposal, those comments are
discussed below.
II. Statutory Authority Under the
Federal Trade Commission Act To
Address Unfair or Deceptive Acts or
Practices
A. Rulemaking and Enforcement
Authority Under the FTC Act
Section 18(f)(1) of the FTC Act
provides that the Board (with respect to
banks), OTS (with respect to savings
associations), and the NCUA (with

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respect to federal credit unions) are
responsible for prescribing ‘‘regulations
defining with specificity * * * unfair or
deceptive acts or practices, and
containing requirements prescribed for
the purpose of preventing such acts or
practices.’’ 15 U.S.C. 57a(f)(1).6
The FTC Act allocates responsibility
for enforcing compliance with
regulations prescribed under section 18
with respect to banks, savings
associations, and federal credit unions
among the Board, OTS, and NCUA, as
well as the OCC and the FDIC. See 15
U.S.C. 57a(f)(2)–(4). The FTC Act grants
the FTC rulemaking and enforcement
authority with respect to other persons
and entities, subject to certain
exceptions and limitations. See 15
U.S.C. 45(a)(2); 15 U.S.C. 57a(a). The
FTC Act, however, sets forth specific
rulemaking procedures for the FTC that
do not apply to the Agencies. See 15
U.S.C. 57a(b)–(e), (g)–(j); 15 U.S.C. 57a–
3.7
In response to the May 2008 Proposal,
industry commenters and the OCC
noted that the Board has stated in the
past that enforcement of the FTC Act’s
prohibition on unfair and deceptive
practices is best handled on a case-bycase basis because determinations of
unfairness and deception depend
heavily on individual facts and
circumstances.8 These commenters
6 The FTC Act refers to OTS’s predecessor agency,
the Federal Home Loan Bank Board (FHLBB), rather
than to OTS. However, in section 3(e) of HOLA,
Congress transferred this rulemaking power of the
FHLBB, among others, to the Director of OTS. 12
U.S.C. 1462a(e). The FTC Act refers to ‘‘savings and
loan institutions’’ in some provisions and ‘‘savings
associations’’ in other provisions. Although
‘‘savings associations’’ is the term currently used in
the HOLA, see, e.g., 12 U.S.C. 1462(4), the terms
‘‘savings and loan institutions’’ and ‘‘savings
associations’’ can be and are used interchangeably.
OTS has determined that the outdated language
does not affect OTS’s rulemaking authority under
the FTC Act.
7 Some commenters suggested that the proposed
rules were not supported by sufficient evidence and
that the Agencies should follow the rulemaking
procedures for the FTC under the FTC Act, which
include the requirement to hold informal hearings
at which interested parties may submit their
positions and rebut the positions of others. 15
U.S.C. 57a(c). As the commenters acknowledge, this
process applies only to the FTC. The Agencies
believe that the comment process provides a robust
opportunity for interested parties to express their
views and provide relevant information. This is
confirmed by the unprecedented number of
comment letters received by the Agencies in
response to the proposed rules. In many cases, the
data and other information necessary to make
informed judgments regarding the proposed rules is
in the possession of the institutions to which the
rules would apply. Although institutions generally
consider this data proprietary, some have chosen to
submit certain information to the Agencies for
consideration as part of the public record. The
Agencies have carefully considered all public
information in issuing the final rule.
8 See, e.g., Testimony of Randall S. Kroszner,
Governor, Board of Governors of the Federal

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urged that the Agencies withdraw the
proposed rules and that the Board
instead use its authority under TILA,
the Electronic Fund Transfer Act
(EFTA), 15 U.S.C. 1693 et seq., or other
statutes to promulgate rules regarding
consumer credit card accounts and
overdraft services on deposit accounts,
respectively. One commenter suggested
that OTS instead use its authority under
HOLA.
As discussed in greater detail below
in section VI of this SUPPLEMENTARY
INFORMATION, the Agencies agree that
concerns about overdraft services can be
appropriately addressed using the
Board’s authority under the EFTA. With
respect to consumer credit card
accounts, however, the Agencies believe
that use of their FTC Act authority is
appropriate. Although the Agencies
continue to believe that case-by-case
enforcement is often the most effective
means of addressing unfair and
deceptive practices, the practices
addressed by the final rule are or have
been engaged in by a substantial number
of the institutions offering credit cards
without significant material variation in
the facts and circumstances. As a result,
case-by-case enforcement by the
banking agencies would not only be an
inefficient means of addressing these
practices but could also lead to
inconsistent outcomes. Accordingly, the
Agencies have determined that, in this
instance, promulgating regulations
under the FTC Act is the most effective
way to address the practices at issue.9
B. Standards for Unfairness Under the
FTC Act
Congress has codified standards
developed by the FTC for its use in
determining whether acts or practices
are unfair under section 5(a) of the FTC
Act.10 Specifically, the FTC Act
Reserve System, before the H. Comm. on Financial
Services (June 13, 2007); Testimony of Sandra F.
Braunstein before the H. Subcomm. on Fin. Instits.
& Consumer Credit (Mar. 27, 2007); Letter from Ben
S. Bernanke, Chairman, Board of Governors of the
Federal Reserve System, to the Hon. Barney Frank
(Mar. 21, 2006); Letter from Alan Greenspan,
Chairman, Board of Governors of the Federal
Reserve System, to the Hon. John J. LaFalce (May
30, 2002).
9 Industry commenters and the OCC raised
concerns that, because many of the practices
prohibited by the proposed rules are widely used,
determinations by the Agencies that those practices
are unfair or deceptive under the FTC Act could
lead to litigation under similar state laws. As
discussed below in § VII of this SUPPLEMENTARY
INFORMATION, the Agencies do not intend these rules
to apply to acts or practices preceding the effective
date and have determined that, prior to the effective
date, the prohibited practices are not unfair under
the FTC Act.
10 See 15 U.S.C. 45(n); FTC Policy Statement on
Unfairness, Letter from the FTC to the Hon.
Wendell H. Ford and the Hon. John C. Danforth, S.

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provides that the FTC has no authority
to declare an act or practice unfair
unless: (1) It causes or is likely to cause
substantial injury to consumers; (2) the
injury is not reasonably avoidable by
consumers themselves; and (3) the
injury is not outweighed by
countervailing benefits to consumers or
to competition. In addition, the FTC
may consider established public policy,
but public policy may not serve as the
primary basis for its determination that
an act or practice is unfair. See 15
U.S.C. 45(n).
In proposing and finalizing rules
under section 18(f)(1) of the FTC Act,
the Agencies have applied the statutory
elements consistent with the standards
articulated by the FTC. The Board,
FDIC, and OCC have previously issued
guidance generally adopting these
standards for purposes of enforcing the
FTC Act’s prohibition on unfair or
deceptive acts or practices.11 Although
the OTS had not taken similar action in
generally applicable guidance prior to
the May 2008 Proposal,12 the
commenters on OTS’s ANPR who
addressed this issue overwhelmingly
urged that any OTS action be consistent
with the FTC’s standards for unfairness.
According to the FTC, an unfair act or
practice will almost always represent a
market failure or imperfection that
prevents the forces of supply and
demand from maximizing benefits and
minimizing costs.13 Not all market
failures or imperfections constitute
unfair acts or practices, however.
Instead, the central focus of the FTC’s
unfairness analysis is whether the act or
practice causes substantial consumer
injury.14
Substantial consumer injury. The FTC
has stated that a substantial consumer
injury generally consists of monetary,
economic, or other tangible harm.15
Trivial or speculative harms do not
constitute substantial consumer
injury.16 Consumer injury may be
Comm. on Commerce, Science & Transp. (Dec. 17,
1980) (FTC Policy Statement on Unfairness)
(available at http://www.ftc.gov/bcp/policystmt/adunfair.htm).
11 See Board and FDIC, Unfair or Deceptive Acts
or Practices by State-Chartered Banks (Mar. 11,
2004) (available at http://www.federalreserve.gov/
boarddocs/press/bcreg/2004/20040311/
attachment.pdf); OCC Advisory Letter 2002–3,
Guidance on Unfair or Deceptive Acts or Practices
(Mar. 22, 2002) (available at http://
www.occ.treas.gov/ftp/advisory/2002–3.doc).
12 See OTS ANPR, 72 FR at 43573.
13 Statement of Basis and Purpose and Regulatory
Analysis for Federal Trade Commission Credit
Practices Rule (Statement for FTC Credit Practices
Rule), 49 FR 7740, 7744 (Mar. 1, 1984).
14 Id. at 7743.
15 See id.; FTC Policy Statement on Unfairness at
3.
16 See Statement for FTC Credit Practices Rule, 49
FR at 7743 (‘‘[E]xcept in aggravated cases where

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substantial, however, if it imposes a
small harm on a large number of
consumers or if it raises a significant
risk of concrete harm.17
In response to the May 2008 Proposal,
several commenters expressed concern
that the FTC’s interpretation of
substantial consumer injury is
overbroad and requested that the
Agencies introduce a variety of
limitations. As noted above, the
Agencies have adopted the FTC’s
standards for determining whether an
act or practice is unfair. Accordingly, in
the interest of uniform application of
the FTC Act, the Agencies decline to
read in such limitations where the FTC
has not done so.18 Furthermore, the
Agencies emphasize that a finding of
consumer injury does not, by itself,
establish an unfair practice. Instead, as
discussed below and with respect to
each of the prohibited practices, the
injury also must not be reasonably
avoidable and must not be outweighed
by countervailing benefits to consumers
or to competition. Thus, while many
practices that result in imposition of a
fee or assessment of interest may cause
a substantial consumer injury, few may
satisfy the other elements of unfairness.
Injury is not reasonably avoidable.
The FTC has stated that an injury is not
reasonably avoidable when consumers
are prevented from effectively making
their own decisions about whether to
incur that injury.19 The marketplace is
normally expected to be self-correcting
because consumers are relied upon to
survey the available alternatives, choose
those that are most desirable, and avoid
those that are inadequate or
unsatisfactory.20 Accordingly, the test is
not whether the consumer could have
made a wiser decision but whether an
act or practice unreasonably creates or
tangible injury can be clearly demonstrated,
subjective types of harm—embarrassment,
emotional distress, etc.—will not be enough to
warrant a finding of unfairness.’’); FTC Unfairness
Policy Statement at 3 (‘‘Emotional impact and other
more subjective types of harm * * * will not
ordinarily make a practice unfair.’’).
17 See Statement for FTC Credit Practices Rule, 49
FR at 7743; FTC Policy Statement on Unfairness at
3 & n.12.
18 See Am. Fin. Servs. Assoc. v. FTC, 767 F.2d
957, 978–83 (DC Cir. 1985) (‘‘In essence, petitioners
ask the court to limit the FTC’s exercise of its
unfairness authority to situations involving
deception, coercion, or withholding of material
information. * * * [D]espite considerable
controversy over the bounds of the FTC’s authority,
neither Congress nor the FTC has seen fit to
delineate the specific ‘kinds’ of practices which will
be deemed unfair within the meaning of section
5.’’).
19 See FTC Policy Statement on Unfairness at 3.
20 See Statement for FTC Credit Practices Rule, 49
FR at 7744 (‘‘Normally, we can rely on consumer
choice to govern the market.’’); FTC Policy
Statement on Unfairness at 3.

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takes advantage of an obstacle to the
consumer’s ability to make that decision
freely.21
In response to the May 2008 Proposal,
several industry commenters argued
that an injury resulting from the
operation of a contractual provision is
always reasonably avoidable because
the consumer could read the contract
and decide not to enter into it. These
commenters further argued that
institutions could not be held
responsible for consumers’ failure to
read or understand the contract or the
disclosures provided by the institution.
These arguments, however, are
inconsistent with the FTC’s application
of the unfairness analysis in support of
its Credit Practices Rule, where the FTC
determined that consumers could not
reasonably avoid injuries caused by
otherwise valid contractual
provisions.22 Furthermore, as discussed
below, many of the practices at issue
either create the complexity that acts as
an obstacle to consumers’ ability to
make free and informed decisions or
take advantage of that complexity by
assessing interest or fees when a
consumer fails to understand the
practice.23
Injury is not outweighed by
countervailing benefits. The FTC has
stated that the act or practice causing
the injury must not also produce
benefits to consumers or competition
that outweigh the injury.24 Generally, it
21 See Statement for FTC Credit Practices Rule, 49
FR at 7744 (‘‘In considering whether an act or
practice is unfair, we look to whether free market
decisions are unjustifiably hindered.’’); FTC Policy
Statement on Unfairness at 3 & n.19 (‘‘In some
senses any injury can be avoided—for example, by
hiring independent experts to test all products in
advance, or by private legal actions for damages—
but these courses may be too expensive to be
practicable for individual consumers to pursue.’’).
22 See Statement for FTC Credit Practices Rule, 49
FR 7740 et seq.; see also Am. Fin. Servs. Assoc., 767
F.2d at 978–83 (upholding the FTC’s analysis).
23 One commenter stated that the following
language from the FTC Policy Statement on
Unfairness suggested that complexity alone is not
sufficient to make injury unavoidable: ‘‘A seller’s
failure to present complex technical data on his
product may lessen a consumer’s ability to choose
* * * but may also reduce the initial price he must
pay for the article.’’ FTC Policy Statement on
Unfairness at 3. The Agencies note that the FTC
included this example in its discussion of whether
injury is outweighed by countervailing benefits, not
whether the injury is reasonably avoidable.
24 See Statement for FTC Credit Practices Rule, 49
FR at 7744; FTC Policy Statement on Unfairness at
3; 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

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5503

is important to consider both the costs
of imposing a remedy and any benefits
that consumers enjoy as a result of the
practice.25 The FTC has stated that both
consumers and competition benefit from
prohibitions on unfair or deceptive acts
or practices because prices may better
reflect actual transaction costs and
merchants who do not rely on unfair or
deceptive acts or practices are no longer
required to compete with those who
do.26
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.27 For purposes of the
unfairness analysis, public policy is
generally embodied in a statute,
regulation, or judicial decision.28 As
discussed below, the Agencies have
considered various authorities cited by
commenters as evidence of public
policy.29 At no point, however, have the
Agencies used public policy as the
primary basis for a determination that a
practice was unfair.
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
exercise of its unfairness authority, gathering and
considering reasonably available evidence.’’).
25 See FTC Public Comment on OTS–2007–0015,
at 6 (Dec. 12, 2007) (available at http://
www.ots.treas.gov/docs/9/963034.pdf).
26 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.’’).
27 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.’’).
28 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 * * *’’).
29 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.

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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.’’ 30 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.
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.31 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.32 Although
these standards have not been codified,
they have been applied by numerous
courts.33 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.34
A representation or omission is
deceptive if the overall net impression
created is likely to mislead consumers.35
The FTC conducts its own analysis to
determine whether a representation or
omission is likely to mislead consumers
acting reasonably under the
30 15

U.S.C. 57a(f)(1) (third sentence).
Policy Statement on Deception.
32 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.
33 See, e.g., FTC v. Tashman, 318 F.3d 1273, 1277
(11th Cir. 2003); FTC v. Gill, 265 F.3d 944, 950 (9th
Cir. 2001); FTC v. QT, Inc., 448 F. Supp. 2d 908,
957 (N.D. Ill. 2006); FTC v. Think Achievement, 144
F. Supp. 2d 993, 1009 (N.D. Ind. 2000); FTC v.
Minuteman Press, 53 F. Supp. 2d 248, 258 (E.D.N.Y.
1998).
34 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.
35 See, e.g., FTC v. Cyberspace.com, 453 F.3d
1196, 1200 (9th Cir. 2006); Gill, 265 F.3d at 956;
Removatron Int’l Corp. v. FTC, 884 F.2d 1489, 1497
(1st Cir. 1989).

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circumstances.36 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.37 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.38
A representation or omission is
material if it is likely to affect the
consumer’s conduct or decision
regarding a product or service.39 Certain
types of claims are presumed to be
material, including express claims and
claims regarding the cost of a product or
service.40
D. Choice of Remedy
The Agencies have wide latitude to
determine what remedy is necessary to
prevent an unfair or deceptive act or
practice so long as that remedy has a
reasonable relation to the act or
practice.41 The Agencies have carefully
considered the potential remedies for
addressing each practice and have
adopted the remedy that, in the
Agencies’ judgment, is effective in
preventing that practice while
minimizing the burden on institutions.
III. Summary of Final Rule
Based on the comments and further
analysis, the Agencies have revised the
proposed rules substantially. As
discussed in greater detail below, the
Agencies are not taking action on some
aspects of the proposed rule at this time.
However, the Agencies note that this
rule is not intended to identify all unfair
or deceptive acts or practices, even with
regard to consumer credit card accounts.
Accordingly, the fact that a particular
act or practice is not addressed by
today’s final rule does not limit the
ability of any agency to make a
determination that it is unfair or
deceptive. As noted elsewhere, to the
extent that specific practices raise
concerns regarding unfairness or
deception under the FTC Act, the
Agencies plan to continue to address
those practices on a case-by-case basis
36 See FTC v. Kraft, Inc., 970 F.2d 311, 319 (7th
Cir. 1992); QT, Inc., 448 F. Supp. 2d at 958.
37 FTC Policy Statement on Deception at 3.
38 Id.
39 Id. at 2, 6–7.
40 See FTC Public Comment on OTS–2007–0015,
at 21; FTC Policy Statement on Deception at 6; see
also FTC v. Pantron I Corp., 33 F.3d 1088, 1095–
96 (9th Cir. 1994); In re Peacock Buick, 86 F.T.C.
1532, 1562 (1975), aff’d 553 F.2d 97 (4th Cir. 1977).
41 See Am. Fin. Servs. Assoc., 767 F.2d at 988–
89 (citing Jacob Siegel Co. v. FTC, 327 U.S. 608,
612–13 (1946)).

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through supervisory and enforcement
actions.
Credit Practices Rule
The Agencies proposed to make
certain non-substantive, organizational
changes to their respective versions of
the Credit Practices Rule. These changes
are adopted as proposed except for one
additional nonsubstantive clarification
to the scope paragraph of OTS’s rule.
OTS also solicited comment on
eliminating the section of its rule on
state exemptions. 73 FR at 28911. OTS
is eliminating that section as discussed
in section IV of this SUPPLEMENTARY
INFORMATION.
Consumer Credit Card Accounts
In May 2008, the Agencies proposed
several provisions under the FTC Act
related to consumer credit card
accounts. As discussed below, based on
the comments and further analysis, the
Agencies have adopted five provisions
designed to protect consumers who use
credit cards from unfair acts or
practices.
First, the Agencies have adopted the
proposed rule prohibiting institutions
from treating a payment as late for any
purpose unless consumers have been
provided a reasonable amount of time to
make that payment. The Agencies have
also adopted the proposed safe harbor
providing that institutions may comply
with this requirement by adopting
reasonable procedures designed to
ensure that periodic statements are
mailed or delivered at least 21 days
before the payment due date. Elsewhere
in today’s Federal Register, the Board
has adopted two additional proposals
under Regulation Z that further ensure
that consumers receive a reasonable
amount of time to make payment.
Specifically, the Board has revised 12
CFR 226.10(b) to seek to ensure that
creditors do not set cut-off times for
mailed payments earlier than 5 p.m. at
the location specified by the creditor for
receipt of such payments. The Board has
also adopted 12 CFR 226.10(d), which
requires that, if the due date for
payment is a day on which the U.S.
Postal Service does not deliver mail or
the creditor does not accept payment by
mail, the creditor may not treat a
payment received by mail the next
business day as late for any purpose.
Second, the Agencies have adopted a
revised version of the proposed rule
regarding allocation of payments when
different annual percentage rates apply
to different balances on a consumer
credit card account. The final rule
requires institutions to allocate amounts
paid in excess of the minimum payment
either by applying the entire amount

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Federal Register / Vol. 74, No. 18 / Thursday, January 29, 2009 / Rules and Regulations
first to the balance with the highest
annual percentage rate or by splitting
the amount pro rata among the balances.
Third, the Agencies have revised the
proposed rule regarding increases in
annual percentage rates to require
institutions to disclose at account
opening the rates that will apply to the
account and to prohibit institutions
from increasing annual percentage rates
unless expressly permitted. Institutions
are permitted to increase a rate
disclosed at account opening at the
expiration of a specified period,
provided that the increased rate was
also disclosed at account opening. After
the first year following opening of the
account, institutions are also permitted
to increase rates for new transactions so
long as the institution complies with the
45-day advance notice requirement in
Regulation Z (adopted by the Board
elsewhere in today’s Federal Register).
In addition, institutions may increase a
variable rate due to the operation of an
index and increase a rate when the
consumer is more than 30 days’
delinquent.
Fourth, the Agencies have adopted
the proposed rule prohibiting
institutions from imposing finance
charges based on balances for days in
billing cycles that precede the most
recent billing cycle as a result of the loss
of a grace period. This rule generally
prohibits institutions from reaching
back to earlier billing cycles when
calculating the amount of interest
charged in the current cycle, a practice
that is sometimes referred to as two- or
double-cycle billing.
Fifth, the Agencies have adopted a
revised version of the proposed rule
regarding the financing of security
deposits or fees for the issuance or
availability of credit (such as accountopening fees or membership fees). The
final rule prohibits institutions from
financing security deposits or fees for
the issuance or availability of credit if,
during the first year after account
opening, those deposits or fees consume
the majority of the available credit on
the account. In addition, the Agencies
have adopted a requirement that
security deposits and fees exceeding 25
percent of the credit limit to be spread
over no less than the first six months,
rather than charged as a lump sum
during the first billing cycle.
Furthermore, elsewhere in today’s
Federal Register, the Board has adopted
revisions to Regulation Z requiring
creditors that collect or obtain a
consumer’s agreement to pay a fee
before providing account-opening
disclosures to permit that consumer to
reject the plan after receiving the
disclosures and, if the consumer does

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so, to refund any fee collected or to take
any other action necessary to ensure the
consumer is not obligated to pay the fee.
Finally, the Agencies are not taking
action at this time on the proposed rule
addressing holds placed on available
credit. As discussed below, the Board is
proposing to address holds placed on
available funds in a deposit account
using its authority under Regulation E.
In addition, the Agencies are not taking
action at this time on the proposed rule
regarding firm offers of credit
advertising multiple annual percentage
rates or credit limits. Concerns about
this practice are addressed by
amendments to Regulation Z adopted by
the Board elsewhere in today’s Federal
Register. The Agencies plan to rely on
case-by-case supervisory and
enforcement actions in appropriate
circumstances where practices regarding
credit holds or firm offers of credit raise
unfairness or deception concerns.
Overdraft Services
The Agencies are not taking action on
overdraft services on deposit accounts
or debit holds at this time. As discussed
below, the Board has published a
separate proposal addressing these
issues under Regulation E elsewhere in
today’s Federal Register. The Agencies
will review information obtained
through that rulemaking to determine
whether to take further action.
IV. Section-by-Section Analysis of the
Credit Practices Subpart
On March 1, 1984, the FTC adopted
its Credit Practices Rule pursuant to its
authority under the FTC Act to
promulgate rules that define and
prevent unfair or deceptive acts or
practices in or affecting commerce.42
The FTC Act provides that, whenever
the FTC promulgates a rule prohibiting
specific unfair or deceptive practices,
the Board, OTS (as the successor to the
Federal Home Loan Bank Board), and
NCUA must adopt substantially similar
regulations imposing substantially
similar requirements with respect to
banks, savings associations, and federal
credit unions within 60 days of the
effective date of the FTC’s rule unless
the agency finds that such acts or
practices by banks, savings associations,
or federal credit unions are not unfair or
deceptive or the Board finds that the
adoption of similar regulations for
banks, savings associations, or federal
credit unions would seriously conflict
with essential monetary and paymentsystems policies of the Board. The
42 See 42 FR 7740 (Mar. 1, 1984) (codified at 16
CFR part 444); see also 15 U.S.C. 57a(a)(1)(B),
45(a)(1).

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Agencies have previously adopted rules
substantially similar to the FTC’s Credit
Practices Rule.43
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 l.1 Authority, purpose, and
scope 44
The provisions in proposed § l.1
were largely drawn from the current
authority, purpose, and scope
provisions in the Agencies’ respective
Credit Practices Rules. As discussed
below, § l.1 is generally adopted as
proposed.
Section l.1(a) Authority
Proposed § l.1(a) provided that the
Agencies issued this part under section
18(f) of the FTC Act. Section l.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,
43 See 12 CFR part 227, subpart B (Board); 12 CFR
535 (OTS); 12 CFR 706 (NCUA).
44 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, § l.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.

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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.45 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.46 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.
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.47
45 See, e.g., 12 CFR 563.161(a) (OTS management
and financial policies rule).
46 See 12 CFR 560.30 and Endnote 6.
47 As stated in Fid. Fed. Sav. & Loan Ass’n v. 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 v. Coast

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Consequently, OTS has a history of
using HOLA as the legal basis for
consumer protection regulations.
Examples include the OTS Advertising
Rule,48 OTS rules that limit home loan
late charges, prepayment penalties, and
adjustments to the interest rate,
payment, balance, or term to maturity,49
as well as the portions of the OTS
Nondiscrimination Rule that exceed
Equal Credit Opportunity Act and Fair
Housing Act requirements.50 All of the
practices addressed in the rule will help
protect consumers.
Section l.1(b) Purpose
Proposed § l.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 § l.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
§ l.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 l.1(c) Scope
Proposed § l.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
Federal Savings and Loan Ass’n, 98 F. Supp. 311,
316 (S.D. Cal. 1951).
Accord Conference of Federal Savings and Loan
Associations v. 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).
48 12 CFR 563.27.
49 12 CFR 560.33, 12 CFR 560.34, and 12 CFR
560.35.
50 12 CFR part 528.

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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.51
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 § l.1(d) of the Board’s rule
would have clarified that, unless
51 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).

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otherwise noted, terms used in the
Board’s proposed § l.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.52

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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 crossreference to a definition contained in a
different part of OTS’s rules. OTS has
moved the definition of ‘‘cosigner’’ to
52 Longstanding OTS and NCUA complaint
procedures are available to consumers and the
public at http://www.ots.treas.gov and http://
www.ncua.gov.

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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

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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.53 The Agencies
noted that only three states have been
granted exemptions under the Credit
Practices Rule.54 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 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
53 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).
54 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.

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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.55
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

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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
55 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.’’).

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Agencies’ respective regulations under
the FTC Act.
Section l.21—Definitions
Section l.21 defines certain terms
used in Subpart C.
Section l.21(a) Annual Percentage Rate
Proposed § l.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 l.21(b) Consumer
Proposed § l.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 l.21(c) Consumer Credit Card
Account
Proposed § l.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 ‘‘openend 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 § l.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

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‘‘credit card’’ under 12 CFR 226.2, they
are covered. Accordingly, this definition
is adopted as proposed.
Proposed Section l.21(d) Promotional
Rate
Proposed § l.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 §§ l.23 and
l.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 l.22—Unfair Acts or Practices
Regarding Time To Make Payment
Summary. In May 2008, the Agencies
proposed § l.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 § l.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
§ l.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 § l.22 as proposed except that
proposed § l.22(b) has been revised to
clarify that institutions must be able to
establish that they have complied with
§ l.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

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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

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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.56 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.
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
56 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).

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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 $30.92.57 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.
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
57 See

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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 § l.22(b), the costs of complying
with the proposed rule would be
minimal. Other industry commenters

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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 § l.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 21day 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 § l.22
does not apply to the mailing or
delivery of periodic statements with
respect to the expiration of grace
periods. See § l.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 § l.22(c)
specifically provided that the rule
would not affect the requirements of

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section 163(a) of TILA. Accordingly,
because § l.22(c) has been adopted as
proposed, the Agencies conclude that
§ l.22 is not contrary to public policy
generally or any established payment
systems policy of the Board.
Final Rule
Section l.22(a) General Rule
Proposed § l.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
§ l.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.58 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.
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 § l.22(a) in § l.22(b)
58 See Consumer Data Industry Ass’n, Credit
Reporting Resource Guide 6–6 (2006).

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

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Section l.22(b) Compliance With
General Rule
As proposed, § l.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.59 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.
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 21day 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
59 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).

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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 presorting 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.60 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.61
Third, many industry commenters
stated that complying with the 21-day
60 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).
61 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.

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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 30day 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 § l.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

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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 § l.22(a). The Agencies have
added a new § l.22(b)(1), which
clarifies that institutions are responsible
for establishing that they have complied
with § l.22(a). The 21-day safe harbor,
which the Agencies have moved to
§ l.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 § l.22(a) because those
consumers would need less time to
receive their statements or make their
payments by mail.
Section l.22(c) Exception for Grace
Periods
In order to avoid any potential
conflict with section 163(a) of TILA,
proposed § l.22(c) provided that
proposed § l.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
§ l.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

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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
§ l.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.62
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
62 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).

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(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.63 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.
Section l.23—Unfair Acts or Practices
Regarding Allocation of Payments
Summary. In May 2008, the Agencies
proposed § l.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 § l.23(a) would have
addressed this practice by requiring
institutions to allocate payments in
excess of the required minimum
periodic payment (‘‘excess payments’’)
63 12

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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 § l.23(b) would have placed
more stringent requirements on those
accounts. Proposed § l.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
§ l.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
§ l.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 § l.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 § l.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 § l.23(b) in the final
rule. First, because current practices
regarding assessment of deferred
interest are not permitted under the
final version of § l.24, the provisions
regarding deferred interest plans are no
longer necessary. Second, due to
concerns that proposed § l.23(b) could
significantly reduce or eliminate
promotional rate offers that provide
substantial benefits to consumers, the
Agencies have not included the

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provisions regarding promotional rate
balances. Instead, the Agencies believe
that applying the general allocation rule
in § l.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

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5513

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 closedend 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

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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

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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.64
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 § l.23
by placing limitations on allocation of
excess payments.65 The Agencies also
solicited comment on whether the
exception regarding deferred interest
balances was needed. 73 FR 28916.
The Agencies received comments in
support of proposed § .l23 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
64 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.
65 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.

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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.66
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
66 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, § l.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.

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$930 million annually as a result of the
practices addressed by proposed
§ l.23.67 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.68
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.69 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.
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.70
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
67 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).
68 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).
69 See Statement for FTC Credit Practices Rule, 49
FR at 7743; FTC Policy Statement on Unfairness at
3.
70 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).

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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.71 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.
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.72
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.
71 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)).
72 For this reason, the Board has removed the
proposed disclosure regarding payment allocation
under Regulation Z, as discussed elsewhere in
today’s Federal Register.

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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 § l.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
§ l.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).73 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
73 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’’).

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impact of proposed § l.23 on the cost
and availability of credit.74
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 $155.75
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 § l.23 by
increasing the rate to 15.15% or by
decreasing the credit limit to $8,850.76
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.77 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 § l.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
74 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.
75 The Argus Analysis estimated that proposed
§ l.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 § l.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
§ l.23 would be proportionate to the overall
reduction predicted by the Argus Analysis. Thus,
because the estimated revenue loss attributable to
proposed § l.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
§ l.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
§ l.23 on rates and credit limits, it appears this
impact would not be substantial.
76 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
§ l.23 by, for example, adjusting interest rates on
existing balances or reducing credit limits.
77 See Exhibit 4a, Table 3b to Argus Analysis.

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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
§ l.23(b) should significantly reduce
the estimated impact.78 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.
Some industry commenters also
argued that compliance with proposed
§ l.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 § l.23
78 As noted above, the Argus Analysis stated that,
as a result of proposed § l.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 § l.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.

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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.79
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.80
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.81 For purposes of the unfairness
analysis, public policy is generally
embodied in a statute, regulation, or
judicial decision.82 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
79 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.
80 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).
81 15 U.S.C. 45(n).
82 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 * * *’’).

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

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Final Rule
As proposed, § l.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 § l.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 § l.23(b) and
applies a revised version of the general
rule in proposed § l.23(a) to all types
of balances.
As an initial matter, industry
commenters and a member of Congress
criticized proposed § l.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 l.23 Allocation of Excess
Payments
When an account has balances with
different annual percentage rates,
proposed § l.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
§ l.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
§ l.23(a)(2) would have allowed an
institution to allocate equal portions of
the excess payment to each balance.
Third, proposed § l.23(a)(3) would
have allowed an institution to allocate
the excess payment among the balances

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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
§ l.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 § l.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

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5517

rate,83 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.84
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,85 institutions were unlikely to
take advantage of this option because it
would require individualized
determinations based on each
consumer’s balances and rates.
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 § l.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 § l.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
83 See Exhibit 7, Table 1c to Argus Analysis
(column labeled ‘‘Overall’’).
84 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.
85 See proposed comment 23(a)–1, 73 FR at
28944.

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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 § l.23 would
be applied. Proposed comment 23–1
clarified that § l.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 § l.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 § l.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.86 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 § l.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
86 One commenter requested that proposed
§ l.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.

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consistent with applicable law and
regulatory guidance. Otherwise,
proposed comment 23–1 is adopted as
proposed.
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 § l.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 § l.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

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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 § l.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
§ l.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 § l.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

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regarding specific allocation methods.87
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 § l.24 and
accounts with multiple balances at the
same rate and at least one balance at a
different rate. Otherwise, this comment
is redesignated as comment 23(a)–1 and
adopted as proposed.
With respect to pro rata allocation,
some industry commenters requested
guidance on how the total balance
should be determined. They suggested
that amounts paid by the required
minimum periodic payment should be
included in the total balance because
excluding such amounts would be
operationally burdensome insofar as it
would require institutions to allocate
the minimum payment and then
recalculate each balance for purposes of
allocating pro rata. The Agencies agree
that the suggested clarification will
reduce burden and assist institutions in
allocating payments consistent with
§ l.23(b). Accordingly, the Agencies
have adopted comment 23(b)–1
clarifying that an institution may, but is
not required to, deduct amounts paid by
the consumer’s required minimum
periodic payment when calculating the
total balance for purposes of § l.23(b).
An illustrative example is provided in
comment 23(b)–2.iii.
In the May 2008 Proposal, proposed
comment 23(a)(3)–1 provided an
example of allocating excess payments
pro rata among the balances. This
comment is redesignated as comment
23(b)–2 for organizational reasons and
generally adopted as proposed. In
response to requests from commenters,
however, 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 § l.24 and, as
noted above, the different methods of
calculating the total balance consistent
with comment 23(b)–1.
87 Because the final rule does not permit
institutions to use a payment allocation method that
is no less beneficial to consumers than one of the
listed methods, the Agencies have omitted
proposed comments 23(a)–1 and –2, which clarified
the meaning of this aspect of the proposal.
Similarly, because the final rule does not permit
institutions to allocate equal portions of the excess
payment to each balance, the Agencies have
omitted proposed comment 23(a)(2)–1, which
provided examples of that allocation method.

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Proposed Section l.23(b) Special Rules
for Accounts With Promotional Rate
Balances or Deferred Interest Balances
As proposed, § l.23(b) contained
special rules for accounts with
promotional rate and deferred interest
balances that were intended to ensure
that consumers received the full benefit
of the promotional rate or deferred
interest plan. Proposed § l.23(b)(1)(i)
would have required that excess
payments be allocated to promotional
rate balances or deferred interest
balances only after all other balances
had been paid in full. Because, however,
the Agencies were concerned that
consumers may want to pay off deferred
interest balances shortly before the
deferred interest period expired,
proposed § l.23(b)(1)(ii) would have
permitted the existing practice by some
institutions of allocating the entire
payment first to the deferred interest
balance in the last two months of the
deferred interest period. Finally,
proposed § l.23(b)(2) would have
prohibited institutions from requiring
consumers who are otherwise eligible
for a grace period to repay any portion
of a promotional rate balance or
deferred interest balance in order to
receive the benefit of a grace period on
other balances (such as purchases).
Proposed § l.23(b) was strongly
opposed by industry commenters on the
grounds that, if implemented, it would
significantly diminish interest revenue,
leading institutions to significantly
reduce or eliminate promotional rate
and deferred interest offers that provide
substantial benefits to consumers. Many
of these commenters requested that
proposed § l.23(b) be withdrawn and
that institutions instead be permitted to
apply excess payments first to
promotional rate and deferred interest
balances. Some industry commenters,
however, requested that the general rule
in proposed § l.23(a) be applied to all
balances. In contrast, some consumer
advocates urged the Agencies to ban
deferred interest balances rather than
create an exception for them.
As an initial matter, the Agencies
have not included the special rules
regarding deferred interest balances. As
discussed below with respect to the
§ l.24, the final rule does not permit
institutions to charge interest
retroactively and thus does not permit
deferred interest plans.
With respect to promotional rates, the
Argus Analysis indicates that 16–19
percent of active accounts have one or
more promotional rate balances and that
the average promotional rate on those
balances is between two and three
percent, which is approximately 13

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percentage points lower than the
average non-promotional rate.88
Furthermore, when the rates were
weighted to account for the proportion
of the total balance that was at a
promotional rate, the effective annual
percentage rate for these accounts was
approximately 5.5 percent or roughly
ten percentage points lower than the
average rate for non-promotional
balances.89 Assuming this information
is accurate, it appears that discounted
promotional rates offer significant
benefits to many consumers.
Notwithstanding these benefits, the
Agencies continue to believe that, as
suggested by other commenters,
allocating payments to promotional rate
balances before other balances with
higher interest rates significantly
diminishes the value of promotional
rate offers. Furthermore, although the
Agencies believe that proposed § l.23
would have had a negative impact on
the availability of promotional rates, the
commenters provided little data
regarding the extent of that impact.
Thus, the Agencies believe that
application of the general payment
allocation rule in § l.23 to promotional
rate balances is appropriate. Application
of this rule to all balances will limit the
extent to which institutions may reduce
promotional rate offers while ensuring
that payment allocation is not used to
significantly undercut the benefits to
consumers who act in reliance on such
offers. Accordingly, the Agencies have
not included proposed § l.23(b)(1)(i) in
the final rule. 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.
The Agencies have also omitted
proposed § l.23(b)(2), which would
have prohibited institutions from
denying a grace period solely because a
consumer did not repay a promotional
rate or deferred interest balance. This
proposal was strongly criticized by
industry as operationally burdensome
and punitive for institutions that
voluntarily provide a grace period on
purchases. Proposed § l.23(b)(2) was
intended to act in combination with
proposed § l.23(b)(1)(i) to ensure that
consumers receive the full benefit of
promotional rate and deferred interest
offers. Because the Agencies have
concluded that a different approach is
appropriate, the Agencies have not
included proposed § l.23(b)(2) in the
88 See Exhibit 7, Tables 1b and 2 to Argus
Analysis.
89 See id.

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final rule. 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.
Other Issues
Implementation. As discussed in
section VII of this SUPPLEMENTARY
INFORMATION, the effective date for
§ l.23 is July 1, 2010. As of that date,
this provision applies to existing as well
as new consumer credit card accounts
and balances. Thus, institutions must
apply amounts paid by the consumer in
excess of the required minimum
periodic payment that the institution
receives after the effective date
consistent with § l.23.
Alternative to proposed rule. The
Agencies requested comment on
whether consumers should be permitted
to instruct the institution regarding
allocation of amounts in excess of the
required minimum periodic payment.
The response was mixed. Some
consumer groups supported creating an
exception to proposed § l.23 allowing
consumers to select how their excess
payments would be allocated, while
others expressed concern that such an
exception would be ineffective and
subject to abuse because disclosures do
not enable consumers to understand
payment allocation. Similarly,
institutions that currently allow
consumers to select how their payments
are allocated requested that they be
permitted to continue doing so, while
most industry commenters opposed any
provision that would require them to
allocate consistent with consumer
choice as operationally burdensome.
In consumer testing prior to the May
2008 Proposal, the Board tested
whether, given the opportunity,
consumers could select how amounts
paid in excess of the minimum would
be allocated using the 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. Additional testing
conducted by the Board after the May
2008 Proposal produced similar results.
Accordingly, because it does not appear
that consumer choice would be
effective, the Agencies have not
included such an exception in the final
rule.
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.

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Section 535.23 supports safety and
soundness by reducing reputational risk
that would result from allocating
consumers’ payments in an unfair
manner. Section 535.23 also protects
consumers by providing them with fair
allocations of their payments. When a
creditor treats a consumer credit card
account as having separate balances
with separate interest rates and terms, it
is essentially treating the card as having
separate debts even though the
consumer makes only one payment.
Were the separate balances actually
separate debts being collected by a debt
collector, the consumer would have the
right under section 810 of the Fair Debt
Collection Practices Act (15 U.S.C.
1692h) to have payments applied in
accordance with the consumer’s
directions. As discussed above, that
approach did not test well for consumer
credit card accounts with multiple
balances, and the Agencies are not
imposing the same requirement under
§ l.23. However, ensuring that the
consumer’s payment will be applied to
the highest rate balance first or pro rata
will be an important protection for
consumers. Consequently, HOLA serves
as an independent basis for § 535.23.
Section l.24—Unfair Acts or Practices
Regarding Increases in Annual
Percentage Rates
Summary. In May 2008, the Agencies
proposed to prohibit the application of
increased rates to outstanding balances,
except in certain limited circumstances.
See 73 FR 28917–28921. Specifically,
proposed § l.24(a)(1) would have
prohibited the application of an
increased annual percentage rate to an
outstanding balance on a consumer
credit card account, except as provided
in proposed § l.24(b). Proposed
§ l.24(a)(2) would have defined
‘‘outstanding balance’’ as the amount
owed on an account at the end of the
fourteenth day after the institution
provides the notice required by
Regulation Z, 12 CFR 226.9(c) or (g).
Proposed § l.24(b) would have
permitted institutions to increase the
rate on an outstanding balance due to an
increase in an index, when a
promotional rate expired or was lost, or
when the account became more than 30
days’ delinquent. Finally, proposed
§ l.24(c) would have prohibited
institutions from engaging in certain
practices that would undercut the
protections in proposed § l.24(a).
Under proposed § l.24(c)(1),
institutions would have been prohibited
from requiring consumers to repay the
outstanding balance over a period of
less than 5 years or from more than
doubling the repayment rate on the

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outstanding balance. Proposed
§ l.24(c)(2) would also have prohibited
institutions from assessing fees or
charges based solely on the outstanding
balance (for example, assessing a
maintenance fee in lieu of increased
interest charges).
Based on the comments received and
further analysis, the Agencies have
revised proposed § l.24(a) to prohibit
institutions from increasing the annual
percentage rate for a category of
transactions on any consumer credit
card account unless specifically
permitted by one of the exceptions in
§ l.24(b). The final rule also requires
institutions to disclose at account
opening all rates that will apply to each
category of transactions on the account.
Because consumers rely on the rates
stated by the institution when deciding
whether to open a credit card account
and whether to use the account for
transactions, these requirements are
intended to ensure that consumers are
protected from unfair surprise and to
better enable them to comparison shop.
The Agencies have also revised the
exceptions in proposed § l.24(b). First,
the Agencies have adopted a new
§ l.24(b)(1), which permits an
institution that has disclosed at account
opening that an annual percentage rate
will increase at a specified time to a
specified amount to increase that rate
accordingly. Second, the Agencies have
adopted the proposed exception for
variable rates as § l.24(b)(2). Third, the
Agencies have adopted a new
§ l.24(b)(3), which permits institutions
to increase rates for new transactions
pursuant to the 45-day advance notice
requirement in 12 CFR 226.9 (adopted
by the Board elsewhere in today’s
Federal Register), although this
exception does not apply during the
first year after account opening. Fourth,
to allow institutions to adjust rates in
response to serious delinquencies, the
Agencies have adopted the proposed
exception allowing repricing when an
account becomes more than 30 days’
delinquent as § l.24(b)(4). Fifth, to
avoid discouraging workout
arrangements that decrease rates for
consumers in default if the consumer
abides by certain conditions (for
example, making payment on time each
month), § l.24(b)(5) has been added
allowing a decreased rate to be returned
to the pre-existing rate if the consumer
fails to abide by the conditions of the
workout arrangement. Finally, the
Agencies have adopted the repayment
provisions in proposed § l.24(c) with
some stylistic changes.
Background. Prior to the Regulation Z
amendments published elsewhere in
today’s Federal Register, 12 CFR

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226.9(c) required 15 days’ advance
notice of certain changes to the terms of
an open-end plan as well as increases in
the minimum payment. However,
advance notice was not required if an
interest rate or other finance charge
increased due to a consumer’s default or
delinquency.90 Furthermore, no changein-terms notice was required if the
creditor set forth the specific change in
the account-opening disclosures.91
In its June 2007 Regulation Z
Proposal, the Board expressed concern
that the imposition of penalty pricing
can come as a costly surprise to
consumers who are not aware of, or do
not understand, what behavior is
considered a ‘‘default’’ under their
agreement. See 72 FR at 33009–33013.
The Board noted that penalty rates can
be more than twice as much as the
consumer’s normal rate on purchases
and may apply to all of the balances on
the consumer’s account for several
months or longer.92
Consumer testing conducted for the
Board indicated that interest rates are a
primary consideration for consumers
when shopping for credit card accounts
but that some consumers do not
understand that events such as one late
payment can cause them to lose the
advertised rate and incur penalty
pricing. In addition, some testing
participants did not appear to
understand that penalty rates can apply
to all of their balances, including
outstanding balances. Some participants
also did not appear to understand how
long a penalty rate could remain in
effect. The Board observed that accountopening disclosures may be provided to
the consumer too far in advance for the
consumer to recall the circumstances
that may cause rates to increase. In
addition, the consumer may not have
retained a copy of the account-opening
disclosures and may not be able to
effectively link the information
disclosed at account opening to the
current repricing of the account.
The Board’s June 2007 Regulation Z
Proposal included revisions to the
regulation and its commentary designed
to improve consumers’ awareness about
changes in their account terms and
increased rates, including rate increases
imposed as a penalty for delinquency or
90 See prior versions of 12 CFR 226.9(c)(1); 12
CFR 226.9 comment 226.9(c)(1)–3.
91 See prior version of 12 CFR 226.9 comment
226.9(c)–1.
92 See also GAO Credit Card Report at 24 (noting
that, for the 28 credit cards it reviewed, ‘‘[t]he
default rates were generally much higher than rates
that otherwise applied to purchases, cash advances,
or balance transfers. For example, the average
default rate across the 28 cards was 27.3 percent in
2005—up from the average of 23.8 in 2003—with
as many as 7 cards charging rates over 30 percent’’).

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other acts or omissions constituting
default under the account agreement.
These revisions were also intended to
enhance consumers’ ability to shop for
alternative financing before such
changes in terms or increased rates
become effective. Specifically, the Board
proposed to give consumers 45 days’
advance notice of a change in terms or
an increased rate imposed as a penalty
and to make the disclosures about
changes in terms and increased rates
more effective.93 The Board also
proposed to require that periodic
statements for credit card accounts
disclose the annual percentage rate or
rates that may be imposed as a result of
late payment.94
When developing the June 2007
Regulation Z Proposal, the Board
considered, but did not propose, a
prohibition on so-called ‘‘universal
default clauses’’ or similar practices
under which a creditor raises a
consumer’s interest rate to the penalty
rate if, for example, the consumer makes
a late payment on an account with a
different creditor. The Board also
considered but did not propose a
requirement similar to that in some state
laws providing consumers with the right
to reject a change in terms if the
consumer agrees to close the account.
In response to its June 2007
Regulation Z Proposal, individual
consumers, consumer groups, another
federal banking agency, and a member
of Congress stated that notice alone was
not sufficient to protect consumers from
the harm caused by rate increases.
These commenters argued that many
consumers would not read or
understand the proposed disclosures
and, even if they did, many would be
unable to transfer the balance to a new
credit card account with comparable
terms before the increased rate went
into effect. Some of these commenters
argued that creditors should be
prohibited from increasing the rate on
an outstanding balance in all instances.
Others argued that consumers should be
given the right to reject application of an
increased rate to an outstanding balance
by closing the account, but only if the
increase was not triggered by a late
payment or other violation of the terms
of that account. This approach was also
endorsed by some credit card issuers.
On the other hand, most industry
commenters stated that the 45-day
93 See proposed 12 CFR 226.9(c), (g), 72 FR at
33056–33058, 73 FR at 28891. Elsewhere in today’s
Federal Register, the Board has adopted a revised
version of this proposal.
94 See proposed 12 CFR 226.7(b)(11)(i)(C), 72 FR
at 33053. Elsewhere in today’s Federal Register, the
Board has adopted a revised version of this
proposal.

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5521

notice requirement would delay issuers
from increasing rates to reflect a
consumer’s increased risk of default,
requiring them to account for that risk
by, for example, charging higher annual
percentage rates at the outset of the
account relationship. These commenters
also noted that, because rate increases
are also used to pass on the cost of
funds issuers themselves pay, delays in
the imposition of increased rates could
result in higher costs of credit or less
available credit.
In the May 2008 Proposal, the
Agencies expressed concern that
disclosure alone may be insufficient to
protect consumers from the harm
caused by the application of increased
rates to outstanding balances.
Accordingly, the Agencies proposed
§ l.24, which would have prohibited
this practice except in certain limited
circumstances. This aspect of the
proposal received strong support from
individual consumers, consumer
groups, members of Congress, the FDIC,
two state attorneys general, and a state
consumer protection agency. Many of
these commenters urged the Agencies to
go further, by eliminating all but the
exception for variable rates and by
applying the prohibition to rate
increases on future transactions. In
contrast, however, the proposal received
strong opposition from credit card
issuers, industry groups, and the OCC.
These commenters generally argued that
the proposed restrictions undermined
institutions’ ability to price according to
current market conditions and the risk
presented by the consumer and would
therefore result in higher costs of credit
or reduced credit availability for all
consumers. They requested that the
Agencies adopt additional exceptions to
the proposed rule, take a different
approach (such as requiring consumers
to opt out of rate increases), or withdraw
the proposal entirely. To the extent that
commenters addressed specific aspects
of the proposal or its supporting legal
analysis, those comments are discussed
below.
Legal Analysis
The Agencies conclude that, except in
certain limited circumstances,
increasing the annual percentage rate
applicable to an outstanding balance on
a consumer credit card account is an
unfair practice under 15 U.S.C. 45(n)
and the standards articulated by the
FTC. In addition, based on these
standards, the Agencies conclude that it
is also an unfair practice to increase an
annual percentage rate that applies to a
consumer credit card account during the
first year after account opening (except
in certain limited circumstances).

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Substantial consumer injury. In May
2008, the Agencies stated that
application of an increased annual
percentage rate to an outstanding
balance appeared to cause substantial
monetary injury by increasing the
interest charges assessed to a
consumer’s credit card account.
Commenters who opposed the proposed
rule did not dispute that such increases
result in additional interest charges.
Indeed, the Argus Analysis indicated
that consumers are charged more than
$11 billion in interest annually as a
result of the practices addressed by
proposed § l.24.95
Some industry commenters stated that
only a minority of accounts are repriced
each year and that even consumers who
have violated the account terms by, for
example, paying late are, as a general
matter, not repriced. This does not,
however, alter the fact that consumers
who are repriced incur substantial
monetary injury.
Some industry commenters argued
that, to the extent the increased rate
reflects the prevailing market rate for
consumers with the same risk profile
and other relevant characteristics, it
cannot constitute an injury under the
FTC Act. These commenters did not
provide—nor are the Agencies aware
of—any legal authority supporting the
proposition that increasing the cost of
credit is not an injury under the FTC
Act so long as the increased rate does
not exceed the market rate.
For all of these reasons, the Agencies
conclude that applying an increased
annual percentage rate to an outstanding
balance causes substantial consumer
injury. The Agencies further conclude
that consumers who rely on advertised
interest rates when deciding to open
and use a credit card account
experience substantial injury in the
form of the increased cost of new
transactions when rates are increased
during the first year after account
opening.96 In addition, the account loses
some of its value because the cost of
financing transactions is higher than
anticipated when the consumer decided
to open the account.
Injury is not reasonably avoidable. In
May 2008, the Agencies stated that,
although the injury resulting from
increases in the annual percentage rate
95 See Exhibit 1, Table 1 to Argus Analysis
(estimated annualized interest lost for rows labeled
‘‘30+DPD Penalty Trigger,’’ ‘‘CIT Repricing,’’ and
‘‘Non 30+DPD Penalty Triggers’’). The Argus
Analysis indicates that some portion of this total is
attributable to the requirement in Regulation Z, 12
CFR 226.9, that creditors provide 45 days’ advance
notice of most rate increases.
96 For this reason, consumers must be informed
at account opening of the rates that will apply to
each category of transactions on the account.

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may be avoidable by some consumers
under certain circumstances, this injury
did not appear to be reasonably
avoidable as a general matter because
consumers appeared to lack control over
many of the circumstances in which
institutions increase rates. The Agencies
grouped these circumstances into four
categories: Circumstances that are
completely unrelated to the consumer’s
behavior (for example, changes in
market conditions); consumer behavior
that is unrelated to the account on
which the rate is increased (for example,
so-called ‘‘universal defaults’’);
consumer behavior that is related to the
account in question but does not violate
the terms of that account (for example,
using most but not all of the credit
limit); and consumer behavior that
violates the terms of the account (for
example, late payment or exceeding the
credit limit). As discussed below, based
on the comments and further analysis,
the Agencies conclude that consumers
cannot, as a general matter, reasonably
avoid rate increases on outstanding
balances.
First, an institution may increase a
rate for reasons that are completely
unrelated to the consumer’s behavior.
For instance, an institution may
increase rates to increase revenues or to
respond to changes in the cost to the
institution of borrowing funds. In May
2008, the Agencies observed that
consumers lack any control over these
increases and cannot be reasonably
expected to predict when such
repricings will occur because many
institutions reserve the right to change
the terms of the consumer’s account at
any time and for any reason.
Accordingly, the Agencies concluded
that consumers appeared to be unable to
reasonably avoid injury in these
circumstances.
Some industry commenters
responded that consumers can
reasonably avoid injury by transferring
the balance to another credit card
account, particularly if the consumer
receives the 45 days’ advance notice
required by proposed 12 CFR 226.9.
These commenters acknowledged,
however, that many consumers will be
unable to find another credit card
account with a rate comparable to the
pre-increase rate. Furthermore, even if a
comparable rate could be found, the
transfer may carry a cost because many
institutions charge a flat fee for
transferring a balance or a fee equal to
a percentage of the transferred balance.
Accordingly, the Agencies conclude that
consumers cannot reasonably avoid the
injury caused by rate increases on
outstanding balances for reasons that are
unrelated to their behavior.

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Second, an institution may increase
an annual percentage rate on a
consumer credit card account based on
behavior that is unrelated to the
consumer’s performance on that
account. This is sometimes referred to
as ‘‘off-account’’ behavior or ‘‘universal
default.’’ For example, an institution
may increase a rate due to a drop in a
consumer’s credit score or a default on
an account with a different creditor
even though the consumer has paid the
credit card account with the institution
according to the terms of the cardholder
agreement.97 The consumer may or may
not have been aware of or able to control
the factor that caused the drop in credit
score, and the consumer cannot control
what factors are considered or how
those factors are weighted in creating
the credit score. For example, a
consumer is not likely to be aware that
using a certain amount of the available
credit on open-end credit accounts can
lead to a reduction in credit score.
Moreover, even if a consumer were
aware that the utilization of available
credit can affect a credit score, the
consumer could not control how the
institution uses credit scores or other
information to set interest rates.98
Furthermore, as discussed below, a late
payment or default on a different
account (or the account in question) will
not be reasonably avoidable in some
instances.
One industry commenter stated that a
consumer has a right under the Fair
Credit Reporting Act (FCRA) to dispute
any inaccurate information that causes a
drop in credit score.99 This right,
however, does not assist consumers
whose credit scores decrease due to
information that accurately reflects
events that were nevertheless
unavoidable by the consumer.
Furthermore, even when the drop in
credit score was caused by inaccurate
information, the right to dispute that
information comes too late to enable the
consumer to avoid the harm caused by
an increase in rate on an outstanding
balance. Accordingly, the Agencies
conclude that, as a general matter,
consumers cannot reasonably avoid the
97 See, e.g., Statement of Janet Hard before S.
Perm. Subcomm. on Investigations, Hearing on
Credit Card Practices: Unfair Interest Rate Increases
(Dec. 4, 2007) (available at http://www.senate.gov/
∼govt-aff/index.cfm?Fuseaction=Hearings.Detail&
HearingID=509).
98 Indeed, several credit card issuers stated in
their comments that, rather than relying solely on
credit scores to increase rates, they use proprietary
underwriting systems that examine a wide range of
criteria. Because those criteria are not available to
the public, consumers cannot be reasonably
expected to know what behavior will cause their
issuer to increase the rate on their account.
99 See 15 U.S.C. 1681i.

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injury caused by rate increases on
outstanding balances that are based on
a drop in credit score or on behavior
that is unrelated to the consumer’s
performance on the account in question.
Third, some institutions increase
annual percentage rates on consumer
credit card accounts based on consumer
behavior that is related to the account
but does not violate the account terms.
For example, an institution may
increase the annual percentage rates of
consumers who are close to (but not
over) the credit limit on the account or
who make only the required minimum
periodic payment set by the institution
for several consecutive months.100
Although in some cases this type of
activity may be within the consumer’s
control, the consumer cannot reasonably
avoid the resulting injury because the
consumer is not aware that this behavior
may be used by the institution’s internal
risk models as a basis for increasing the
rate on the account. Indeed, a consumer
could reasonably interpret an
institution’s provision of a specific
credit limit, minimum payment, or
other account term as an implicit
representation that the consumer will
not be penalized if the credit limit is not
exceeded, the minimum payment is
made, or the consumer otherwise
complies with the terms of the account.
Accordingly, the Agencies conclude that
consumers cannot reasonably avoid the
injury caused rate increases based on
behavior that does not violate the
account terms.
Fourth, institutions increase annual
percentage rates based on consumer
behavior that violates the account terms.
Although what violates the account
terms can vary from institution to
institution and from account to account,
the most common violations that result
in an increase in rate are exceeding the
credit limit, a payment that is returned
for insufficient funds, and a late
payment.101 In the May 2008 Proposal,
the Agencies stated that, in some cases,
it appeared that individual consumers
could avoid these events by taking
reasonable precautions. In other cases,
however, it appeared that the event was
not reasonably avoidable. For example,
consumers who carefully track their
transactions are less likely to exceed
their credit limit than those who do not,
but these consumers may still exceed
the limit due to charges of which they
were unaware (such as the institution’s
100 See, e.g., Statement of Bruce Hammonds,
President, Bank of America Card Services before S.
Perm. Subcomm. on Investigations, Hearing on
Credit Card Practices: Unfair Interest Rate Increases
at 5 (Dec. 4, 2007) (available at http://hsgac.senate.
gov/public/_files/STMTHammondsBOA.pdf).
101 See GAO Credit Card Report at 25.

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imposition of interest or fees) or because
of the institution’s delay in replenishing
the credit limit following payment.
Similarly, although consumers can
reduce the risk of making a payment
that will be returned for insufficient
funds by carefully tracking the credits
and debits on their deposit account,
consumers still lack sufficient
information about key aspects on their
accounts, including when funds from a
deposit or a credit will be made
available by the depository
institution.102 Finally, the Agencies
noted that, although proposed § l.22
would ensure that a consumer’s
payment would not be treated as late for
any reason (including for purposes of
triggering an increase in rate) unless the
consumer received a reasonable amount
of time to make that payment,
consumers may nevertheless pay late for
reasons that are not reasonably
avoidable. As support, the Agencies
cited the FTC’s conclusion with respect
to its Credit Practices Rule that the
majority of defaults are not reasonably
avoidable by consumers as well as
studies, reports, and other evidence
indicating that involuntary factors such
as unemployment play a large role in
delinquency.103
In response, some industry
commenters asserted that, because most
consumers pay on time and do not
otherwise violate the account terms,
these behaviors must be reasonably
avoidable. As an initial matter, although
the information available is limited, it
appears that a significant number of
consumers are penalized for violating
the account terms.104 Furthermore, the
102 See also 73 FR at 28927–28933 (discussing
unfairness concerns regarding overdraft services
and debit holds).
103 See Statement for FTC Credit Practices Rule,
49 FR at 7747–48 (finding that ‘‘the majority [of
defaults] are not reasonably avoidable by
consumers’’ because of factors such as loss of
income or illness); Testimony of Gregory Baer,
Deputy General Counsel, Bank of America before
the H. Fin. Servs. Subcomm. on Fin. Instit. &
Consumer Credit at 4 (Mar. 13, 2008) (‘‘If a
customer falls behind on an account, our
experience tells us it is likely due to circumstances
outside his or her control.’’); Sumit Agarwal &
Chunlin Liu, Determinants of Credit Card
Delinquency and Bankruptcy: Macroeconomic
Factors, 27 J. of Econ. & Finance 75, 83 (2003)
(finding ‘‘conclusive evidence that unemployment
is critical in determining delinquency’’); Fitch: U.S.
Credit Card & Auto ABS Would Withstand Sizeable
Unemployment Stress, Reuters (Mar. 24, 2008)
(‘‘According to analysis performed by Fitch,
increases in the unemployment rate are expected to
cause auto loan and credit card loss rates to
increase proportionally with subprime assets
experiencing the highest proportional rate.’’)
(available at http://www.reuters.com/article/press
Release/idUS94254+24-Mar-2008+BW20080324).
104 See GAO Report at 32–33 (finding that, in
2005, 11% of active accounts were being assessed
a penalty interest rate, 35% had been assessed a late
fee, and 13% had been assessed a fee for exceeding

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5523

fact that a particular behavior may be
relatively infrequent does not
necessarily make it reasonably
avoidable.105
Another commenter cited as evidence
that late payment is reasonably
avoidable a study finding that a
consumer is 44 percent less likely to pay
a late fee in the current month if that
consumer paid a late fee the prior
month.106 While this study indicates
that consecutive late payments are less
likely to be accidental, it does not
indicate that the initial late payment
(which currently may trigger a rate
increase) is reasonably avoidable.
Accordingly, the Agencies conclude
that, as a general matter, the injury
caused by rate increases on outstanding
balances due to a violation of the
account terms is not reasonably
avoidable. For all of the reasons
discussed above, the Agencies further
conclude that, although the injury
resulting from the application of
increased annual percentage rates to
outstanding balances is avoidable in
some individual cases, this injury is not
reasonably avoidable by consumers as a
general matter.107
For these same reasons, the Agencies
also conclude that the injury caused by
the credit limit); Exhibit 6, Tables 1a to Argus
Analysis (stating that a total of 15.6% of accounts
were repriced as a penalty from March 2007
through February 2008). One credit card issuer
cited data showing that its consumers tend to make
payments close to the due date, which—it argued—
indicates that consumers are able to reasonably
avoid late payment. This same data, however,
indicated that a significant number of payments are
received after the due date.
105 Some industry commenters noted that the
Board’s consumer testing indicated that consumers
have a general understanding that their rate would
change if they violated the account terms by, for
example, paying late. This does not, however, mean
that consumers can, as a general matter, reasonably
avoid such violations.
106 See Sumit Agarwal et al., Stimulus and
Response: The Path from Naivete to Sophistication
in the Credit Card Market (Aug. 20, 2006) (available
at http://www.iue.it/FinConsEU/ResearchActivities/
BehavioralApproachesMay2007/Driscoll.pdf).
107 Some commenters argued that the Board’s
existing or proposed Regulation Z disclosures or
state laws allowing consumers to opt out of rate
increases by closing the account enable consumers
to reasonably avoid injury. These arguments are
addressed below in the Agencies’ discussion of
public policy. In particular, the Agencies note that
disclosure will not enable consumers to select a
credit card that does not reprice because
institutions almost uniformly reserve the right to
increase rates at any time and for any reason. See
Statement for FTC Credit Practices Rule, 48 FR at
7746. In addition, some commenters criticized the
May 2008 Proposal for failing to explain why injury
was reasonably avoidable for each of the proposed
exceptions in proposed § l.24(b). As discussed
below, the exceptions in § l.24(b) are not based on
a conclusion that the injury is reasonably avoidable
as a general matter but instead on a determination
that allowing repricing in those circumstances
ensures that the costs of prohibiting rate increases
on outstanding balances do not outweigh the
benefits.

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rate increases during the first year after
account opening is not, as a general
matter, reasonably avoidable,
particularly if consumers are not
informed at account opening of the rates
that will apply to the account. A
consumer will receive 45 days’ advance
notice of such increases pursuant to the
Board’s revisions to 12 CFR 226.9
(adopted elsewhere in today’s Federal
Register) but, as discussed above, many
consumers will be unable to find
another credit card account with a rate
comparable to the pre-increase rate.
Thus, although some consumers may be
able to avoid injury by using a different
credit card account for transactions or
ceasing to use credit cards entirely,
consumers who open an account to
finance important purchases (such as
medical services or home or automotive
repairs) and cannot obtain credit at the
same or a better rate elsewhere cannot
reasonably avoid injury. Furthermore, to
the extent that consumers are injured
because the rate increase caused the
account to lose value as a means of
financing transactions, this injury is not
reasonably avoidable because, as
discussed above, rate increases are not,
as a general matter, reasonably
avoidable.
Injury is not outweighed by
countervailing benefits. In May 2008,
the Agencies stated that, although
proposed § l.24 could result in
increased costs or reduced credit
availability for consumers generally,
these costs did not appear to outweigh
the substantial benefits to consumers of
avoiding significant unanticipated
increases in the cost of completed
transactions. As discussed below, based
on the comments received and further
analysis, the Agencies have revised
aspects of proposed § l.24 in order to
ensure that the final rule creates benefits
for consumers that exceed any
associated costs. In light of these
revisions, the Agencies conclude that, to
the extent prohibited by § l.24,
increases in the annual percentage rate
do not produce benefits for consumers
or competition that outweigh the injury.
In response to the May 2008 Proposal,
individual consumers, consumer
groups, and some members of Congress
argued that repricing is inherently
unfair and should be prohibited in most
if not all circumstances. In contrast,
industry commenters generally argued
that flexible pricing models that
respond to changes in the consumer’s
risk of default have produced
substantial benefits for consumers and
competition that outweigh any injury.
These commenters noted that, whereas
institutions once charged a single rate of
around 20 percent on all credit card

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accounts regardless of the risk presented
by the consumer, institutions now vary
the interest rate based on the
consumer’s risk profile with the result
that the great majority of consumers
receive rates below 20 percent.108
The exceptions in proposed § l.24(b)
permitted three types of repricing that
appeared to produce benefits for
consumers and competition that
outweighed the injury. These exceptions
were designed to provide institutions
with flexibility in the repricing of
outstanding balances while protecting
consumers from unfair surprise. Based
on the comments and further analysis,
the Agencies have modified these
exceptions as well as the general rule.
As discussed below, the Agencies
believe that the final rule achieves the
appropriate balance between providing
consumers with increased certainty and
transparency regarding the cost of credit
and providing institutions with
sufficient flexibility to adjust to market
conditions and allocate risk efficiently.
1. Increases in the Rate That Applies to
New Transactions
Individual consumers, consumer
groups, members of Congress, and the
FDIC urged the Agencies to apply the
proposed restrictions on the repricing of
outstanding balances to increases in the
rates that apply to future transactions.
Some argued that consumers who have
opened an account in reliance on the
rates stated by the institution should be
protected from unexpected increases in
those rates for a specified period of
time.
As discussed above, the Agencies
agree that rate increases during the first
year after account opening can cause
substantial injury that is not, as a
general matter, reasonably avoidable by
consumers. In addition, because the
Board’s consumer testing indicates that
interest rates are a primary focus for
consumers when reviewing credit card
applications and solicitations, the
Agencies believe that allowing
unlimited rate increases during the first
year would be contrary to the purpose
of § l.24, which is to prevent surprise
increases in the cost of credit. Indeed,
as noted below with respect to
promotional rates, allowing this type of
repricing while restricting others would
create an incentive for institutions to
108 Many of these commenters relied on the GAO
Credit Card Report, which states that data reported
by six top issuers indicated that, in 2005, about
80% of active accounts were assessed rates of less
than 20% (with more than 40% receiving rates of
15% or less). See GAO Credit Card Report at 5.
However, as noted by consumer groups, this data
also indicated that approximately 11% of active
accounts were charged rates over 25%. See id. at
32.

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offer artificially low interest rates to
attract new customers based on the
expectation that future repricings will
generate sufficient revenues, a practice
which distorts competition and
undermines consumers’ ability to
evaluate the true cost of using credit.
Accordingly, because consumers who
open an account should be able to rely
on the interest rate (or rates) stated by
the institution, the Agencies have
revised § l.24 to prohibit, as a general
matter, rate increases during the first
year after account opening.
This prohibition, however, is not
absolute. The exception in § l.24(b)(1)
permits an institution to increase any
annual percentage rate disclosed at
account opening so long as the
institution also disclosed a period of
time after which the rate will increase
and the increased rate that will apply.
In addition, a variable rate may be
increased due to an increase in the
index pursuant to § l.24(b)(2).
Furthermore, after the first year,
§ l.24(b)(3) permits an institution to
increase the rates that apply to new
transactions, provided the institution
complies with Regulation Z’s 45-day
advance notice requirement. Finally,
§ l.24(b)(4) permits an institution to
increase rates when the account
becomes more than 30 days delinquent.
The Agencies acknowledge that these
additional restrictions will reduce
interest revenue and therefore have
some effect on the cost and availability
of credit. Industry commenters,
however, generally stated that the
amount of interest revenue generated
from raising rates on future transactions
was relatively small in comparison to
the revenue generated from applying
increased rates to outstanding balances.
Therefore, the Agencies believe that the
effect of restricting rate increases during
the first year after account opening will
be significantly less than that for
restricting rate increases on outstanding
balances. Accordingly, the Agencies
conclude that repricing during the first
year after account opening does not
produce benefits for consumers or
competition that outweigh the injury to
consumers.
By requiring institutions to commit in
advance to the rates that will ultimately
apply to transactions and to disclose
those rates to consumers, the final rule
will also prevent institutions from
relying on the ability to reprice
outstanding balances when setting
upfront rates, thereby creating
additional incentives for institutions to
ensure that the rates offered to
consumers at the outset fully reflect the
risk presented by the consumer as well

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2. Variable Rates
The proposed rule provided that the
prohibition on applying an increased
annual percentage rate to an outstanding
balance would not extend to variable
rates. This exception was intended to
allow institutions to adjust to increases
in the cost of funds by utilizing a
variable rate that reflects market
conditions because, if institutions were
not permitted to do so, they would be
less willing to extend open-end credit.
The Agencies reasoned that, although
the injury caused by application of an
increased variable rate to an outstanding
balance is not reasonably avoidable
insofar as the increase is due to market
conditions that are beyond the
consumer’s ability to predict or control,
the proposed exception would protect
consumers from arbitrary rate increases
by requiring that the index for the
variable rate be outside the institution’s
control and available to the general
public. This exception was supported
by most commenters. Accordingly,
because allowing institutions to utilize
variable rates provides countervailing
benefits sufficient to outweigh the
increased interest charges, the Agencies
have adopted the proposed exception
for variable rates as § l.24(b)(2) with
some stylistic changes.
3. Non-Variable Rates
Industry commenters urged the
Agencies to revise proposed § l.24 to
provide greater flexibility to offer rates
that do not vary with an index. Without
such an exception, they argued,
concerns regarding increases in the cost
of funds would force institutions to offer
only variable rates, depriving consumers
of the reliability of rates that do not
fluctuate with the market. Some of these
commenters requested that proposed
§ l.24 be revised to allow repricing of
outstanding balances at the end of a
specified period (such as six months,
one year, or two years).
The Agencies agree that non-variable
rates can provide significant benefits to
consumers but only if consumers are
informed before opening an account or
engaging in transactions how long the
rate will apply and what rate will be
applied thereafter. Accordingly, the
final rule provides two ways for
institutions to offer non-variable rates.
First, at account opening, § l.24(b)(1)
permits institutions to offer non-variable
rates that apply for a specified period of
time and to reprice at the end of that
period so long as the institution
discloses at account opening the
increased rate that will apply. For

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example, an institution could offer a
consumer credit card account with a
non-variable rate of 10% for six months
after which a variable rate based on a
disclosed index and margin will apply
to outstanding balances and new
transactions. Similarly, following the
first year after account opening,
§ l.24(b)(3) permits institutions to
provide non-variable rates that apply for
a specified period of time, although
these rates can only be applied to new
transactions. For example, consistent
with the notice requirements in 12 CFR
226.9(c), an institution could apply a
non-variable rate of 15% to purchases
for one year after which a variable rate
will apply.
In either case, a consumer who
receives a non-variable rate would be
subject to repricing. However, the
consumer will know at the time of each
purchase not only how long the current
rate will apply to that purchase but also
the specific rate that will apply
thereafter. Thus, the final rule provides
institutions with the ability to increase
rates to reflect anticipated changes in
market conditions while enabling
consumers to make informed decisions
about the cost of using credit.
Accordingly, the Agencies conclude that
the benefits of allowing repricing under
these circumstances outweigh the
injury.
4. Promotional Rates
The proposed rule would have
allowed institutions to apply an
increased rate to an outstanding balance
upon expiration or loss of a promotional
rate, except that, when a promotional
rate was lost, the increased rate could
not exceed the rate that would have
applied after expiration. Consumer
groups opposed this exception, stating
that, because it did not limit the
circumstances in which a promotional
rate could be lost, it would leave in
place abusive repricing practices. These
commenters argued that this exception
would allow institutions to continue to
engage in ‘‘hair trigger’’ repricing by, for
example, increasing the rate on an
outstanding balance from a 0%
promotional rate to a 15% standard rate
when the consumer’s payment was
received one day after the due date.
They also stated that some institutions
impose conditions on retention of a
promotional rate that are unrelated to
the consumer’s risk of default and are
instead intended to trap unwary
consumers into losing the discounted
rate (for example, requiring consumers
to make a certain number or dollar
amount of purchases each billing cycle).
Accordingly, they argued that, because
discounted promotional rate offers are

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5525

used to encourage consumers to engage
in transactions they would not
otherwise make (such as large purchases
or balance transfers), consumers who
rely on promotional rate offers need the
same protections as consumers who rely
on non-promotional rates.
Based on the comments and further
analysis, the Agencies agree that this
aspect of the proposed rule could allow
the very practices that the Agencies
intended to prevent. For example, an
institution seeking to attract new
consumers by offering a promotional
rate that is lower than its competitors’
rates could offer a rate that would be
unprofitable if the institution did not
place conditions on retention of the rate
that, based on past consumer behavior,
it anticipates will result in a sufficient
number of repricings to generate
sufficient revenues. This type of
practice distorts competition and
undermines consumers’ ability to
evaluate the true cost of using credit.
Although the Agencies understand
that discounted promotional rates can
provide substantial benefits to
consumers 109 and that institutions may
reduce promotional rate offers if their
ability to reprice is restricted, practices
that cause consumers to lose a
promotional rate before the previouslydisclosed expiration date deprive those
consumers of the benefit of a rate on
which they have relied. Accordingly,
because proposed § l.24 was intended
to improve transparency and prevent
surprise increases in the cost of
completed transactions, the Agencies
conclude that the injury caused by the
repricing of promotional rate balances
prior to expiration is not outweighed by
the benefits of the promotional rate
itself. Absent a serious default, a
consumer should be able to rely on a
rate for the period specified in advance
by the institution. Therefore, the final
rule does not permit repricing of
outstanding balances prior to the end of
the specified period (except in the case
of a delinquency of more than 30 days
as provided in § l.24(b)(4)). As
discussed above, however, the final rule
(like the proposal) permits repricing at
the end of a specified period so long as
the increased rate was disclosed in
advance.
5. Violations of the Account Terms
The proposed rule would have
permitted institutions to increase the
annual percentage rate on an
outstanding balance if the consumer
became more than 30 days delinquent.
109 See above discussion regarding the benefits of
promotional rates in relation to § l.23 (payment
allocation).

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The Agencies observed that, although
this delinquency may not have been
reasonably avoidable in certain
individual cases, the consumer will
have received notice of the delinquency
(in the periodic statement and likely in
other notices as well) and had an
opportunity to cure before becoming
more than 30 days delinquent. The
Agencies noted that a consumer is
unlikely, for example, to become more
than 30 days delinquent due to a single
returned item or the loss of a payment
in the mail. Thus, the harm in
individual cases where a delinquency of
more than 30 days is not reasonably
avoidable appeared to be outweighed by
the benefits to all consumers (in the
form of lower annual percentage rates
and broader access to credit) of allowing
institutions to reprice for risk once a
consumer has become significantly
delinquent. For these reasons and for
the additional reasons discussed below,
the Agencies conclude that the benefits
of allowing repricing in these
circumstances outweigh the costs. The
Agencies further conclude, however,
that the same is not true for repricing
based on other violations of the account
terms.
In response to the May 2008 Proposal,
consumer groups argued that repricing
outstanding balances based on
violations of the account terms is
fundamentally unfair and should be
prohibited entirely or, failing that, a
delinquency of more than 30 days
should be the only circumstance in
which institutions are permitted to
reprice based on a violation of the
account terms. A consumer group
explained that a delinquency of more
than 30 days was the appropriate period
because, under industry guidelines
governing credit reporting, an account is
not reported as delinquent until it is at
least 30 days late, suggesting that paying
less than 30 days late is not considered
to affect creditworthiness
significantly.110 In contrast, industry
commenters and the OCC argued that
the proposed rule provided insufficient
flexibility because accounts that become
more than 30 days delinquent have such
a high rate of loss that repricing is
ineffective. The Argus Analysis stated
that 32.4 percent of accounts that are
more than 30 days past due and 49.8
percent of the balances on those
accounts will become losses within the
next twelve months.111 Industry
110 See Consumer Data Industry Ass’n, Credit
Reporting Resource Guide 6–6 (2006).
111 See Exhibit 5, Tables 1a and 1b to Argus
Analysis (row labeled ‘‘Mar–07’’ containing twelvemonth outcome duration). The Argus Analysis
categorized an account as a loss if it became 90 or
more days delinquent, charged off, or bankrupt. Id.

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commenters argued that, given these
rates, institutions would be unable to
compensate for the losses through rate
increases on all accounts that become
more than 30 days delinquent. Instead,
they argued, these losses would have to
be spread over a larger population of
accounts, potentially raising rates and
reducing credit availability for many or
all consumers.
The Argus Analysis stated that—as a
result of the restrictions in proposed
§ l.23 (payment allocation), proposed
§ l.24 (repricing), and proposed 12 CFR
226.9 (45 days advance notice of most
rate increases)—institutions could lose
1.639 percent of their annual interest
revenue on revolving credit card
accounts.112 This analysis estimated
that, in order to offset this loss,
institutions might increase interest rates
by approximately 120 percent of the loss
(1.937 percentage points), decrease the
average credit line of $9,561 by
approximately 22 percent ($2,029),
cease lending to consumers with Fair
Isaac Corporation (‘‘FICO’’) scores below
620, or engage in some combination of
these responses.113
Although the Argus Analysis did not
estimate the potential impact on interest
rates and credit availability specifically
attributable to proposed § l.24, it did
state that annual interest revenue on
revolving accounts would be reduced by
approximately 1.514 percent as a result
of proposed § l.24 and proposed 12
CFR 226.9.114 Therefore, assuming for
the sake of discussion that the data and
assumptions underlying the Argus
Analysis are accurate, that analysis
predicts that institutions might respond
by increasing interest rates
approximately 1.817 percentage points,
by decreasing credit limits
approximately $1,874, or by
substantially reducing lending to
consumers with FICO scores below
620.115 Accordingly, if, for example, an
112 See Argus Analysis at 3; Exhibit 1, Table 1 to
Argus Analysis.
113 See Argus Analysis at 4; Exhibit 1, Tables 7–
11 to Argus Analysis.
114 See Exhibit 1, Table 1 to Argus Analysis
(combining the predictions for ‘‘Revolvers’’ in the
rows labeled ‘‘30+DPD Penalty Trigger,’’ ‘‘CIT
Repricing,’’ and ‘‘Non 30+DPD Penalty Triggers’’).
115 As noted above, the Argus Analysis estimated
that proposed § l.24 and proposed 12 CFR 226.9
would reduce interest revenue by 1.514 percent.
Accordingly, the Agencies assumed that, consistent
with the Argus Analysis, the increase in interest
rates attributable to proposed § l.24 and proposed
12 CFR 226.9 would be 120 percent of the reduction
in interest revenue (1.514 × 1.2 = 1.817). The
Agencies also assumed that the reduction in credit
limits attributable to proposed § l.24 and proposed
12 CFR 226.9 would be proportionate to the overall
reduction predicted by the Argus Analysis. Thus,
because the estimated revenue loss attributable to
proposed § l.24 and proposed 12 CFR 226.9
(1.514) is 92.4% of the overall estimated revenue

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institution currently charges a consumer
an interest rate of 15% on a credit line
of $9,000, the institution could respond
to proposed § l.24 and proposed 12
CFR 226.9 by increasing the rate to
16.82% or by decreasing the credit limit
to $7,126.
As noted above, however, the
Agencies are unable to verify the
accuracy of the conclusions reached by
the Argus Analysis or its supporting
data. Furthermore, this analysis
assumed that institutions could only
respond to the proposed rules by
increasing rates, reducing credit limits,
or eliminating credit to consumers with
FICO scores below 620, ignoring other
potential responses such as offsetting
lost interest revenue by increasing
revenue from fees (including annual
fees) or developing improved
underwriting techniques in order to
reduce losses on accounts that
eventually default.116
In addition, even if the Agencies were
to accept the Argus Analysis and its
underlying data at face value, that
analysis also indicates that the typical
rate increase is approximately eight
percentage points and that
approximately 22 percent of accounts
are repriced over the course of a year.117
Thus, with respect to interest rates, the
Argus Analysis indicates that the impact
of the proposed rule would be relatively
neutral because the rule would prevent
a six percentage point net increase on
roughly a quarter of accounts while the
other three-quarters may experience an
increase of less than two percentage
points.118 Although the Argus Analysis
loss (1.637), the Agencies assumed that the
reduction in credit limits attributable to proposed
§ l.24 and proposed 12 CFR 226.9 would be 92.4%
of the overall reduction of $2,029 predicted by the
Argus Analysis ($2,029 × 0.924 = $1,874.26). The
Agencies were not able to estimate the potential
impact on credit availability for consumers with
FICO scores below 620 but, because proposed
§ l.24 and proposed 12 CFR 226.9 accounted for
92.4% of the estimated revenue loss, the Agencies
assumed the reduction in available credit for these
consumers would be substantial.
116 As discussed above with respect to § l.23 and
in greater detail below in section VII of this
SUPPLEMENTARY INFORMATION, the Agencies
anticipate that, prior to the effective date, some
institutions may respond to the restrictions in
proposed § l.24 and proposed 12 CFR 226.9 by, for
example, adjusting interest rates on existing
balances, increasing fees, or reducing credit limits.
117 See Argus Analysis at 7; Exhibit 6, Tables 1a
and 3a to Argus Analysis (totaling the percentage
of accounts repriced as a penalty and as a changein-terms from March 2007 through February 2008).
118 In other words, if, according to the Argus
Analysis, roughly 22% of consumers currently
experience a rate increase averaging 8 percentage
points each year and all consumers will experience
a 1.817-point increase in interest rate as a result of
the proposed rules, then the proposed rules will
prevent 22% of consumers from incurring a net
increase of 6.183 points (8 minus 1.817) while the
other 78% may experience an increase of 1.817.

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Federal Register / Vol. 74, No. 18 / Thursday, January 29, 2009 / Rules and Regulations
also predicted that—instead of
increasing interest rates—institutions
might reduce credit limits or lending to
consumers with lower FICO scores,
those responses would reduce or
eliminate the need for a rate increase,
thereby retaining roughly the same
relationship between the costs and
benefits of the rule.119
As with § l.23, 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 § l.24. Upfront annual
percentage rates that are artificially
reduced based on the expectation of
future increases do not represent a true
benefit to consumers as a whole. In
addition to protecting consumers from
unexpected increases in the cost of
transactions that have already been
completed, § l.24 will enable
consumers to more accurately assess the
cost of using their credit card accounts
at the time they engage in new
transactions. Finally, competition will
be enhanced because institutions that
offer annual percentage rates that more
accurately reflect risk and market
conditions will no longer be forced to
compete with institutions offering
artificially reduced rates. Accordingly,
the Agencies conclude that limiting rate
increases on outstanding balances and
during the first year to circumstances
where the account is more than 30 days
delinquent produces benefits that
outweigh the associated costs.
Industry commenters and the OCC
urged the Agencies to adopt additional
exceptions to proposed § l.24 based on
violations of the account terms other
than a single late payment (specifically,
exceeding the credit limit, making
payment with a check that is returned
for insufficient funds, and paying late
twice in a twelve month period). Many
of these commenters provided data
indicating that these behaviors are
associated with loss rates that are
significantly higher than those for
consumers who do not violate the
account terms (although all of these loss
rates were significantly lower than the

loss rates associated with delinquencies
of more than 30 days). As an initial
matter, the Agencies note that the
impact on the cost and availability of
credit of prohibiting repricing based on
these behaviors is subsumed within the
impact of prohibiting repricing based on
any violation of the account terms other
than a delinquency of more than 30
days. Accordingly, for the reasons
already stated above, repricing
outstanding balances based on these
behaviors does not provide benefits to
consumers or competition that outweigh
the injury to consumers.
Furthermore, with respect to repricing
outstanding balances when the credit
limit is exceeded or when a payment is
returned for insufficient funds, the
Agencies have already concluded that
these violations of the account terms are
not, as a general matter, reasonably
avoidable by consumers. Accordingly,
allowing repricing in those
circumstances would undermine the
purpose of § l.24, which is to protect
consumers from being unfairly
surprised by increases in the cost of
completed transactions.
Similarly, the Agencies conclude that
allowing repricing based on two late
payments in twelve months would not
sufficiently protect consumers from
unfair surprise. As discussed above, the
Agencies have already concluded that
consumers cannot, as a general matter,
reasonably avoid repricing based on late
payments. Furthermore, making a
payment that is received one day after
the due date twice in a period of twelve
months is precisely the type of ‘‘hair
trigger’’ repricing that § l.24 is
intended to prevent. Even if repricing
were allowed only when the late
payments were received two, three, or
even five days after the due date (as
some commenters suggested), these
periods would not provide consumers
with sufficient time to learn of the
delinquency and cure it (unlike a
delinquency of 30 days or more).120
Furthermore, as discussed above with
respect to § l.22, the Agencies have
already concluded that providing a
short period of time after the due date
during which payments must be treated
as timely could create consumer

Although some portion of the 22 percent are
presumably accounts that become 30 days
delinquent and thus would still be repriced, the
comments indicate that this portion is relatively
small.
119 The Agencies also note that, while the
estimated impact on interest rates and credit
availability is a prediction regarding potential
future events, the average eight percentage point
increase appears to reflect the harm that is currently
imposed on consumers. Accordingly, the Agencies
believe that the latter figure is entitled to greater
weight.

120 One commenter suggested that the second late
payment would be reasonably avoidable if the first
late payment was followed by a notice warning the
consumer that a second delinquency would result
in repricing. Because, however, this notice could
precede the second late payment by as much as
eleven months, the Agencies do not believe it
would be effective to enable consumers to avoid
repricing. See Agarwal, Stimulus and Response
(finding that a consumer is 44 percent less likely
to pay a late fee in the current month if that
consumer paid a late fee the prior month but that
this effect decreases with each additional month).

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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. Finally, the
Agencies note that the exception in
§ l.24(b)(4) permitting repricing for
delinquencies of more than 30 days is
similar to an exception allowing
repricing based on consecutive
delinquencies because a consumer who
is more than 30 days’ delinquent will,
in most cases, have missed two due
dates.
6. Assessment of Deferred Interest
As noted above, consumer groups
stated that the assessment of deferred
interest raises many of the same
concerns as the repricing of outstanding
balances. Deferred interest plans are
typically marketed as being ‘‘interest
free’’ for a specified period (such as a
year) and are often offered to promote
large purchases such as furniture or
appliances. However, although interest
is not charged to the account during that
period, interest accrues at a specified
rate. If the consumer violates the
account terms (which could include a
‘‘hair trigger’’ violation such as paying
one day late) or fails to pay the purchase
balance in full before expiration of the
period, the institution retroactively
charges all interest accrued from the
date of purchase.
Consumer groups stated that, like
discounted promotional rates, deferred
interest plans are used to encourage
consumers to engage in transactions
they would not otherwise make. They
argued that, because of ‘‘hair trigger’’
repricing, many consumers lose the
benefit of the deferred interest plan
earlier than expected and that many
other consumers incur deferred interest
charges by failing to pay the balance in
full prior to expiration either
inadvertently or because they lack the
resources to do so. In addition, they
noted that the injury to the consumer in
such cases may be far greater than when
a promotional rate is lost because
interest is charged retroactively on the
outstanding balance. Finally, they stated
that deferred interest plans cannot be
adequately disclosed to consumers
because of their complexity.
Based on the comments and further
analysis, the Agencies believe that the
assessment of deferred interest under
these circumstances is effectively a
repricing of an outstanding balance. For
example, assume that an institution
offers a consumer credit card account
that accrues interest on purchases at an
annual percentage rate of 15% but
interest will not be charged on
purchases for one year unless the

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consumer violates the account terms or
the purchase balance is not paid in full
by the end of the year. The account is
marketed as ‘‘no interest on purchases
for one year.’’ On January 1 of year one,
a consumer opens an account in order
to make a $3,000 purchase. Although
interest technically accrues on the
$3,000 purchase at 15% from January 1
through December 31, this interest is not
charged to the account, making the rate
that applies to the purchase effectively
zero during that period. If, however, the
consumer violates the account terms
during year one by paying late or fails
to pay the $3,000 in full by January 1
of year two, all of the interest that has
accrued at 15% since January 1 of year
one will be charged retroactively to the
account. In addition, the 15% rate (or a
higher penalty rate) will apply to the
$3,000 balance thereafter.
The Agencies believe that this is
precisely the type of surprise increase in
the cost of completed transactions that
§ l.24 is intended to prevent. As noted
by the commenters, the assessment of
accrued interest causes substantial
injury to consumers. In addition, for the
same reasons that consumers cannot, as
a general matter, reasonably avoid rate
increases as a result of a violation of the
account terms, consumers cannot, as a
general matter, reasonably avoid
assessment of deferred interest as a
result of a violation of the account terms
or the failure to pay the balance in full
prior to expiration of the deferred
interest period. For example, just as
illness or unemployment may
reasonably prevent some consumers
from paying on time, these conditions
may reasonably prevent some
consumers from paying the deferred
interest balance in full prior to
expiration. In addition, as noted by the
commenters, disclosure may not
provide an effective means for
consumers to avoid the harm caused by
these plans.
Finally, although deferred interest
plans provide some consumers with
substantial benefits in the form of an
interest-free advance if the balance is
paid in full prior to expiration, the
Agencies conclude that these benefits
do not outweigh the substantial injury
to consumers. As discussed above,
deferred interest plans are typically
marketed as ‘‘interest free’’ products but
many consumers fail to receive that
benefit and are instead charged interest
retroactively. Accordingly, as with the
prohibitions on other repricing practices
discussed above, prohibiting the
assessment of deferred interest will
improve transparency and enable
consumers to make more informed
decisions regarding the cost of using

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credit. Accordingly, the Agencies
conclude that an exception to the
general prohibition on rate increases is
not warranted for the assessment of
deferred interest.
The Agencies note, however, that the
final rule does not preclude institutions
from offering consumers interest-free
promotional plans. As discussed above,
institutions can still offer 0%
promotional rates for specified periods
so long as they disclose the rate that will
apply thereafter. Furthermore, an
institution could offer a plan where
interest is assessed on purchases at a
disclosed rate for a period of time but
the interest charges are waived or
refunded if the principal is paid in full
by the end of the period. For example,
assume that an institution offers an
account that charges interest on
purchases at a 15% non-variable rate
but only requires the consumer to repay
a portion of the outstanding principal
balance each month during the first year
after the account is opened. If the
principal is paid in full by the end of
that year, the institution waives all
interest accrued during that year. At
account opening on January 1 of year
one, the institution discloses these
terms (including the 15% rate at which
interest will accrue). The consumer uses
the account for a $3,000 purchase on
January 1. The consumer makes no
other purchases and begins making
payments. At the end of each billing
cycle, the institution charges to the
account interest accrued on the
principal balance at the 15% rate. On
December 15 of year one, the consumer
pays the remaining principal balance
and the institution waives all accrued
interest. This type of product would
comply with the final rule.
Public policy. Industry commenters
and the OCC argued that proposed
§ l.24 conflicted with established
public policy, citing a variety of sources.
The Agencies note that public policy is
not a required element of the unfairness
analysis.121 Nevertheless, after carefully
considering the materials cited by the
comments, the Agencies conclude that
any inconsistency is necessary to
protect consumers from practices that
satisfy the required statutory elements
of unfairness.
First, industry commenters and the
OCC cited testimony, guidance, reports,
and advisory letters from federal
banking regulators (including the Board
and OTS) stating or suggesting that
institutions should actively manage risk
on credit card accounts, that one
method of managing risk is adjusting
interest rates on outstanding balances
121 See

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and new transactions to reflect the
consumer’s risk of default, and that
doing so can be beneficial for consumers
insofar as it reduces rates overall.122 The
Agencies agree that, to the extent that
these materials constitute public policy
for purposes of the FTC Act unfairness
analysis, many contain statements that
could be deemed inconsistent with the
restrictions in § l.24. As discussed
above, however, the Agencies have
already taken the benefits of adjusting
rates to reflect changes in a consumer’s
risk of default into account and
concluded that these benefits do not
outweigh the injury to consumers
caused by this practice. Accordingly,
the Agencies find that the regulatory
materials cited do not preclude a
determination that, to the extent
prohibited by § l.24, application of
increased annual percentage rates is an
unfair practice.
Second, some industry commenters
and the OCC stated that proposed
§ l.24 conflicts with previous Board
policy regarding rate increases.
Specifically, these commenters noted
that, prior to the revisions to Regulation
Z in today’s Federal Register, 12 CFR
226.9 placed no restrictions on rate
increases resulting from a violation of
the account terms and required only 15
days’ advance notice of rate increases
resulting from a change in the terms of
the contract. These commenters further
noted that, rather than proposing to
prohibit repricing of outstanding
balances in the June 2007 Regulation Z
Proposal, the Board instead proposed to
improve disclosures regarding the rate
increases. According to these
commenters, the improved Regulation Z
disclosures are sufficient, by
themselves, to address any concerns
regarding application of increased rates
to outstanding balances.
These commenters first argued that
disclosure in solicitations and at
account opening of the circumstances in
which a penalty rate will be applied to
122 See, e.g., Testimony of Julie L. Williams, Chief
Counsel & First Senior Deputy Controller, OCC
before H. Subcomm. on Fin. Instits. & Consumer
Credit at 5 (Apr. 17, 2008); Board of Governors of
the Federal Reserve System, Report to Congress on
Credit Scoring and Its Effects on the Availability
and Affordability of Credit at O5 (Aug. 2007)
(available at http://www.federalreserve.gov/
boarddocs/RptCongress/creditscore/
creditscore.pdf); Testimony of John C. Dugan,
Comptroller of the Currency, OCC, before the H.
Subcomm. on Fin. Instits. & Consumer Credit at 21–
24 (June 7, 2007) (available at http://
www.house.gov/apps/list/hearing/
financialsvcs_dem/htdugan060707.pdf); OTS
Handbook on Credit Card Lending § 218 (2006)
(available at http://files.ots.treas.gov/422064.pdf);
OCC Advisory Letter 2004–10, at 3 (Sept. 14, 2004);
OCC Handbook, Rating Credit Risk (Apr. 2001)
(available at http://www.occ.treas.gov/handbook/
RCR.pdf).

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a consumer credit card account will
enable consumers to avoid those
circumstances and therefore any injury.
Although these disclosures are
necessary and appropriate for the
informed use of credit, the Agencies do
not believe that, by themselves, they
would be effective in preventing the
harm caused by application of increased
rates. Disclosure will not enable
consumers to select a credit card that
does not reprice outstanding balances
because institutions almost uniformly
reserve the right to increase rates at any
time and for any reason and to apply
those increased rates to prior
transactions.123 Nor, as discussed above,
would disclosure enable consumers to
avoid rate increases resulting from
circumstances outside their control,
such as late payments due to delays in
the delivery of mail. Furthermore, as
noted in the May 2008 Proposal, there
is evidence that disclosure at
solicitation and account opening has
limited effectiveness in preventing
subsequent defaults because consumers
do not focus on the consequences of
default when deciding whether to open
a credit card account and whether to use
the account for a particular
transaction.124
123 The GAO’s 2005 analysis of 28 popular credit
cards, for example, identified only one that did not
reprice outstanding balances to a default rate. See
GAO Report at 24. Furthermore, the comments from
industry on the May 2008 Proposal generally stated
that all or almost all credit card issuers reprice
outstanding balances. Thus, as the FTC concluded
with respect to its Credit Practices Rule, the
prevalence of a contractual provision indicates that
harm caused by that provision is not reasonably
avoidable. See Statement for FTC Credit Practices
Rule, 48 FR at 7746.
124 See Statement for FTC Credit Practices Rule,
49 FR at 7744 (‘‘Because remedies are relevant only
in the event of default, and default is relatively
infrequent, consumers reasonably concentrate their
search on such factors as interest rates and payment
terms.’’); see, e.g., Angela Littwin, Beyond Usury: A
Study of Credit-Card Use and Preference Among
Low-Income Consumers, 80 Tex. L. Rev. 451, 467–
478, 494 (2008) (‘‘Issuers currently compete on the
basis of interest rates, but because this competition
focuses on initial interest rates and not on the total
amount that consumers will pay, it fails to give
sufficient decision-making information either to
consumers who literally do not understand the
events that trigger higher interest rates and fees or
to consumers who underestimate the likelihood that
they will be faced with these rates and fees.’’);
Shane Frederick, et al., Time Discounting and Time
Preference: A Critical Review, 40 J. Econ. Literature
351, 366–67 (2002); Ted O’Donoghue & Matthew
Rabin, Doing It Now or Later, 89 Am. Econ. Rev.
103, 103, 111 (1999). Some industry commenters
argued that, under the FTC Policy Statement on
Unfairness, a finding of unfairness is not
appropriate when the institutions did not create an
obstacle to the free exercise of consumer
decisionmaking. In fact, the FTC Policy Statement
on Unfairness states (at 3) that the proper analysis
is whether the institution ‘‘unreasonably creates or
takes advantage of an obstacle to the free exercise
of consumer decisionmaking.’’ (Emphasis added.)

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Industry commenters also argued that
disclosure of the rate increase 45 days
before that increase goes into effect
allows consumers to avoid injury by
paying the balance in full or transferring
that balance to another credit card
account.125 It would be unreasonable,
however, to expect consumers who have
chosen to use a credit card to finance
purchases in reliance on the rate in
effect at that time to pay those
purchases in full in order to avoid
injury. Furthermore, as discussed above,
alternative financing (such as a balance
transfer) only enables the consumer to
avoid injury if the consumer can obtain
a comparable annual percentage rate
and terms elsewhere, which often will
not be the case. Accordingly, because
disclosure alone would not be effective
in preventing the harm caused by
application of increased rates to
outstanding balances, the Agencies
conclude that § l.24 does not conflict
with the Board’s Regulation Z.
Third, industry commenters and the
OCC argued that proposed § l.24
conflicts with state laws that, rather
than prohibiting repricing of
outstanding balances, require
consumers to affirmatively reject (or opt
out of) such increases by closing the
account.126 These commenters urged the
Agencies to adopt this approach as a
less restrictive alternative to proposed
§ l.24.
In the May 2008 Proposal, the
Agencies considered a similar
suggestion raised by some commenters
in response to the Board’s June 2007
Regulation Z Proposal and concluded
that this remedy would not effectively
protect consumers.127 The Agencies
noted that, in most cases, it would not
be economically rational for a consumer
to choose to pay more for credit that has
already been extended, particularly
when the increased rate is significantly
higher than the prior rate. If consumers
understand their right to reject a rate
increase, most would rationally exercise
that right.128 Thus, the Agencies
125 See

12 CFR 226.9(c)(2) and (g).
e.g., Ala. Code § 5–20–5; 5 Del. Code
§ 952; Off. Code of Ga. § 7–5–4; Nev. Rev. Stat.
§ 97A.140; S.D. Codified Laws § 54–11–10; Utah
Code § 70C–4–102.
127 At that time, commenters urged that the optout right not apply when the rate increase was due
to a violation of the account terms. As the Agencies
noted in May 2008, such a right would not address
the injury to consumers whose rates were increased
due to a violation of the account terms that was not
reasonably avoidable. The Agencies understand the
commenters on this proposal to urge that the optout right be given in all circumstances. This
suggestion, however, does not alter the Agencies’
conclusion that an opt-out right would not
effectively address the injury to consumers.
128 As some commenters noted, a consumer who
cannot obtain a lower rate elsewhere and wants

5529

conclude that providing consumers with
a right to opt out of rate increases on
outstanding balances would be less
restrictive than prohibiting such
increases only if a significant number of
consumers inadvertently forfeited that
right by failing to read, understand, or
act on the notice.129 According to the
GAO Report, however, although state
laws applying to four of the six largest
credit card issuers require an opt-out,
representatives of those issuers stated
that few consumers exercise that
right.130 Although several institutions
asserted that providing an opt-out
would allow consumers to reasonably
avoid injury, none provided the
percentage of consumers that currently
opt out under applicable state
statutes.131
Finally, some industry commenters
argued that the failure to provide an optout for rate increases was inconsistent
with the provision of an opt-out for
payment of overdrafts in proposed
§ l.32(a). As discussed below, the
Agencies are not taking action on
proposed § l.32(a) at this time. The
Board has proposed a revised opt-out
right with respect to overdraft services
under Regulation E elsewhere in today’s
Federal Register. The Board is also
proposing an alternative approach that
would require consumer opt-in to
overdraft services. Furthermore, the
Agencies’ decision to propose an optout with respect to payment of
overdrafts but not with respect rate
increases was based on an evaluation of
the consumers’ incentives in each
situation. A consumer could rationally
prefer assessment of an overdraft fee to
rejection of the transaction because of
the costs associated with rejection (for
example, a merchant fee for a check that
is not honored), whereas—for the
reasons discussed above—few if any
consumers would willingly choose to
pay more for credit already extended.
Accordingly, although § l.24 is
broader than the law in some states, the
Agencies conclude that provision of a
right to opt out of rate increases would
not be effective in preventing the harm

126 See,

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continued access to a credit card account could
rationally choose not to reject application of an
increased rate to an outstanding balance if rejection
meant closing the account. In the scenario,
however, the consumer cannot reasonably avoid
injury.
129 The Agencies also noted in May 2008 that
providing consumers with notice and a means to
exercise an opt-out right (e.g., a toll-free telephone
number) would create additional costs and burdens
for institutions.
130 GAO Credit Card Report at 26–27.
131 One institution stated that half of the
consumers who called its customer service with
questions regarding an opt-out notice exercised that
right, although it is unclear what percentage of all
affected consumers this subset comprised.

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Federal Register / Vol. 74, No. 18 / Thursday, January 29, 2009 / Rules and Regulations

caused by application of increased rates
to outstanding balances.
Applicability of unfairness analysis to
other practices. Industry and consumer
group commenters questioned why the
Agencies’ unfairness analysis with
respect to rate increases as a result of a
violation of the account terms could not
be applied to other consequences of
such violations, such as increases in the
rate for new transactions or fees. As
discussed above, the Agencies have
concluded that the unfairness analysis
does, in fact, preclude rate increases
during the first year after account
opening. After the first year, however,
the Agencies believe that the consumer
has less of a reasonable expectation that
the rate promised at account opening
will continue to apply to new
transactions. At that point, even if the
reason for the rate increase was not
reasonably avoidable, other provisions
should enable consumers to reasonably
avoid the harm caused by an increase in
the rate for new transactions.
Specifically, consumers will receive
notice of most rate increases 45 days
before the increase goes into effect.132
Furthermore, as discussed below,
§ l.24(b)(3) prevents surprise by
prohibiting application of the increased
rate to transactions made up to seven
days after provision of the 45-day
notice. After the first year, these
provisions will enable consumers to
reasonably avoid any injury caused by
application of an increased rate to new
transactions by providing them
sufficient time to receive the 45-day
notice and to decide whether to
continue using the card.
Similarly, although there will be
circumstances in which some
consumers cannot reasonably avoid fees
for violating the account terms (for
example, a late payment fee when a
delay in mail delivery caused the late
payment), this injury is not sufficient to
outweigh the countervailing benefits to
consumers and competition of
discouraging violations of the account
terms. The application of an increased
rate to an outstanding balance increases
consumers’ costs until the rate is
reduced or the balance is paid in full or
transferred to an account with more
favorable terms. Similarly, an increase
in the rate applicable to new
transactions increases the costs of using
the account indefinitely. The
assessment of a fee, however, is
generally an isolated cost that will not
be repeated unless the account terms are
violated again.
132 See

12 CFR 226.9(c)(2) and (g).

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Final Rule
As discussed below, § l.24 imposes
certain disclosure requirements on
institutions. Comment 24–1 clarifies
that an institution that complies with
the applicable disclosure requirements
in Regulation Z, 12 CFR part 226, has
complied with the disclosure
requirements in § 227.24. This comment
further clarifies that nothing in § l.24
alters the 45-day advance notice
requirements in 12 CFR 226.9(c) and (g).
However, nothing in § l.24, its
commentary, or this SUPPLEMENTARY
INFORMATION should be construed to
suggest that, by itself, a failure to
comply with the notice requirements in
12 CFR 226.9 constitutes a violation of
§ l.24.
Section l.24(a) General Rule
Proposed § l.24(a)(1) would have
prohibited institutions from increasing
the annual percentage rate applicable to
any outstanding balance on a consumer
credit card account, except in the
circumstances set forth in proposed
§ l.24(b). Proposed § l.24(a)(2)
defined ‘‘outstanding balance.’’
As discussed above, the Agencies
have adopted a new § l.24(a), which
requires institutions to disclose at
account opening the annual percentage
rates that will apply to each category of
transactions on the consumer credit
card account. Section l.24(a) further
provides that an institution must not
increase the annual percentage rate for
a category of transactions on any
consumer credit card account except as
provided in § l.24(b). As discussed
below, the general prohibition on
increasing rates in § l.24(b) applies to
existing accounts and balances as of the
July 1, 2010 effective date.
Comment 24(a)–1 clarifies that an
institution cannot satisfy the disclosure
requirement in § l.24(a) by disclosing
at account opening only a range of rates
or that a rate will be ‘‘up to’’ a particular
amount. Comment 24(a)–2 provides
illustrative examples of the application
of the prohibition on increasing rates.
Section l.24(b) Exceptions
Proposed § l.24(b) set forth
exceptions to the general prohibition in
proposed § l.24(a) on applying
increased rates to outstanding balances.
As discussed above, the Agencies have
revised § l.24(b) to reflect the changes
to § l.24(a) and to ensure that
consumers are protected from unfair
surprise regarding the cost of credit.
Section l.24(b)(1) Account Opening
Disclosure Exception
Section l.24(b)(1) permits an
increase in the annual percentage rate

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for a category of transactions to a rate
that was disclosed at account opening
upon expiration of a period of time that
was also disclosed at account opening.
For example, an institution could offer
a consumer credit card account that
applies a 5% non-variable rate during
the first six months after account
opening, a 15% non-variable rate for an
additional six months, and a variable
rate thereafter. So long as the institution
discloses these terms to the consumer at
account opening, § l.24(b)(1) permits
the institution to apply the 15% rate to
the purchase balance and to new
purchases after six months and the
variable rate to the purchase balance
and new purchases after the first year.
However, the institution could not
subsequently increase that variable rate
unless specifically permitted by one of
the other exceptions in § l.24(b).
Comment 24(b)(1)–1 clarifies that
§ l.24(b)(1) does not permit application
of increased rates that are disclosed at
account opening but are contingent on
a particular event or occurrence or may
be applied at the institution’s discretion
(unless one of the exceptions in
§ l.24(b) applies). The comment
provides several examples, including
the retroactive assessment of deferred
interest. However, comment 24(b)(1)–2
clarifies that nothing in § l.24 prohibits
an institution from assessing interest
due to the loss of a grace period as
provided in § l.25. In addition,
comment 24(b)(1)–3 clarifies that
nothing in § l.24 prohibits an
institution from applying a rate that is
lower than the disclosed rate upon
expiration of the period. However, if the
lower rate is applied to an existing
balance, the institution cannot
subsequently increase the rate with
respect to that balance unless it has
provided the consumer with advance
notice pursuant to 12 CFR 226.9(c). An
illustrative example is provided.
Section l.24(b)(2) Variable Rate
Exception
Proposed § l.24(b)(1) would have
permitted an increase in the annual
percentage rate due to an increase in an
index that is not under the institution’s
control and is available to the general
public. This exception was designed to
be similar to the exception for variable
rates in 12 CFR 226.5b(f)(1). This aspect
of the proposal was supported by
comments from both industry and
consumer groups. Accordingly,
proposed § l.24(b)(1) is adopted as
§ l.24(b)(2) with stylistic revisions.
This provision cannot be used to
increase the annual percentage rate
based on an index except to the extent
disclosed.

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Federal Register / Vol. 74, No. 18 / Thursday, January 29, 2009 / Rules and Regulations
The Agencies have adopted a new
comment 24(b)(2)–1, which clarifies that
§ l.24(b)(2) does not permit an
institution to increase an annual
percentage rate by changing the method
used to determine a variable (such as by
increasing the margin), even if that
change will not result in an immediate
increase.
Proposed comment 24(b)(1)–1
clarified that an institution may not
increase a variable rate balance based on
its own prime rate but may use a
published prime rate, such as that in the
Wall Street Journal, even if the
institution’s prime rate is one of several
rates used to establish the published
rate. This comment also clarified that an
institution may not increase a variable
rate by changing the method used to
determine the indexed rate. Proposed
comment 24(b)(1)–2 clarified when a
rate is considered ‘‘publicly available.’’
One industry commenter requested
clarification that institutions were not
limited to basing variable rates on prime
rates and could also use one or more
other publicly available indices, such as
the Consumer Price Index. Because the
method for determining the variable rate
must be disclosed consistent with 12
CFR 226.6, the Agencies believe that the
use of multiple indices is appropriate so
long as those indices are publicly
available. The Agencies have revised
proposed comments 24(b)(1)–1 and –2
accordingly and adopted those
comments as 24(b)(2)–2 and –3.
Some industry commenters requested
that institutions be permitted to change
a non-variable rate to a variable rate or
to change the method used to determine
a variable rate so long as, at the time of
the change, the rate would not increase.
Because such changes could lead to
future increases in a rate during the first
year or a rate applicable to an
outstanding balance, comment 24(b)(2)–
4 clarifies that a non-variable rate may
be converted to a variable rate only
when specifically permitted by § l.24.
For example, under § l.24(b)(1), an
institution may convert a non-variable
rate to a variable rate if this change was
disclosed at account opening.
Because § l.24 applies only to
increases in annual percentage rates, the
Agencies have adopted comment
24(b)(2)–5, which clarifies that nothing
in § l.24 prohibits an institution from
changing a variable rate to an equal or
lower non-variable rate. Whether the
non-variable rate is equal to or lower
than the variable rate is determined at
the time the institution provides the
notice required by 12 CFR 226.9(c). For
example, assume that on March 1 a
variable rate that is currently 15%
applies to a balance of $2,000 and the

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institution sends a notice pursuant to 12
CFR 226.9(c) informing the consumer
that the variable rate will be converted
to a non-variable rate of 14% effective
April 16. On April 16, the institution
may apply the 15% non-variable rate to
the $2,000 balance and to new
transactions even if the variable rate on
April 16 was less than 14%.
Comment 24(b)(2)–6 clarifies that an
institution may change the index and
margin used to determine a variable rate
if the original index becomes
unavailable, so long as historical
fluctuations in the original and
replacement indices were substantially
similar and the replacement index and
margin will produce a rate similar to the
rate that was in effect at the time the
original index became unavailable. This
comment further clarifies that, if the
replacement index is newly established
and therefore does not have any rate
history, it may be used if it produces a
rate substantially similar to the rate in
effect when the original index became
unavailable. This comment is modeled
on comment 226.5b(f)(3)(ii)–1 to 12 CFR
226.5b.
Section l.24(b)(3) Advance Notice
Exception
The Agencies have adopted a new
§ l.24(b)(3), which provides that an
annual percentage rate for a category of
transactions may be increased pursuant
to a notice under 12 CFR 226.9(c) or (g)
for transactions that occur more than
seven days after provision of the notice.
An institution cannot, however, utilize
this exception during the first year after
account opening.
The prohibition in § l.24(b)(3) on
applying an increased rate to
transactions that occur more than seven
days after provision of the 12 CFR 226.9
notice is modeled on the definition of
‘‘outstanding balance’’ in proposed
§ l.24(a)(2). Proposed § l.24(a)(2)
defined ‘‘outstanding balance’’ as the
amount owed on a consumer credit card
account at the end of the fourteenth day
after the institution provides the notice
required by proposed 12 CFR 226.9(c) or
(g). This definition was intended to
prevent the requirement in proposed 12
CFR 226.9 that creditors provide 45
days’ advance notice of rate increases
from creating an extended period
following receipt of that notice during
which new transactions could be made
at the prior rate. Although institutions
could address this concern by denying
additional extensions of credit after
sending the 45-day notice, the Agencies
believe that this outcome would not be
beneficial to consumers who have
received the notice and wish to use the
account for new transactions. The 14-

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5531

day period was intended to be
consistent with the 21-day safe harbor
in proposed § l.22(b) insofar as it
would allow seven days for the notice
to reach the consumer and seven days
for the consumer to review that notice
and take appropriate action.
Some industry commenters opposed
proposed § l.24(a)(2) entirely, arguing
that—because rates are often increased
as a result of increases in the
consumer’s risk of default—delaying
imposition of the new rate only
increases the risk borne by the
institution. Other industry commenters
acknowledged that it is reasonable to
provide some period of time for
consumers to receive and review the
notice but that fourteen days is
excessive because average mail times
are much less than seven days and
because a consumer who does not wish
to engage in transactions at the new rate
need only cease to use the card.
As discussed above with respect to
§ l.22, while the Agencies believe that
seven days will be more than sufficient
for the great majority of consumers to
receive a periodic statement or notice by
mail, relying on average mailing times
would not adequately protect the
significant number of consumers whose
delivery times are longer than average.
The Agencies agree, however, that
consumers do not require seven days to
review the notice and take appropriate
action. Indeed, many consumers will
not be required to take any action to
reasonably avoid transactions to which
the increased rate will apply. In
addition, because in most cases the
notice will be delivered in less than
seven days, most consumers will have
time to cancel recurring charges to their
account (if necessary). The Agencies
conclude that, in order to protect
consumers from inadvertently engaging
in transactions to which an increased
rate will apply while minimizing the
period during which credit extended by
the institution must remain at the preincrease rate, a rate that is increased
pursuant to § l.24(b)(3) should apply
only to transactions that occur after the
seventh day following provision of the
12 CFR 226.9 notice.
Comment 24(b)(3)–1 clarifies that the
limitation in § l.24(b)(3) regarding rate
increases during the first year after an
account is opened does not apply to
accounts opened prior to July 1, 2010.
One industry commenter expressed
concern that the ‘‘outstanding balance’’
under proposed § l.24(a)(2) could be
construed to include transactions that
were authorized before the end of the
relevant date but were settled until after
that date. The Agencies agree that an
institution should not be required to

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include such transactions in the balance
to which the increased rate cannot be
applied. Accordingly, comment
24(b)(3)–2 clarifies that an institution
may apply a rate increased pursuant to
§ l.24(b)(3) to transactions that occur
within seven days after provision of the
notice but are settled more than seven
days after that notice was provided. An
illustrative example is provided in
comment 24(b)(3)–3.

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Section l.24(b)(4) Delinquency
Exception
Proposed § l.24(b)(3) provided that
an institution could apply an increased
rate if the consumer’s minimum
payment had not been received within
30 days after the due date. This
exception was intended to ensure that
consumers would generally have notice
and an opportunity to cure the
delinquency before becoming more than
30 days’ past due. As discussed above,
the Agencies have adopted proposed
§ l.24(b)(3) as § l.24(b)(4) with
stylistic changes.133
Some commenters requested that, in
addition to restricting the circumstances
in which institutions could apply high
penalty rates to existing balances based
on a violation of the account terms, the
Agencies also restrict the length of time
a penalty rate can be applied to an
account. They suggested that, for
example, institutions be prohibited from
applying a penalty rate to an account for
more than six months if the consumer
does not violate the account terms
during that period. The Agencies,
however, are not imposing a substantive
prohibition at this time. As discussed
above, the Agencies have placed
significant limitations on institutions’
ability to reprice outstanding balances
based on violations of the account
terms. Furthermore, because the
amendments to Regulation Z adopted by
the Board elsewhere in today’s Federal
Register require creditors to provide 45
days’ advance notice of the imposition
of a penalty rate, a consumer will have
the opportunity to decide whether to
engage in transactions at the penalty
rate.134 Finally, the Board has also
improved the disclosures under
Regulation Z to require creditors to
disclose how long a penalty rate will
remain in effect or, if the creditor
reserves the right to apply the penalty
rate indefinitely, to affirmatively state
that fact.135 Although the Agencies are
133 The example provided in proposed comment
24(b)(3)–1 has been removed. Instead, examples of
the application of this exception are provided in
comment 24(a)–1.
134 See 12 CFR 226.9(g).
135 See 12 CFR 226.5a(b)(1)(iv); comment
5a(b)(1)–5; App. G–10(B) and G–10(C).

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not requiring such practices as part of
today’s final rule, they believe that
limiting the duration of a penalty rate
and periodically reevaluating a
consumer’s creditworthiness to
determine eligibility to return to the
non-penalty rate are policies that can be
both beneficial for the consumer and
safe and sound policy for the
institution. Some industry commenters
indicated that they already follow such
a practice.
Section l.24(b)(5) Workout
Arrangement Exception
One commenter noted that, as
proposed, § l.24 would prohibit
institutions that reduced the annual
percentage rate on an account pursuant
to a workout arrangement from
increasing the rate if the consumer
failed to comply with the terms of the
arrangement. Because workout
arrangements can provide important
benefits to consumers in serious default,
the Agencies have adopted § l.24(b)(5),
which provides that, when a consumer
fails to comply with the terms of a
workout arrangement, the institution
may increase the annual percentage rate
to a rate that does not exceed the rate
that applied prior to the arrangement.
For example, assume that, consistent
with § l.24(b)(4), the annual percentage
rate on a $5,000 balance is increased
from 15% to 25%. Assume also that the
institution and the consumer
subsequently agree to a workout
arrangement that reduces the rate to
15% on the condition that the consumer
pay a specified amount by the payment
due date each month. If the consumer
does not pay the agreed-upon amount
by the payment due date, § l.24(b)(5)
permits the institution to increase the
rate on the $5,000 balance to no more
than 25%. See comment 24(b)(5)–3.
Comment 24(b)(5)–1 clarifies that,
except as expressly provided,
§ l.24(b)(5) does not permit an
institution to alter any of the
requirements in § l.24 pursuant to a
workout arrangement between a
consumer and the institution. For
example, an institution cannot increase
a rate pursuant to a workout
arrangement unless otherwise permitted
by § l.24. In addition, an institution
cannot require the consumer to make
payments with respect to a protected
balance that exceed the payments
permitted under § l.24(c).
Comment 24(b)(5)–2 clarifies that, if
the rate that applied prior to the
workout arrangement was a variable
rate, the rate that can be applied if the
consumer fails to comply with the terms
of the arrangement must be calculated

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using the same formula as before the
arrangement.
Section l.24(c) Treatment of Protected
Balances
Proposed § l.24(c) was intended to
ensure that the protections in § l.24
were not undercut. Accordingly, it
would have provided that, when an
institution increases the annual
percentage rate applicable to a category
of transactions (for example, purchases),
the institution was prohibited from
requiring repayment of an outstanding
balance in that category using a method
that is less beneficial to the consumer
than one of the methods listed in
§ l.24(c)(1) and from assessing fees or
charges solely on an outstanding
balance. In order to clarify the
application of § l.24(c), the Agencies
have revised this paragraph to state that
it applies only to ‘‘protected balances,’’
which are defined as amounts owed for
a category of transactions to which an
increased annual percentage rate cannot
be applied after the rate for that category
of transactions has been increased
pursuant to § l.24(b)(3). This definition
is similar to the definition of
‘‘outstanding balance’’ in proposed
§ l.24. In addition, proposed § .24(c)
has been revised for consistency with
the revisions to § l.24(b) and for
stylistic reasons. Otherwise, it has been
adopted as proposed.
The Agencies have replaced proposed
comments 23(c)–1 and –2 with a new
comment 24(c)–1, which clarifies that,
because rates cannot be increased
pursuant to § l.24(b)(3) during the first
year after account opening, the
requirements of § l.24(c) do not apply
to balances during the first year. Instead,
§ l.24(c) applies only to ‘‘protected
balances.’’ For example, assume that, on
March 15 of year two, an account has a
purchase balance of $1,000 at a nonvariable rate of 12% and that, on March
16, the bank sends a notice pursuant to
12 CFR 226.9(c) informing the consumer
that the rate for new purchases will
increase to a non-variable rate of 15%
on May 2. On March 20, the consumer
makes a $100 purchase. On March 24,
the consumer makes a $150 purchase.
On May 2, § l.24(b)(3) permits the bank
to start charging interest at 15% on the
$150 purchase made on March 24 but
does not permit the bank to apply that
15% rate to the $1,100 purchase balance
as of March 23. Accordingly, § l.24(c)
applies to the $1,100 purchase balance
as of March 23 but not the $150
purchase made on March 24.
Section l.24(c)(1) Repayment
In the May 2008 Proposal, the
Agencies stated that, while there may be

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Federal Register / Vol. 74, No. 18 / Thursday, January 29, 2009 / Rules and Regulations
circumstances in which institutions
would accelerate repayment of the
outstanding balance to manage risk,
proposed § l.24 would provide little
effective protection if consumers did not
receive a reasonable amount of time to
pay off the outstanding balance.
Accordingly, proposed § l.24(c)(1)
would have required institutions to
provide consumers with a method of
paying the outstanding balance that is
no less beneficial to the consumer than
one of the methods listed in proposed
§ l.24(c)(1)(i) and (ii).
Proposed § l.24(c)(1)(i) would have
allowed an institution to amortize the
outstanding balance over a period of no
less than five years, starting from the
date on which the increased rate went
into effect for new transactions.
Although some industry commenters
criticized the five-year period as
excessive and requested that it be
reduced or eliminated, the OCC and
consumer groups generally supported
this repayment period as reasonable.
One consumer group argued that, if the
amount owed is large, five years may be
insufficient.
In May 2008, the Agencies cited as
support for the proposed five-year
amortization period guidance issued by
the Board, OCC, FDIC, and OTS (under
the auspices of the Federal Financial
Institutions Examination Council)
stating that credit card workout
arrangements should generally strive to
have borrowers repay debt within 60
months.136 One commenter argued that
the Agencies’ reliance on this guidance
was misplaced because it applies to
workout arrangements and uses 60
months as a maximum repayment
period, rather than a minimum. The
Agencies note, however, that the
guidance set 60 months as the
repayment period preferred in most
cases for consumers who had become
sufficiently delinquent to be placed in
workout arrangements. Section l.24(c),
however, will generally apply to a less
risky population of consumers because
accounts that have paid more than 30
days late are excluded. See § l.24(b)(4).
Accordingly, based on the comments
and the Agencies’ own analysis, the
Agencies conclude that a five-year
minimum amortization period is
appropriate. Therefore, proposed
§ l.24(c)(1)(i) has been revised for
stylistic reasons and adopted as
proposed.
An industry commenter requested
clarification regarding the relationship
136 See, e.g., Board Supervisory Letter SR 03–1 on
Account Management and Loss Allowance
Methodology for Credit Card Lending (Jan. 8, 2003)
(available at http://www.federalreserve.gov/
boarddocs/srletters/2003/sr0301.htm).

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between § l.24(c)(1) and the payment
allocation rules in proposed § l.23.
Section .23 addresses only payments in
excess of the required minimum
periodic payment. Thus, nothing in
§ l.23 limits an institution’s ability to
set a required minimum periodic
payment consistent with § l.24(c). By
the same token, nothing in § l.24(c)(1)
alters the requirement regarding
allocation of excess payments in § l.23.
Thus, if an institution has elected to set
a required minimum periodic payment
on a protected balance that will
amortize that balance over a five-year
period consistent with § l.24(c)(1)(i),
the institution must apply excess
payments consistent with § l.23 even if
doing so will cause the protected
balance to pay off in less than five years.
In order to eliminate any ambiguity, the
Agencies have added examples to the
commentary to § l.23 illustrating how
an excess payment could be applied in
this situation. See comment 23(a)–1.iii;
comment 23(b)–2.ii. In addition, the
Agencies have added comment
24(c)(1)(i)–1, which clarifies that an
institution is not required to recalculate
the amortization period even if, during
the course of that period, allocation of
excess payments to the protected
balance means the balance will be paid
off in less than 5 years.
An industry commenter requested
clarification on whether an institution
that chose to provide an amortization
period of five years for the outstanding
balance consistent with proposed
§ l.24(c)(1)(i) was prohibited from
applying some or all of the required
minimum periodic payment to the
outstanding balance before the effective
date of the rate increase if doing so
would result in a shorter amortization
period. Section l.24(c)(1)(i) provides
for ‘‘[a]n amortization period for the
outstanding balance of no less than five
years, starting from the date on which
the increased annual percentage rate
becomes effective.’’ (Emphasis added.)
Accordingly, § l.24(c)(1)(i) does not
affect an institution’s ability to apply
some or all of the required minimum
periodic payment to the protected
balance prior to the effective date of the
rate increase.
An industry commenter requested
clarification regarding how an
amortization period would be calculated
if the annual percentage rate was
variable. Comment 24(c)(1)(i)–2 clarifies
that, if the annual percentage rate that
applies to the protected balance varies
with an index as provided in
§ l.24(b)(2), the institution may vary
the interest charges included in the
required minimum periodic payment for
that balance accordingly in order to

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5533

ensure that the protected balance is
amortized in five years.
As an alternative to the five-year
amortization period, proposed
§ l.24(c)(1)(ii) would have allowed the
percentage of the total balance that was
included in the required minimum
periodic payment before the rate
increase to be doubled with respect to
the outstanding balance. For example, if
the required minimum periodic
payment prior to the rate increase was
one percent of the total amount owed
plus accrued interest and fees, an
institution would be permitted to
increase the minimum payment for the
outstanding balance up to two percent
of that balance plus accrued interest and
fees. The Agencies did not receive any
significant comment on this aspect of
the proposal. Accordingly,
§ l.24(c)(1)(ii) has been revised for
stylistic reasons and adopted as
proposed.
Proposed comment 24(c)(1)(ii)–1
clarified that proposed § l.24(c)(1)(ii)
did not limit or otherwise address an
institution’s ability to determine the
amount of the minimum payment on
other balances (in other words, balances
that are not outstanding balances under
§ l.24(a)(2)). This comment has been
revised for stylistic reasons and adopted
as proposed.
Proposed comment 24(c)(1)(ii)–2
provided an example of how an
institution could adjust the minimum
payment on the outstanding balance.
This comment has been revised for
clarity.
Proposed comment 24(c)(1)–1
clarified that an institution may provide
a method of paying the outstanding
balance that is different from the
methods listed in § l.24(c)(1) so long as
the method used is no less beneficial to
the consumer than one of the listed
methods. It further stated that a method
is no less beneficial to the consumer if
the method amortizes the outstanding
balance in five years or longer or if the
method results in a required minimum
periodic payment on the outstanding
balance that is equal to or less than a
minimum payment calculated
consistent with § l.24(c)(1)(ii). As
requested by the commenters, the
Agencies have clarified and expanded
the examples provided in the proposed
comment. Otherwise, the comment has
been revised for stylistic reasons and
adopted as proposed.
An industry commenter asked
whether, if amortization of the
outstanding balance over a five-year
period would result in a required
minimum periodic payment below the
lower limit or ‘‘floor’’ used by the

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institution for such payments,137 the
institution could require the consumer
to pay the floor minimum payment. The
Agencies believe this should be
permitted, so long as the lower limit for
the required minimum periodic
payment on the protected balance is the
same limit used by the institution before
the increased rate went into effect.
Similarly, an institution is permitted to
require the consumer to make a preexisting floor minimum payment that
exceeds the amount permitted under
§ l.24(c)(1)(ii). Accordingly, the
Agencies have adopted comment
24(c)(1)–2.

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Section l.24(c)(2) Fees and Charges
The protections of proposed § l.24(a)
would also be undercut if institutions
were permitted to assess fees or other
charges as a substitute for an increase in
the annual percentage rate. Accordingly,
proposed § l.24(c)(2) would have
prohibited institutions from assessing
any fee or charge based solely on the
outstanding balance. As explained in
proposed comment 24(c)(2)–1, this
proposal would have prohibited, for
example, an institution from assessing a
monthly maintenance fee on the
outstanding balance. The proposal
would not, however, have prohibited an
institution from assessing fees such as
late payment fees or fees for exceeding
the credit limit that are based in part on
the outstanding balance. Similarly,
proposed § l.24(c)(2) would not have
prohibited assessment of fees that are
unrelated to the outstanding balance,
such as fees for providing account
documents.
The Agencies did not receive any
significant comment on this aspect of
the proposal. Accordingly, proposed
§ l.24(c)(2) and the accompanying
commentary have been revised for
stylistic reasons and adopted as
proposed.
Other Issues
Implementation. As discussed in
section VII of this SUPPLEMENTARY
INFORMATION, the effective date for
§ l.24 is July 1, 2010. As of that date,
this provision applies to existing as well
as new consumer credit card accounts
and balances (except as expressly stated
below). The Agencies provide the
following guidance:
• Account opening disclosures. The
disclosure requirements in § l.24(a)
apply only to accounts opened on or
after the effective date. Thus, if a
consumer credit card account is opened
137 For example, an institution might require a
minimum periodic payment that is the greater of
$20 or the total of 1% of the amount owed plus
interest and fees.

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on or after July 1, 2010, the institution
must disclose the annual percentage
rates that will apply to each category of
transactions on that account.
• Rates that expire after a specified
period of time. If a rate that will expire
after a specified period of time applies
to a balance on the effective date, the
institution can apply an increased rate
to that balance at expiration so long as
the institution previously disclosed the
increased rate. For example, if on
January 1, 2010 an account is opened
with a non-variable promotional rate of
5% on purchases that applies for one
year (after which a variable rate will
apply) and, on July 1, 2010, the 5% rate
applies to a balance of $2,000, the
institution can apply the previously
disclosed variable rate to any remaining
portion of the $2,000 balance on
January 1, 2011 pursuant to
§ l.24(b)(1).
• Variable rates that do not expire. If
a variable rate that does not expire
applies to a balance on the effective
date, the institution may continue to
adjust that rate due to increases in an
index consistent with § l.24(b)(2).
• Non-variable rates that do not
expire. If a non-variable rate that does
not expire applies to a balance on the
effective date, the institution cannot
increase the rate that applies to that
balance unless the account becomes
more than 30 days delinquent (in which
case an increase is permitted by
§ l.24(b)(4)). For example, if an account
has a $3,000 purchase balance at a nonvariable rate of 15% on July 1, 2010, the
institution cannot subsequently increase
the rate that applies to the $3,000
(unless the account becomes more than
30 days delinquent, in which case
§ l.24(b)(4) applies).
• Rate increases pursuant to advance
notice under 12 CFR 226.9(c) or (g).
Section l.24(b)(3) applies to any rate
increase for new transactions that will
take effect on or after the July 1, 2010
effective date. For example, assume that
an account has a $3,000 purchase
balance at a non-variable rate of 15%. In
order to increase the rate that applies to
purchases made on or after July 1, 2010
to a non-variable rate of 18%, the
institution must comply with 12 CFR
226.9(c) by providing notice of the
increase at least 45 days in advance (in
this case, on or before May 17, 2010).
Assuming the institution provides the
notice on May 17, the requirements in
§ l.24(c) will apply to the $3,000
balance beginning on May 24, 2010.
• First year after the account is
opened. An institution may not increase
an annual percentage rate pursuant to
§ l.24(b)(3) during the first year after
the account is opened. However, this

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limitation does not apply to accounts
opened prior to July 1, 2010. For
example, if an account is opened on
June 1, 2010, the institution may
increase a rate for new transactions
pursuant to § l.24(b)(3).
• Delinquencies of more than 30
days. An institution may increase a rate
pursuant to § l.24(b)(4) when an
account becomes more than 30 days
delinquent even if the delinquency
began prior to the effective date. For
example, if the required minimum
periodic payment due on June 15, 2010
is not received until July 20,
§ l.24(b)(4) permits the institution to
increase the rates on that account.
• Workout arrangements. If a workout
arrangement applies to an account on
the effective date and the consumer fails
to comply with the terms of
arrangement after the effective date,
§ l.24(b)(5) only permits the institution
to apply an increased rate that does not
exceed the rate that applied prior to
commencement of the workout
arrangement. For example, assume that,
on June 1, 2010, an institution decreases
the rate that applies to a $5,000 balance
from a non-variable penalty rate of 30%
to a non-variable rate of 15% pursuant
to a workout arrangement between the
institution and the consumer. Under
this arrangement, the consumer must
pay by the fifteenth of each month in
order to retain the 15% rate. The
institution does not receive the payment
due on July 15 until July 20. In these
circumstances, § l.24(b)(5) does not
permit the institution to apply a rate to
the $5,000 balance that exceeds the 30%
penalty rate.
Effect of § l.24 on securitization. In
the May 2008 Proposal, the Agencies
requested comment on what effect the
restrictions in proposed § l.24 would
have on outstanding securitizations and
institutions’ ability to securitize credit
card assets in the future. In response,
industry commenters raised general
concerns that a reduction in interest
revenue as a result of proposed § l.24
could require institutions to alter the
structure of existing securities and
could reduce investor interest in future
offerings. As discussed below, however,
the Agencies are providing institutions
and the markets for credit card
securities with 18 months in which to
adjust interest rates and other account
terms to compensate for the restrictions
in the final rules. Accordingly, the
Agencies do not believe that any
additional revisions are necessary to
accommodate securitization of credit
card assets.

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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.
For example, § 535.24 supports safety
and soundness by reducing reputation
risk that would occur from repricing
consumer credit card accounts in an
unfair manner. Section 535.24 also
protects consumers by providing them
with fair terms on which their accounts
may be repriced. Consequently, HOLA
serves as an independent basis for
§ 535.24.

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Section l.25—Unfair Balance
Computation Method
Summary. In the May 2008 Proposal,
the Agencies proposed § l.26, which
would have prohibited institutions from
imposing finance charges on consumer
credit card accounts based on balances
for days in billing cycles that precede
the most recent billing cycle. 73 FR at
28922–28923. This proposal was
intended to prohibit the balance
computation method sometimes referred
to as ‘‘two-cycle billing’’ or ‘‘doublecycle billing.’’ As discussed below,
based on the comments and further
analysis, the Agencies have revised the
proposed rule and its commentary to
clarify that the final rule prohibits the
assessment of interest charges on
balances for days in prior billing cycles
when such charges are imposed as a
result of the loss of a grace period. The
Agencies have also removed the
exception for assessment of deferred
interest and added an exception
permitting adjustments to finance
charges following the return of a
payment for insufficient funds. Finally,
because the Agencies are not taking
action on proposed § l.25 at this time
(as discussed below), proposed § l.26
has been designated in the final rule as
§ l.25.
Background. TILA requires creditors
to explain as part of the accountopening disclosures the method used to
determine the balance to which interest
rates are applied. 15 U.S.C. 1637(a)(2).
In its June 2007 Regulation Z Proposal,
the Board proposed that the balance
computation method be disclosed
outside the account-opening table
because explaining lengthy and
complex methods may not benefit
consumers. 72 FR at 32991–32992. That
proposal was based on the Board’s
consumer testing, which indicated that
consumers did not understand
explanations of balance computation
methods. Nevertheless, the Board
observed that, because some balance
computation methods are more

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favorable to consumers than others, it
was appropriate to highlight the method
used, if not the technical computation
details.
In response to the June 2007
Regulation Z Proposal, consumers,
consumer groups, and a member of
Congress urged the Board to prohibit
two-cycle billing. The two-cycle balance
computation method has several
permutations but, generally speaking, an
institution using the two-cycle method
assesses interest not only on the balance
for the current billing cycle but also on
balances on days in the preceding
billing cycle. This method generally
does not result in additional finance
charges for a consumer who consistently
carries a balance from month to month
(and therefore does not receive a grace
period) because interest is always
accruing on the balance. Nor does the
two-cycle method affect consumers who
pay their balance in full within the
grace period every month because
interest is not imposed on their
balances. The two-cycle method does,
however, result in greater interest
charges for consumers who pay their
balance in full one month but not the
next month (and therefore lose the grace
period).
The following example illustrates
how the two-cycle method results in
higher costs for these consumers than
other balance computation methods:
Assume that the billing cycle on a
consumer credit card account starts on
the first day of the month and ends on
the last day of the month. The payment
due date for the account is the twentyfifth day of the month. Under the terms
of the account, the consumer will not be
charged interest on purchases if the
balance at the end of a billing cycle is
paid in full by the following payment
due date (in other words, if the
consumer receives a grace period). The
consumer uses the credit card to make
a $500 purchase on March 15. The
consumer pays the balance for the
February billing cycle in full on March
25. At the end of the March billing cycle
(March 31), the consumer’s balance
consists only of the $500 purchase and
the consumer will not be charged
interest on that balance if it is paid in
full by the following due date (April 25).
The consumer pays $400 on April 25,
leaving a $100 balance. Because the
consumer did not pay the balance for
the March billing cycle in full on April
25, the consumer would lose the grace
period and most institutions would
charge interest on the $500 purchase
from the start of the April billing cycle
(April 1) through April 24 and interest
on the remaining $100 from April 25
through the end of the April billing

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5535

cycle (April 30). Institutions using the
two-cycle method, however, would also
charge interest on the $500 purchase
from the date of purchase (March 15) to
the end of the March billing cycle
(March 31).
The proposed ban on two-cycle
billing was generally supported by
individual consumers, consumer
groups, members of Congress, other
federal banking regulators, state
consumer protection agencies, state
attorneys general, and some industry
groups and credit card issuers. On the
other hand, some credit card issuers and
one industry group opposed the
proposal on the grounds that two-cycle
billing was not sufficiently prevalent to
warrant a ban. As discussed below, the
Agencies are including a prohibition on
the two-cycle method because that
method continues to be used by a
number of large credit card issuers. To
the extent that the commenters
addressed specific aspects of the
proposal or the supporting legal
analysis, those comments are discussed
below.
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 impose
finance charges on consumer credit card
accounts based on balances for days in
billing cycles that precede the most
recent billing cycle as a result of the loss
of any time period provided by the
institution within which the consumer
may repay any portion of the credit
extended without incurring a finance
charge (in other words, a grace period).
Substantial consumer injury. In the
May 2008 Proposal, the Agencies stated
that computing finance charges based
on balances preceding the most recent
billing cycle appeared to cause
substantial consumer injury because
consumers who lose the grace period
incur higher interest charges than they
would under a balance computation
method that calculates interest based
only on the most recent billing cycle.
One industry commenter asserted that
use of the two-cycle method could not
cause an injury for purposes of the FTC
Act simply because other, less costly
methods exist. As discussed above,
however, it is well established that
monetary harm constitutes an injury
under the FTC Act.138 As with similar
arguments raised regarding § l.23, this
commenter did not provide any legal
138 See Statement for FTC Credit Practices Rule,
49 FR at 7743; FTC Policy Statement on Unfairness
at 3.

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authority distinguishing interest charges
assessed as a result of the two-cycle
method from other monetary harms, nor
are the Agencies aware of any such
authority.
Another industry commenter stated
that assessing interest consistent with a
contractual provision to which the
consumer agreed cannot constitute an
injury under the FTC Act. As discussed
above, however, this argument is
inconsistent with the FTC’s application
of the unfairness analysis in support of
the Credit Practices Rule, where the FTC
determined that otherwise valid
contractual provisions injured
consumers.139
Finally, an industry commenter
argued that the two-cycle method was
not unfair because it only injures
consumers who lose the grace period. A
practice need not, however, injure all
consumers in order to be unfair.
Accordingly, the Agencies conclude
that the two-cycle balance computation
method causes substantial consumer
injury.
Injury is not reasonably avoidable.
The Agencies’ May 2008 Proposal stated
that it did not appear that consumers
can reasonably avoid injury because,
once they use the card, they have no
control over the methods used to
calculate the finance charges on their
accounts. The proposal further noted
that, because the Board’s consumer
testing indicates that disclosures are not
successful in helping consumers
understand balance computation
methods, a disclosure would not enable
consumers to avoid the two-cycle
method when comparing credit card
accounts or to avoid the effects of the
two-cycle method when using a credit
card.140
One industry commenter argued that
consumers could reasonably avoid the
injury by paying their balance in full
each month. As discussed above,
however, because one of the intended
purposes of a credit card (as opposed to
a charge card) is to finance purchases
over multiple billing cycles, it would
not be reasonable to expect consumers
to avoid the two-cycle method by
paying their balance in full each month.
Accordingly, the Agencies conclude
that consumers cannot reasonably avoid
the injury caused by the two-cycle
balance computation method.
139 See Statement for FTC Credit Practices Rule,
49 FR 7740 et seq.; see also Am. Fin. Servs. Assoc.
767 F.2d at 978–83 (upholding the FTC’s analysis).
140 Although several industry commenters on the
May 2008 Proposal argued that disclosure would
enable consumers to choose a credit card with a
different balance computation method, those
commenters did not provide any evidence that
refutes the Board’s consumer testing.

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Injury is not outweighed by
countervailing benefits. The May 2008
Proposal stated that there did not appear
to be any significant benefits to
consumers or competition from
computing finance charges based on
balances for days in billing cycles
preceding the most recent billing cycle.
The Agencies also noted that many
institutions no longer use the two-cycle
balance computation method. In
addition, the Agencies noted that,
although prohibition of the two-cycle
method may reduce revenue for the
institutions that currently use it and
those institutions may replace that
revenue by charging consumers higher
annual percentage rates or fees, it
appeared that this result would
nevertheless benefit consumers because
it will result in more transparent
pricing.
One industry commenter stated that,
given a preference, consumers would
choose lower prices and other purported
benefits of the two-cycle method (such
as the provision of a grace period) over
transparency. As an initial matter, the
commenter did not cite any evidence
that institutions that use the two-cycle
method are more likely to offer lower
prices and grace periods than
institutions that do not, nor are the
Agencies aware of any such evidence.
Furthermore, individual consumers
overwhelmingly supported the
proposed prohibition on the two-cycle
method. Finally, the Agencies believe
that transparent pricing provides
substantial benefits to consumer by
enabling them to make informed
decisions about the use of credit.
Accordingly, the Agencies conclude
that the two-cycle method does not
produce benefits that outweigh the
injury to consumers.
Public policy. Several industry
commenters stated that the proposed
rule was contrary to established public
policy because, as noted above, TILA
requires creditors to disclose the
balance computation method at account
opening (15 U.S.C. 1637(a)(2)) and
Regulation Z includes the two-cycle
method in the list of methods that may
be described by name (12 CFR
226.5a(g)).141 Regulation Z’s
acknowledgment that the two-cycle
method has been a commonly used
balance computation method does not,
however, constitute an endorsement of
that method. Furthermore, nothing in
141 As discussed elsewhere in today’s Federal
Register, the Board has not deleted the two-cycle
method from the list in 12 CFR 226.5a(g) because
the prohibition in § l.25 does not apply to all
credit card issuers.

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TILA or Regulation Z requires use of the
two-cycle method.
One industry commenter noted that,
more than twenty years ago, a member
of the Board expressed concern that the
costs of regulating balance computation
methods could outweigh the benefits for
consumers.142 As discussed above,
however, the Agencies have concluded
that, in today’s marketplace, the costs
associated with prohibiting this
particular balance computation method
do not outweigh the benefits to
consumers.
Final Rule
As discussed below, the Agencies are
not taking action on credit holds at this
time. Accordingly, subject to the
revisions discussed below, proposed
§ l.26 is adopted as § l.25. The
proposed commentary has been
redesignated to reflect this change.
Section l.25(a) General Rule
The proposed rule prohibited
institutions from imposing finance
charges on balances on consumer credit
card accounts based on balances for
days in billing cycles preceding the
most recent billing cycle. Proposed
comment 26(a)–1 cited the two-cycle
average daily balance computation
method as an example of balance
computation methods that would be
prohibited by the proposed rule,
tracking commentary under Regulation
Z. See 12 CFR 226.5a(g)(2). Proposed
comment 26(a)–2 provided an example
of the circumstances in which the
proposed rule prohibited the assessment
of interest.
Industry commenters stated that, as
drafted, the proposed rule went further
than necessary to protect consumers
from the injury caused by the two-cycle
balance computation method.
Specifically, because the proposed rule
was not limited to circumstances in
which the two-cycle method results in
greater interest charges than other
balance computation methods (that is,
when a consumer who has been eligible
for a grace period does not pay the
balance in full on the due date), it
would prohibit the assessment of
interest from the date of the transaction
even when the consumer was not
eligible for a grace period. Because the
Agencies did not intend this result,
§ l.25(a) and its commentary have been
revised to clarify that an institution is
prohibited from imposing finance
charges based on balances for days in
billing cycles that precede the most
142 See Statement of Emmett J. Rice, Member,
Board of Governors of the Federal Reserve System
before the S. Subcomm. on Fin. Instits. (May 21,
1986).

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recent billing cycle as a result of the loss
of the grace period. Otherwise, the
Agencies adopt the proposed rule and
commentary.
Section l.25(b) Exceptions
As proposed, § l.26(b) contained two
exceptions to the general prohibition in
§ l.26(a). First, under proposed
§ l.26(b)(1), institutions would not be
prohibited from charging consumers for
deferred interest even though that
interest may have accrued over multiple
billing cycles. Thus, if a consumer did
not pay a balance or transaction in full
by the specified date under a deferred
interest plan, the institution would have
been permitted to charge the consumer
for interest accrued during the period
the plan was in effect. As discussed
above, because current practices
regarding the assessment of deferred
interest are prohibited by § l.24, this
exception has not been adopted.
Second, under proposed § l.26(b)(2),
institutions would not have been
prohibited from adjusting finance
charges following resolution of a billing
error dispute. For example, if after
complying with the requirements of 12
CFR 226.13 an institution determines
that a consumer owes all or part of a
disputed amount, the institution would
be permitted to adjust the finance
charge consistent with 12 CFR 226.13,
even if that requires computing finance
charges based on balances in billing
cycles preceding the most recent billing
cycle. The Agencies did not receive any
significant comment on this exception.
Accordingly, the Agencies have revised
this exception for clarity and adopted it
as § l.25(b)(1).
Industry commenters requested two
additional exceptions to the proposed
rule. First, they requested an exception
when the date of a transaction for which
the consumer does not receive a grace
period is in a different billing cycle than
the date on which that transaction is
posted to the account—for example, if a
consumer uses a convenience check for
a cash advance transaction (which is not
typically subject to a grace period) on
the last day of a billing cycle, the check
may not reach the institution for posting
to the account until the first day of the
next billing cycle or later. These
commenters stated that the proposed
rule should not apply in this situation
because the institution is entitled to
assess interest from the transaction date.
Rather than creating an additional
exception, the Agencies have addressed
this concern by clarifying, as discussed
above, that § l.25(a) only applies to
interest charges imposed as a result of
the consumer losing the grace period.
Accordingly, when a consumer is not

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eligible for a grace period at the time of
a transaction, the final rule does not
prohibit the institution from assessing
interest from the date of the transaction.
Second, industry commenters
requested an exception allowing
adjustments to finance charges when a
consumer’s payment is credited to the
account in one billing cycle but is
returned for insufficient funds in the
subsequent billing cycle. This could
occur, for example, when a consumer’s
check is received and credited by the
institution near the end of a billing
cycle but is returned to the institution
for insufficient funds early in the next
billing cycle. The Agencies view this
situation as analogous to adjusting
finance charges following resolution of
a billing error or other dispute, which is
permitted under § l.25(b)(1).
Accordingly, the final rule adopts, in
§ l.25(b)(2), an exception permitting
adjustments to finance charges as a
result of the return of a payment for
insufficient funds.
Other Issues
Implementation. As discussed in
section VII of this SUPPLEMENTARY
INFORMATION, the effective date for
§ l.25 is July 1, 2010. As of the
effective date, this provision applies to
existing as well as new consumer credit
card accounts and balances.
Additional prohibitions considered.
Consumer groups and a member of
Congress requested that the proposed
rule be expanded to cover two
additional practices. First, they urged
that, when a consumer who is eligible
for a grace period pays some but not all
of the relevant balance by the due date,
the institution be prohibited from
assessing interest on the amount paid.
For example, assume that the billing
cycle on a consumer credit card account
starts on the first day of the month and
ends on the last day of the month and
that the payment due date is the twentyfifth day of the month. Under the terms
of the account, the consumer will
receive a grace period on purchases if
the balance at the end of a billing cycle
is paid in full by the following payment
due date. The consumer is eligible for a
grace period on a $500 purchase made
on March 15. At the end of the March
billing cycle (March 31), the consumer’s
balance consists only of the $500
purchase. The consumer pays $400 on
the following due date (April 25),
leaving a $100 balance. Because the
consumer did not pay the balance for
the March billing cycle in full on April
25, § l.25(a) prohibits the institution
from charging interest on the $500
purchase from the date of purchase
(March 15) to the end of the March

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5537

billing cycle (March 31). The
commenters would also prohibit the
institution from assessing any interest
on $400 of the $500 purchase during the
April billing cycle because the
consumer paid that amount by the due
date.
The Agencies, however, are not taking
action on this issue at this time. As an
initial matter, elsewhere in today’s
Federal Register, the Board has
improved the disclosures under
Regulation Z to assist consumers in
understanding that they must pay the
entire balance by the due date to receive
the grace period.143 Furthermore,
because TILA does not require
institutions to provide a grace period,
the requested prohibition could reduce
the availability of such periods, which
provide substantial benefits to
consumers. 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.
Second, many of the same
commenters requested that, when a
consumer who has been carrying a
balance from month to month—and
therefore has not been receiving a grace
period—pays the balance stated on the
most recent periodic statement by the
applicable due date, the institution be
prohibited from assessing interest on
that balance in the period between
mailing or delivery of the statement and
receipt of the consumer’s payment. This
type of interest is sometimes referred to
as ‘‘trailing interest.’’ For example,
assume that a consumer who is not
eligible for a grace period receives a
periodic statement reflecting a balance
of $1,000 as of March 31 and a due date
of April 25. The consumer mails a
payment of $1,000, which is credited by
the institution on April 25. Ordinarily,
because the consumer was not eligible
for a grace period, this payment will not
be sufficient to pay off the balance in
full because interest will have accrued
on the $1,000 balance from April 1
through April 24. The commenters,
however, would prohibit the assessment
143 See 12 CFR 226.5a(b)(5) comment 5a(b)(5)–1
(‘‘The card issuer must state any conditions on the
applicability of the grace period. An issuer that
offers a grace period on all purchases and
conditions the grace period on the consumer paying
his or her outstanding balance in full by the due
date each billing cycle, or on the consumer paying
the outstanding balance in full by the due date in
the previous and/or the current billing cycle(s) will
be deemed to meet these requirements by providing
the following disclosure, as applicable: ‘Your due
date is [at least] ldays after the close of each billing
cycle. We will not charge you interest on purchases
if you pay your entire balance by the due date each
month.’ ’’).

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of interest on the $1,000 balance after
March 31. The Agencies note that,
because an institution will not know at
the time it sends a periodic statement
whether the consumer will pay the
balance in full, the requested
prohibition would essentially require
institutions to waive subsequent interest
charges for the subset of consumers who
do so. 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.

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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 535.25 supports safety and
soundness by reducing reputation risk
that would occur from using unfair
balance computation methods. Section
535.25 also protects consumers by
providing them with fair balance
computation methods on their account
so that they do not pay additional
interest due to the application of this
balance computation method that
testing shows few understand. Section
535.25 is consistent with the best
practices of thrift institutions
nationwide. Few institutions still use
the two-cycle balance computation
method. Based on OTS supervisory
observations and experience, no large
savings associations are currently
engaged in this practice. Consequently,
HOLA serves as an independent basis
for § 535.25.
Section l.26—Unfair Charging of
Security Deposits and Fees for the
Issuance or Availability of Credit to
Consumer Credit Card Accounts
Summary. In the May 2008 Proposal,
the Agencies proposed § l.27(a), which
would have prohibited institutions from
charging to a consumer credit card
account security deposits and fees for
the issuance or availability of credit
during the twelve months after the
account is opened that, in the aggregate,
constitute the majority of the credit
limit for that account. The Agencies also
proposed § l.27(b), which would have
prohibited institutions from charging to
the account during the first billing cycle
security deposits and fees for the
issuance or availability of credit that
total more than 25 percent of the credit
limit and would have required that if
security deposits and fees for the
issuance or availability of credit total
more than 25 percent but less than the
majority of the credit limit during the

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first year, the institution must spread
that amount equally over the eleven
billing cycles following the first billing
cycle. Further, the Agencies proposed
§ l.27(c), which would have defined
‘‘fees for the issuance or availability of
credit.’’ See 73 FR at 28925–28926.
Based on the comments received and
further analysis, the Agencies have
revised proposed § l.27(a) for clarity
and adopted that provision as
§ l.26(a).144 The Agencies have revised
proposed § l.27(b) to permit security
deposits and fees to be spread over no
fewer than the first six months, rather
than the first year (as proposed). This
provision has been adopted as
§ l.26(b).145
In § l.26(c), the Agencies have
adopted a new provision prohibiting
institutions from evading §§ l.26(a)
and (b) by providing the consumer with
additional credit to fund the payment of
security deposits and fees for the
issuance or availability of credit in
excess of the amounts permitted by
§§ l.26(a) and (b). The Agencies have
also added definitions to proposed
§ l.27(c) and adopted that provision as
§ l.26(d).
Background. Subprime credit cards
often have substantial fees related to the
issuance or availability of credit. For
example, these cards may impose an
annual fee and a monthly maintenance
fee for the card. In other cases, a
security deposit may be charged to the
account. These cards may also impose
multiple one-time fees when the
consumer opens the card account, such
as an application fee and a program fee.
Those amounts are often billed to the
consumer as part of the first periodic
statement and substantially reduce the
amount of credit that the consumer has
available to make purchases or other
transactions on the account. For
example, some subprime credit card
issuers assess $250 in fees at account
opening on accounts with credit limits
of $300, leaving the consumer with only
$50 of available credit with which to
make purchases or other transactions. In
addition, the consumer will pay interest
on the $250 in fees until they are paid
in full.
The federal banking agencies have
received many complaints from
consumers with respect to subprime
credit cards. Consumers often stated
144 As discussed above, the Agencies are not
taking action on proposed § l.25 at this time.
Accordingly, proposed § l.26 and § l.27 have
been adopted as § l.25 and § l.26, respectively.
145 For purposes of this discussion, products that
currently charge security deposits and fees for the
issuance or availability of credit that exceed the
amounts permitted by the final rule are referred to
as ‘‘high-fee subprime credit cards.’’

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that they were not aware of how the
high upfront fees would affect their
ability to use the card for its intended
purpose of engaging in transactions. In
an effort to address these concerns, the
Board’s June 2007 and May 2008
Regulation Z Proposals included several
proposed amendments to the disclosure
requirements for credit and charge cards
(which have been adopted in a revised
form elsewhere in today’s Federal
Register). Because, however, the
Agencies were concerned that
disclosure alone was insufficient to
protect consumers from unfair practices
regarding high-fee subprime credit
cards, the May 2008 Proposal contained
additional, substantive protections.
The Agencies received comments on
the proposed rule from a wide range of
interested parties. The proposal
received strong support from consumer
groups, several members of Congress,
the FDIC, the OCC, two state attorneys
general, and a state consumer protection
agency. These commenters generally
argued that high-fee subprime credit
cards trap consumers with low incomes
or poor credit histories, causing those
consumers either to pay off the upfront
fees by depleting their limited resources
or to default and further damage their
credit records. In particular, one
consumer group stated that high-fee
subprime credit cards are unfair
because: (1) The upfront fees impose an
overly high price for access to credit and
significantly reduce available credit,
leading consumers to exceed their credit
limit and incur additional fees; (2)
disclosures are insufficient because
subprime consumers are particularly
vulnerable to predatory marketing
practices and may have limited
educational or literacy skills; and (3)
subprime consumers generally have
limited incomes and therefore cannot
pay the upfront fees within the grace
period for the initial billing cycle,
causing them to incur interest charges.
Many of these commenters urged the
Agencies to strengthen the proposed
rule by, for example, lowering the
thresholds for security deposits and
fees, applying those thresholds to all
security deposits and fees regardless of
whether they are charged to the account,
and prohibiting the marketing of
subprime credit cards as credit repair
products.
Some industry commenters also
expressed support for the proposed rule,
stating that it was an appropriate use of
the Agencies’ rulemaking authority
under the FTC Act. In contrast, other
issuers who specialize in subprime
credit cards strongly opposed the
proposed rule. According to these
commenters, the large upfront fees and

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limited initial credit availability that
characterize high-fee subprime credit
cards are necessitated by the risk and
expense of extending credit to
consumers who pose a greater risk of
default than prime consumers. They
asserted that subprime credit card
accounts have higher delinquencies,
losses, reserve requirements, and
servicing costs than prime credit card
accounts.146 They further argued that, to
the extent the proposal would prevent
issuers from protecting themselves
against the risk of loss, it would
ultimately harm consumers because
issuers would be forced to reduce credit
access and increase the price of credit.
They also asserted that high-fee
subprime credit cards offer important
benefits by providing credit cards to
consumers who could not otherwise
obtain them and by enabling consumers
with limited or damaged credit records
to build positive credit histories and
qualify for prime credit. Finally, these
commenters argued that any concerns
regarding high-fee subprime credit cards
should be addressed through improved
disclosures, such as those proposed by
the Board under Regulation Z.
Subprime credit card issuers received
support from some state and
Congressional representatives. The
Agencies also received comments from
thousands of individual consumers,
who explained that high-fee subprime
credit cards were the only option
available to them because of their credit
problems. These consumers expressed
concern that they might have fewer
credit alternatives if the proposal were
finalized. Finally, two advocacy
organizations expressed concern that
the proposed rule would result in
reduced credit availability for lowincome minority consumers.
Legal Analysis

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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 charge to a
consumer credit card account security
deposits or fees for the issuance or
availability of credit that exceed the
limits in the final rule.
146 One subprime credit card issuer stated that
approximately 30% of its consumers charge off
without paying all or part of the balance due. The
same issuer stated that the delinquency rate for
subprime credit card accounts is approximately
20% (versus 4–5% for prime accounts) and that
reserve requirements for such accounts can be up
to 56% of outstanding balances (versus as little as
8% for prime credit card issuers). Finally, this
issuer stated that subprime consumers contact their
issuers an average of once or twice a month (versus
once per year for prime consumers).

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Substantial consumer injury. The
Agencies conclude that consumers incur
substantial monetary injury when
security deposits and fees for the
issuance or availability of credit are
charged to a consumer credit card
account, both in the form of the charges
themselves and in the form of interest
on those charges. Even in cases where
the institution provides a grace period,
many consumers will be unable to pay
the charges in full during that grace
period and will incur interest. Indeed,
many consumers who use high fee
subprime cards submitted comments
explaining that they have very limited
incomes. Moreover, a large issuer of
subprime cards commented that, while
it offers consumers the option of paying
fees up front, most new cardholders do
not do so. Thus, as consumer advocates
noted in their comments, consumers
who open a high-fee subprime credit
card account are unlikely to be able to
pay down the upfront charges quickly.
In addition, when security deposits and
fees for the issuance or availability of
credit are charged to the consumer’s
account, they substantially diminish the
value of that account by reducing the
credit available to the consumer for
purchases or other transactions.147
Injury is not reasonably avoidable. In
May 2008, the Agencies stated that the
Board’s proposed disclosures under
Regulation Z did not appear to be
sufficient, by themselves, to allow
consumers to reasonably avoid the
injury caused by security deposits and
fees that consume most of the available
credit at account opening. Specifically,
the Agencies expressed concern that
high-fee subprime credit cards are
typically marketed to financially
vulnerable consumers with limited
credit options and that these products
have in the past been associated with
deceptive sales practices. Although
several industry commenters asserted
that the disclosures in Regulation Z
were sufficient to enable consumers to
avoid any injury, the Agencies
conclude, for the reasons discussed
below, that consumers cannot, as a
general matter, reasonably avoid the
injury caused by high-fee subprime
credit cards.
In the May 2008 Proposal, the
Agencies noted that high-fee subprime
credit cards are typically marketed to
147 See OCC Advisory Letter 2004–4, at 3 (Apr.
28, 2004) (stating that a finding of unfairness with
respect to subprime cards with financed security
deposits could be based on the fact that ‘‘because
charges to the card by the issuer utilize all or
substantially all of the nominal credit line assigned
by the issuer, they eliminate the card utility and
credit availability applied and paid for by the
cardholder’’) (available at http://www.occ.treas.gov/
ftp/advisory/2004-4.txt).

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vulnerable consumers whose credit
histories or other characteristics prevent
them from obtaining less expensive
credit card products.148 In support of its
Credit Practices Rule, the FTC suggested
that, when most or all credit offers
received by a consumer contain
particular terms, those terms may not be
reasonably avoidable.149 In addition,
when evaluating whether a practice
violates the FTC Act, the FTC has
considered whether that practice targets
consumers who are particularly
vulnerable to unfair or deceptive
practices.150 Similarly, states have used
statutes and regulations prohibiting
unfairness and deception to ensure that
lenders do not ‘‘exploit the lack of
access of low-income individuals, the
elderly, and communities of color to
mainstream banking institutions.’’ 151
In response to the proposed rule, the
Agencies received thousands of
comments from individual consumers
who have used high-fee subprime credit
cards. These consumers frequently
stated that, due to their credit problems
148 For a consumer who has sufficient funds, a
secured credit card account is generally a more
beneficial product than a high-fee subprime credit
card. Secured credit cards generally require the
consumer to provide a cash collateral deposit that
is equal to the credit line for the account. For
example, in order to obtain a credit line of $300,
a consumer would be required to deposit $300 with
the lender. Generally, the consumer can receive the
deposit back if the account is closed with no
outstanding balance. In some cases, these deposits
earn interest. See OTS Examination Handbook,
Asset Quality, Section 218 Credit Card Lending at
§ 218.3 (May 2006). The final rule does not limit
issuers’ ability to offer secured credit cards. Indeed,
by restricting the financing of security deposits and
fees, the final rule may encourage issuers to expand
secured credit card offerings.
149 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)).
150 See FTC Trade Regulation Rule; Funeral
Industry Practices, 47 FR 42260, 42262 (Sept. 24,
1982) (stating finding by the FTC’s Presiding Offer
‘‘that the funeral transaction has several
characteristics which place the consumer in a
disadvantaged bargaining position * * *, leave the
consumer vulnerable to unfair and deceptive
practices, and cause consumers to have little
knowledge of legal requirements [and] available
alternatives. * * *’’); In the Matter of Travel King,
Inc., 86 F.T.C. 715 (Sept. 30, 1975), paragraphs 7
and 8 (alleging that ‘‘[p]eople who are seriously ill,
and their families, are vulnerable to the influence
of respondents’ promotions [regarding ‘psychic
surgery’] which held out tantalizing hope which the
medical profession, by contrast, cannot offer’’).
151 United Companies Lending Corp. v. Sargeant,
20 F. Supp. 2d 192, 203 (D. Mass. 1998) (upholding
a state regulation that limited the rates and other
terms of certain subprime mortgage loans in order
to ‘‘prevent[] lenders from exploiting the financial
vacuum created by redlining’’).

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and limited incomes, high-fee subprime
credit cards were the only type of credit
card that they could obtain. Many of
these consumers described themselves
as elderly, living on limited incomes,
and/or having serious health problems.
Accordingly, because high-fee subprime
credit cards are marketed to financially
vulnerable consumers who generally
cannot obtain credit card products with
less onerous terms, the Agencies
conclude that—even with improved
disclosures—those consumers cannot,
as a general matter, reasonably avoid the
injury caused by high upfront fees and
low initial credit availability.
As discussed in the May 2008
Proposal, this conclusion is further
supported by the Agencies’ concern that
the Regulation Z disclosures could be
undermined by deceptive sales
practices. In addition to taking
enforcement actions against issuers of
high-fee subprime credit cards, the OCC
has found as a general matter that
‘‘solicitations and other marketing
materials used for [high-fee subprime]
credit card programs have not
adequately informed consumers of the
costs and other terms, risks, and
limitations of the product being offered’’
and that, ‘‘[i]n a number of cases,
disclosure problems associated with
secured credit cards and related
products have constituted deceptive
practices under the applicable standards
of the FTC Act.’’ 152 The Agencies
believe that the amendments to
Regulation Z published elsewhere in
today’s Federal Register will reduce the
risk of deception in written
solicitations. However, because of the
vulnerable nature of subprime
consumers and the history of deceptive
practices by some subprime credit card
issuers, the Agencies remain concerned
that the required disclosures could be
undermined by, for example, deceptive
telemarketing practices.153
Injury is not outweighed by
countervailing benefits. In May 2008,
the Agencies recognized that, in some
cases, high-fee subprime credit cards
can provide access to credit to
consumers who are unable to obtain
152 OCC Advisory Letter 2004–4, at 2–3 (emphasis
in original); see also In re First Nat’l Bank in
Brookings, No. 2003–1 (Dept. of the Treasury, OCC)
(Jan. 17, 2003) (available at http://
www.occ.treas.gov/ftp/eas/ea2003-1.pdf); In re First
Nat’l Bank of Marin, No. 2001–97 (Dept. of the
Treasury, OCC Dec. 3, 2001) (available at http://
www.occ.treas.gov/ftp/eas/ea2001-97.pdf).
153 See, e.g., People v. Applied Card Sys., Inc.,
805 N.Y.S.2d 175, 178 (App. Div. 2005) (finding
that credit card marketing materials sent to
consumers who were otherwise unable to qualify
for credit ‘‘did not represent an accurate estimation
of a consumer’s credit limit’’ and that, ‘‘at all times,
it appeared that the confusion was purposely
fostered by [the defendant’s] telemarketers.’’).

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other credit card products. Nevertheless,
the Agencies stated that, once security
deposits and fees for the issuance or
availability of credit consume a majority
of the initial credit limit, the benefit to
consumers from access to credit
appeared to be outweighed by the high
cost of paying for that credit. In order to
minimize the impact on access to credit,
the Agencies tailored the proposed rule
to allow institutions to charge to the
account security deposits and fees that
total less than a majority of the credit
limit during the first year and by
allowing institutions to charge amounts
totaling up to 25 percent of the initial
credit limit in the first billing cycle. In
addition, the Agencies clarified that
security deposits and fees paid from
separate funds would not be affected by
the proposal.
In response, industry commenters
who opposed the rule primarily relied
on two arguments. First, they contended
that, rather than increasing access to
credit, the restrictions in the proposed
rule would reduce or eliminate the
availability of credit cards for subprime
consumers. Specifically, they argued
that the cost of extending credit to
subprime consumers is substantially
higher than the cost of extending credit
to prime consumers and that the
proposed rule would limit subprime
issuers’ ability to pass those higher costs
on to consumers. In addition, they
argued that the proposed restrictions on
the amount of security deposits and fees
that may be charged to the account in
the first billing cycle will actually
increase issuer costs because subprime
issuers will be forced to make more
credit available to consumers, which
will increase their cost of funds, their
reserve requirements, and their losses.
As a result, they argued, subprime credit
card issuers will be forced to reduce
costs by substantially reducing the
amount of credit extended to subprime
consumers.
The Agencies have carefully
considered the arguments presented by
these commenters but have concluded
that, while the final rule may result in
some subprime consumers who are
currently eligible for high-fee subprime
credit cards not having access to a credit
card, this outcome does not outweigh
the benefits to subprime consumers
generally of receiving credit cards that
provide a meaningful amount of
available credit. The Agencies recognize
that credit cards enable consumers to
engage in certain types of transactions,
such as making purchases by telephone
or online or renting a car or hotel room.
As noted above, however, credit lines
for subprime credit card accounts are
typically very low, meaning that, once

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security deposits and fees have been
charged to the account, consumers
receive little available credit with which
to make purchases until they pay off the
deposits or fees. Currently, many
subprime credit card issuers assess fees
that consume 75 percent or more of the
credit line at account opening. Thus, on
an account with a $400 credit limit, a
consumer may pay $300 (plus interest
charges) to obtain $100 of available
credit. The benefit of receiving this
relatively small amount of available
credit does not outweigh its high cost.
Some industry commenters suggested
that, rather than focusing on the amount
of available credit at account opening,
the Agencies should consider the
benefits to consumers who pay the
upfront charges and then have access to
the entire credit line. As an initial
matter, these commenters did not
provide information regarding how
many consumers are able to obtain
access to the entire credit line or how
long it takes them to do so. Furthermore,
as noted above, a large issuer of
subprime cards indicated that few new
cardholders choose not to finance the
upfront fees, and many consumer
commenters who use high fee subprime
cards explained that they have limited
incomes. Therefore, it is unlikely that
consumers who open a high-fee
subprime credit card account will be
able to pay down the upfront charges
quickly. Moreover, as noted above,
consumers who have the resources to
pay upfront charges may receive more
economic benefit from using those
resources to obtain secured credit card
accounts instead of high-fee subprime
credit cards.
Accordingly, the Agencies conclude
that, when security deposits and fees
charged to a credit card account in the
first year exceed the amount of credit
extended at account opening, the injury
caused by the charges outweighs the
benefit to the consumer of receiving
available credit. Similarly, the Agencies
conclude that, in order to ensure that
consumers receive a meaningful amount
of available credit at account opening
that outweighs the injury, security
deposits and fees can consume no more
than 25 percent of the available credit
at account opening.154
154 Some issuers and members of Congress
recommended that the Agencies endorse a ‘‘Code of
Fair Practices’’ instead of finalizing the rule. These
practices include enhanced disclosure, offering
consumers the option to pay fees up front, not
assessing interest on fees posted to the account, a
commitment to report account payment experience
to credit reporting agencies, and offering consumers
the opportunity to cancel the card after receiving
disclosures. Several of these ‘‘best practices’’ have
essentially been codified by the Board’s
amendments to Regulation Z elsewhere in today’s

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Although these restrictions will
require issuers of high-fee subprime
credit cards to adjust their lending
practices, the Agencies believe that the
final rule provides sufficient flexibility
for these issuers to continue offering
credit cards to subprime consumers.
Specifically, subprime issuers may
charge to the account in the first year
security deposits and fees totaling 50
percent of the initial credit limit and
may charge half of that total at account
opening.155 In addition, the Agencies
have modified the proposal to permit
issuers to spread deposits and fees that
constitute more than 25 percent of the
initial credit limit over the first six
months rather than the first year. This
change is intended to better enable
issuers to limit the risk from the early
default of new cardholders, but still
ensure that consumers who obtain these
cards have meaningful access to credit.
Furthermore, although issuers are
prohibited from evading the final rule
by providing the consumer with
additional credit to finance additional
fees, the final rule does not limit issuers’
ability to collect additional amounts if
the consumer can obtain those funds
independently.
The second argument raised by
industry commenters was that high-fee
subprime credit cards offer an
opportunity for consumers with
damaged or limited credit histories to
build or repair their credit records and
qualify for credit at prime rates.
However, the data supplied by these
commenters indicates that most users of
high-fee subprime credit cards do not
experience an increase in credit score.
Specifically, a study of subprime
accounts performed by TransUnion (one
of the three nationwide consumer
Federal Register. For example, creditors will be
required to disclose the impact of security deposits
and fees for the issuance or availability of credit on
the amount of available credit the consumer will
receive at account opening. See 12 CFR
226.5a(b)(14). In addition, the Board has clarified
the circumstances under which a consumer who
has received account-opening disclosures (but has
not yet used the account or paid a fee) may reject
the plan and not be obligated to pay upfront fees.
See 12 CFR 226.5(b)(1)(iv). As discussed above, few
consumers considering high fee subprime cards are
likely to have the resources to pay the amount of
fees currently assessed ‘‘up front.’’ Moreover, while
the Agencies support accurate credit reporting, the
rulemaking record discussed below indicates that
the majority of high fee subprime cardholders do
not improve their credit scores. Finally, while
forbearance from charging interest on fees would
provide some benefit to consumers, that benefit is
outweighed by the harm that consumers experience
from the high fees themselves.
155 Notably, the final rule does not place any limit
on the dollar amount of security deposits and fees
that may be charged to the account. Instead, the
amount of deposits and fees that an issuer may
charge to the account is tied to the credit limit,
which the issuer determines.

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reporting agencies) indicates that, while
approximately 37 percent of consumers
experienced an increase in credit score
during the twelve months following the
opening of a subprime credit card, the
other 63 percent experienced a drop or
no change in credit score.156 Similarly,
a subprime credit card issuer stated that
only 35 percent of consumers who
receive its low limit credit cards
improve their credit score within 24
months of account opening.157 The
Agencies cannot verify the accuracy of
this data, nor can the Agencies verify
that the subset of consumers who did
experience an increase in credit score
did so as a result of the use of a
subprime credit card and not due to
other factors. Furthermore, even
assuming for purposes of this discussion
that the data are accurate, they indicate
that most consumers who use subprime
credit cards do not experience an
increase in credit score. In fact, it
appears that the majority of the
consumers in the sample studied by
TransUnion actually experienced a
decrease in credit score within twelve
months of opening a subprime credit
card account.158
Accordingly, for the reasons
discussed above, the Agencies conclude
that high-fee subprime credit cards do
not produce benefits that outweigh the
injury to consumers.
Public policy. For purposes of the
unfairness analysis, public policy is
generally embodied in a statute,
regulation, or judicial decision.159 In the
May 2008 Proposal, however, the
Agencies noted that the OCC has
concluded in regulatory guidance that
high-fee subprime credit card accounts
increase the risk of default and therefore
present concerns regarding the safety
and soundness of financial
institutions.160 To the extent that this
156 See TransUnion Summary of Results for CEAC
Coalition (‘‘TransUnion Summary’’) at 4 (dated July
2008) (attached to comment letter from the Political
and Economic Research Council (PERC) (dated Aug.
4, 2008)).
157 This same issuer also stated that, on average,
only 22.5% of these consumers receive a higher
limit card within 24 months, which—it asserted—
is higher than the industry average of 20%.
158 See TransUnion Summary at 6.
159 See, e.g., FTC Policy Statement on Unfairness
at 5.
160 See OCC Advisory Letter 2004–4, at 4
(‘‘[P]roducts carrying fee structures that are
significantly higher than the norm pose a greater
risk of default. * * * This is particularly true when
the security deposit and fees deplete the credit line
so as to provide little or no card utility or credit
availability upon issuance. In such circumstances,
when the consumer has no separate funds at stake,
and little or no consideration has been provided in
exchange for the fees and other amounts charged to
the consumer, the product may provide a
disincentive for responsible credit behavior and
adversely affect the consumer’s credit standing.’’)

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guidance constitutes public policy, that
policy weighs in favor of the restrictions
in the final rule. The OCC’s guidance
does not, however, serve as a primary
basis for the Agencies’ unfairness
determination.
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 535.26 supports safety and
soundness. The commenters described
very high credit risks associated with
high-fee subprime credit cards. One
estimated that at least one-third of new
high fee cardholders default and over 75
percent of them default immediately,
upon using 97 percent of their available
credit, paying no fees, and repaying no
principal. The TransUnion study also
found that about 60 percent of subprime
cardholders experience a drop in their
VantageScore, which suggests a
continuing inability to pay these
obligations. Section 535.26 provides
issuers with an incentive to employ
better underwriting in order to target
customers who are less likely to default.
Consequently, it fosters the safe and
sound operation of the institutions that
offer these products.
In this vein, it should be noted that
the federal banking agencies have
agreed that subprime lending that is
appropriately underwritten, priced and
administered can serve the goals of
enhancing credit access for borrowers
with blemished credit histories.161
However, OTS has made it clear that
credit card issuers under its jurisdiction
must have well-defined credit approval
criteria to ensure that underwriting
standards are appropriately and
uniformly followed.162 OTS advises all
of its institutions that whether they use
a judgmental process, an automated
scoring system, or a combination of both
to make the credit decision, it is
important to have well-defined credit
approval criteria to ensure that
underwriting standards are
appropriately and uniformly
followed.163 Appropriate underwriting
should reduce the costs of default for
issuers and consumers with subprime
credit histories.
Moreover, as noted above, subprime
cardholders now receive little usable
credit due to the current market practice
of charging fees for the issuance of
credit in amounts that substantially
161 Interagency Expanded Guidance for Subprime
Lending Programs (Feb. 2, 2001).
162 OTS Examination Handbook, Asset Quality,
Section 218 Credit Card Lending, at § 218.5 (May
2006).
163 Id.

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exhaust the line. Section 535.26 should
alleviate some of the negative
consequences associated with this
practice, including the creation of
unmanageable debt that consumers
cannot repay. In particular, requiring
issuers to spread the payment of a
portion of account opening fees over a
number of billing cycles should increase
the likelihood that borrowers can repay
them. It is therefore consistent with
guidance issued by the federal banking
agencies on the management of credit
card lending.164 It is also consistent
with guidance issued by the OTS.165
Given the high default rate and the
unsecured nature of credit card lending,
OTS concludes that it is not a safe and
sound practice for savings associations
to offer consumer credit cards that
charge security deposits and fees that do
not comply with § 535.26.
With regard to consumer protection,
§ 535.26 is consistent with regulating
savings associations in a manner that
protects consumers and gives due
consideration to best practices of thrift
institutions nationwide. As a result of
this provision, consumers will be
protected from excessive security
deposits and fees for the issuance or
availability of credit that diminish the
value of the account by reducing the
credit available to the consumer for
purchases or other transactions. They
will also be protected from incurring
excessive cost for credit cards that
provide access to a very small amount
of credit. Issuers will have less incentive
to make unsubstantiated claims that
these products facilitate credit repair.
These benefits are particularly
important when it is recognized that the
consumers most likely to receive the
protections provided by § 535.26 are
those who are the most vulnerable,
including people who are elderly, live
on limited incomes, have serious health
problems, or live with a combination of
these circumstances. Among OTSsupervised institutions, cards that do
not comply with the restrictions in
§ 535.26 are rare. In fact, based on OTS
supervisory observations and
164 See Interagency Guidance, Credit Card
Lending, Account Management and Loss Allowance
Guidance, OTS, Examination Handbook, Asset
Quality, Credit Card Lending, Appendix A.
165 OTS Examination Handbook, Asset Quality,
Section 218 Credit Card Lending, p. 218.10 (May
2006). Notably, OTS has recognized the risks to
safety and soundness of subprime lending by
requiring more intensive risk management and
capital for institutions that engage in subprime
lending. Id. at § 218.4. These risks are particularly
pronounced in the current economic environment,
in which credit card charge-offs have increased. See
Federal Reserve Board Statistical Release, Chargeoff and Delinquency Rates, 3rd Q 2008 (available at:
http://www.federalreserve.gov/releases/chargeoff/
chgallsa.htm).

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experience, only two savings
associations currently offer such cards
and those products are a small part of
their business.
Consequently, HOLA serves as an
independent basis for § 535.26.

these cards have meaningful access to
credit. The Agencies have revised
proposed comments 27(b)–1 and 27(b)–
2 for consistency with the final rule and
adopted those comments as 26(b)–1 and
26(b)–2, respectively.

Final Rule
As discussed above, the Agencies
have redesignated proposed § l.27 as
§ l.26. The proposed commentary has
been revised accordingly. In addition,
the title of this section has been revised
for clarity.

Section l.26(c) Evasion Prohibited
As discussed above, some consumer
groups expressed concern that
institutions could evade the proposed
rule by requiring consumers to pay
security deposits and fees for the
issuance or availability of credit from
separate funds. Although the Agencies
generally do not intend the final rule to
apply to amounts that are not charged
to the account (such as deposits for
secured credit cards), the Agencies
conclude that § l.26 would provide
little effective protection against the
unfair assessment of security deposits
and fees if institutions could evade its
requirements by providing the
consumer with additional credit to fund
the payment of security deposits and
fees for the issuance or availability of
credit that exceed the total amounts
permitted by § l.26(a) and (b).
Accordingly, the Agencies have adopted
§ l.26(c), which prohibits this practice.
The Agencies have also adopted
comment 26(c)–1 (which provides an
example of the application of the rule)
and comment 26(c)–2 (which clarifies
that an institution does not violate
§ l.26(c) if it requires the consumer to
pay security deposits or fees for the
issuance or availability of credit using
funds that are not obtained, directly or
indirectly, from the institution).

Section l.26(a) Limitation for First
Year
Proposed § l.27(a) would have
prohibited institutions from charging to
the account security deposits and fees
for the issuance or availability of credit
during the twelve months following
account opening if, in the aggregate,
those fees constitute a majority of the
initial credit limit. The Agencies have
revised this paragraph of the proposed
rule for clarity and adopted it as
§ l.26(a).
Proposed comment 27(a)–1 clarified
that the total amount of security
deposits and fees for the issuance or
availability of credit constitutes a
majority of the initial credit limit if that
total is greater than half of the limit and
provided an example. The Agencies
adopt this comment as comment 26(a)–
1.
Proposed § l.27(b) would have
prohibited institutions from charging to
the account during the first billing cycle
security deposits and fees for the
issuance or availability of credit that, in
the aggregate, constitute more than 25
percent of the initial credit limit. It
would have further required that any
additional security deposits and fees be
spread equally among the eleven billing
cycles following the first billing cycle.
Proposed comment 27(b)–1 clarified
that, when dividing amounts pursuant
to § l.27(b)(2), the institution may
adjust amounts by one dollar or less.
Proposed comment 27(b)–2 provided an
example of the application of the rule.
As discussed above, the Agencies
have adopted § l.27(b) as § l.26(b)
with modifications. The final rule
provides that security deposits and fees
that constitute more than 25 percent of
the initial credit limit be charged to the
account in equal portions in no fewer
than the five billing cycles immediately
following the first billing cycle.
Institutions that wish to spread these
deposits and fees over a longer period
may do so. This change is intended to
better enable issuers to limit the risk of
early default by new cardholders, but
still ensure that consumers who obtain

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Section l.26(d) Definitions
Proposed § l.27(c) would have
defined ‘‘fees for the issuance or
availability of credit’’ as including any
annual or other periodic fee, any fee
based on account activity or inactivity,
and any non-periodic fee that relates to
opening an account. This definition is
based on the definition of ‘‘fees for the
issuance or availability of credit’’ in 12
CFR 226.5a(b)(2), published by the
Board elsewhere in today’s Federal
Register. This definition does not
include fees such as late fees or fees for
exceeding the credit limit. In order to
provide additional clarity, the Agencies
have added definitions of other terms
used in the rule and have adopted those
definitions in § l.26(d). Specifically,
the Agencies have moved the definition
of ‘‘initial credit limit’’ in proposed
comment 27–1 into the text of the
regulation and added definitions
clarifying the meaning of the terms
‘‘first billing cycle’’ and ‘‘first year.’’
Proposed comments 27(c)–1, –2, and
–3 clarified the meaning of ‘‘fees for the

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issuance or availability of credit.’’ These
comments were based on similar
commentary to 12 CFR 226.5a(b)(2),
which was proposed by the Board with
its June 2007 Regulation Z Proposal.
The Agencies have revised the proposed
commentary to § l.26(d) for
consistency with the final Regulation Z
commentary published by the Board
elsewhere in today’s Federal Register.
Specifically, proposed comment 27(c)–2
has been revised to clarify that fees for
providing additional cards to primary
cardholders (as opposed to authorized
users) are fees for the issuance or
availability of credit. Otherwise, these
comments are redesignated as
comments 26(d)–1, –2, and –3 and
adopted as proposed.
Other Issues
Implementation. As discussed in
section VII of this SUPPLEMENTARY
INFORMATION, the effective date for
§ l.26 is July 1, 2010. Although the
Agencies particularly encourage
institutions to use their best efforts to
conform their practices to this section of
the final rule sooner, institutions are not
prohibited from charging security
deposits and fees for the issuance or
availability that do not comply with
§ l.26 until the effective date. These
provisions do not affect security
deposits and fees charged to consumer
credit card accounts prior to that date,
even if some or all of the security
deposits and fees have not been paid in
full as of the effective date.
Advertising. Based on the record in
this rulemaking, the Agencies are not
persuaded that, as a general matter,
high-fee subprime credit cards provide
meaningful benefits to consumers as
credit repair tools. Notably, institutions
that make marketing claims regarding
the use of subprime credit cards as a
means to improve credit scores risk
violating the FTC Act’s prohibition on
deception if they cannot substantiate
their claims.166 Savings associations
that cannot do so are also at risk of
violating the OTS rule against making
inaccurate representations in
advertising.167
Other Proposals

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Proposed § l.25—Unfair Acts or
Practices Regarding Fees for Exceeding
the Credit Limit Caused by Credit Holds
Summary. In May 2008, the Agencies
proposed § l.25, which would have
166 See FTC Policy Statement Regarding
Advertising Substantiation, 49 FR 30999 (Aug. 2,
1984); see also FTC v. QT, Inc., 448 F. Supp. 2d.
908, 959–960 (N.D. Ill. 2006) (substantiation policy
used in federal litigation as guidance for the court),
aff’d, 512 F.3d 858 (7th Cir. 2008).
167 See 12 CFR 563.27.

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prohibited institutions from assessing a
fee or charge for exceeding the credit
limit on a consumer credit card account
if the credit limit would not have been
exceeded but for a hold placed on any
portion of the available credit on the
account that is in excess of the actual
purchase or transaction amount. See 73
FR 28921–28922. The Agencies
intended this provision to parallel
proposed § l.32(b), which would have
imposed identical restrictions with
respect to holds placed on available
funds in a deposit account as a result of
a debit card transaction. See id. at
28931–32892. As discussed below, the
Agencies are not taking action on debit
holds or credit holds at this time.
Background. Although the Board’s
June 2007 Regulation Z Proposal did not
directly address over-the-credit-limit
(OCL) fees, the Board received
comments from consumers, consumer
groups, and members of Congress
expressing concern about the penalties
imposed by creditors for exceeding the
credit limit. Specifically, commenters
were concerned that consumers may
unknowingly exceed their credit limit
and incur significant rate increases and
fees as a result.
As discussed in the May 2008
Proposal, the Agencies believed these
concerns were addressed by proposed
§ l.24 to the extent that it prohibited
institutions from applying increased
rates to outstanding balances as a
penalty for exceeding the credit limit.
The Agencies were concerned, however,
about the imposition of OCL fees in
connection with credit holds. As further
discussed below in section VI of this
SUPPLEMENTARY INFORMATION, some
merchants place a temporary ‘‘hold’’ on
an account when a consumer uses a
credit or debit card for a transaction in
which the actual purchase amount is
not known at the time the transaction is
authorized. For example, when a
consumer uses a credit card to obtain a
hotel room, the hotel often will not
know the total amount of the transaction
at the time because that amount may
depend on, for example, the number of
days the consumer stays at the hotel or
the charges for incidental services the
hotel may provide to the consumer
during the stay (such as room service).
Therefore, the hotel may place a hold on
the available credit on the consumer’s
account in an amount sufficient to cover
the expected length of the stay plus an
additional amount for potential
purchases of incidentals. In these
circumstances, the institution may
authorize the hold but the final amount
of the transaction will not be known
until the hotel submits the actual
purchase amount for settlement.

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5543

Typically, the hold is kept in place
until the transaction amount is
presented to the institution for payment
and settled, which may take place a few
days after the original authorization.
During this time between authorization
and settlement, the hold may remain in
place on the consumer’s account. As
discussed in the May 2008 Proposal, the
Agencies were concerned that
consumers who were unfamiliar with
credit hold practices might
inadvertently exceed the credit limit
and incur an OCL fee because they
assumed that the available credit was
reduced only by the actual amount of
the purchase.
Comments received. Industry
commenters stated that credit holds do
not typically reduce the amount of
available credit on a consumer credit
card account (in contrast to debit holds,
which do reduce the amount of
available funds in a deposit account).
Some stated that, for this reason, they
did not object to the proposed rule,
while others argued that—to the extent
the provision would require any
changes to issuers’ systems—it would be
unnecessarily burdensome because
credit holds are very unlikely to result
in OCL fees.
The proposed rule was supported by
consumer groups, members of Congress,
the FDIC, state attorneys general, and
state consumer protection agencies,
although these commenters generally
argued that the final rule should go
further in addressing the harm caused
by OCL fees. Some of these commenters
argued that exceeding the credit limit
should not be a basis for loss of a
promotional rate under proposed
§ l.24(b)(2). As discussed above with
respect to § l.24, the Agencies agree
and the final version of § l.24(b)(2)
does not permit this practice.
In addition, some of these
commenters argued that institutions that
reduce the credit limit on a consumer
credit card account should be
prohibited from penalizing consumers
for exceeding that reduced limit. The
Agencies believe that these concerns are
addressed by the Board’s revisions to
Regulation Z, published elsewhere in
today’s Federal Register. Specifically,
12 CFR 226.9(c)(2)(v) provides that, if a
creditor decreases the credit limit on an
account, notice of the decrease must be
provided at least 45 days before an OCL
fee or a penalty rate can be imposed
solely as a result of the consumer
exceeding the newly-decreased limit.
These commenters also urged the
Agencies to take a variety of other
actions with respect to OCL fees,
including prohibiting OCL fees unless
the account is over the credit limit at the

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end of the billing cycle, prohibiting OCL
fees when the institution approved the
transaction that put the account over the
credit limit (or allowing consumers to
direct institutions not to honor such
transactions), prohibiting OCL fees
when interest charges or other fees
placed the account over the credit limit,
prohibiting multiple OCL fees based on
a single transaction, and prohibiting
OCL fees that are not reasonably related
to the institution’s cost. The Agencies,
however, believe that the protections
provided elsewhere in Regulation Z and
in this final rule—particularly the
prohibition on repricing existing
balances as a penalty for exceeding the
credit limit—provide substantial
protections for consumers who exceed
their credit limit.
Conclusion. The Agencies are not
taking action on credit holds or debit
holds at this time. As discussed below
in section VI of this SUPPLEMENTARY
INFORMATION, the Board has published
proposed amendments to Regulation E
addressing debit holds elsewhere in
today’s Federal Register. The Agencies
will review information obtained
through that rulemaking to determine
whether to take further action. In
addition, to the extent that specific
practices involving debit or credit holds
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.
Proposed § l.28—Deceptive Acts or
Practices Regarding Firm Offers of
Credit
Summary. In May 2008, the Agencies
proposed § l.28 to address
circumstances in which institutions
make firm offers of credit for consumer
credit card accounts that contain a range
of or multiple annual percentage rates or
credit limits because such offers
appeared to be deceptive. See 72 FR at
28925–28927. When the rate or credit
limit that a consumer responding to
such an offer will receive depends on
specific criteria bearing on
creditworthiness, proposed § l.28
would have required that the institution
disclose the types of eligibility criteria
in the solicitation. An institution would
have been permitted to use the
following disclosure to meet these
requirements: ‘‘If you are approved for
credit, your annual percentage rate and/
or credit limit will depend on your
credit history, income, and debts.’’
Based on the comments and further
analysis, the Agencies have concluded
that concerns regarding firm offers of
credit containing a range of or multiple
annual percentage rates are adequately

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addressed by provisions of Regulation Z
published by the Board elsewhere in
today’s Federal Register. Accordingly,
as discussed below, the Agencies are not
taking action on this issue at this time.
Background. The Fair Credit
Reporting Act (FCRA) limits the
purposes for which consumer reports
can be obtained. It permits consumer
reporting agencies to furnish consumer
reports only for one of the ‘‘permissible
purposes’’ enumerated in the statute.168
One of the permissible purposes set
forth in the FCRA relates to prescreened
firm offers of credit or insurance.169 In
a typical use of prescreening for firm
offers of credit, a creditor submits a
request to a consumer reporting agency
for the contact information of
consumers meeting certain preestablished criteria, such as credit
scores or a lack of serious
delinquencies. The creditor then sends
offers of credit targeted to those
consumers, which state certain terms
under which credit may be provided.
For example, a firm offer of credit may
contain statements regarding the annual
percentage rate or credit limit that may
be provided.
The FCRA requires that a firm offer of
credit state, among other things, that (1)
information contained in the
consumer’s credit report was used in
connection with the transaction; (2) the
consumer received the firm offer
because the consumer satisfied the
criteria for creditworthiness under
which the consumer was selected for
the offer; and (3) if applicable, the credit
may not be extended if, after the
consumer responds to the offer, the
consumer does not meet the criteria
used to select the consumer for the offer
or any other applicable criteria bearing
on creditworthiness or does not furnish
any required collateral.170 The creditor
may apply certain additional criteria to
evaluate applications from consumers
that respond to the offer, such as the
consumer’s income.171
As discussed in the May 2008
Proposal, the Agencies were concerned
that, because firm offers of credit often
state that consumers have been ‘‘preselected’’ for credit or make similar
statements, consumers receiving such
offers may not understand that they are
not necessarily eligible for the lowest
annual percentage rate and the highest
168 See 15 U.S.C. 1681b. Similarly, persons
obtaining consumer reports may do so only with a
permissible purpose. See 15 U.S.C. 1681b(f).
169 See 15 U.S.C. 1681b(c); see also 15 U.S.C.
1681a(l) (defining ‘‘firm offer of credit or
insurance’’).
170 See 15 U.S.C. 1681m(d)(1); see also 16 CFR
642.1–642.4 (Prescreen Opt-Out Notice Rule).
171 See, e.g., 15 U.S.C. 1681a(l).

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credit limit stated in the offer. Thus, in
the absence of an affirmative statement
to the contrary, consumers could
reasonably believe that they could
receive the lowest annual percentage
rate and highest credit limit stated in
the offer even though that is not the
case. Accordingly, the Agencies
proposed § l.28.
Comments received. Proposed § l.28
was supported by some industry
commenters as well as some members of
Congress, the FDIC, and state attorneys
general. Other industry commenters
argued that the Agencies’ concerns
regarding firm offers of credit were more
appropriately addressed under
Regulation Z or the FCRA. Consumer
groups, some members of Congress, and
a state consumer protection agency
criticized the proposed disclosure as
ineffective and requested that the
Agencies take more substantive action,
such as prohibiting institutions from
making firm offers of credit that do not
state a specific annual percentage rate or
credit limit or making firm offers of
credit to consumers who are not eligible
for the best terms stated in the offer.
Conclusion. The Agencies believe that
the Board’s final rules under Regulation
Z (published elsewhere in today’s
Federal Register) adequately address
their concerns regarding firm offers of
credit that contain a range of or multiple
annual percentage rates. Specifically,
the Board has adopted 12 CFR
226.5a(b)(1)(v) to address circumstances
in which a creditor is unable to state in
a solicitation the exact rate all
consumers who respond to the
solicitation will receive because that
rate depends on a subsequent evaluation
of the consumer’s creditworthiness.
This provision generally requires the
creditor to disclose in the Schumer Box
provided with credit card solicitations
(including firm offers of credit) the
specific rates or the range of rates that
could apply and to state that the rate for
which the consumer may qualify at
account opening will depend on the
consumer’s creditworthiness and other
factors (if applicable).
After conducting consumer testing,
the Board has also provided model
forms that can be used to disclose
multiple rates or a range of rates. See
App. G to 12 CFR 226, Samples G–10(B)
and G–10(C). In this testing, almost all
participants understood that, when
multiple rates or a range of rates were
provided in the Schumer Box, it meant
that the consumer’s initial annual
percentage rate would be determined
among those rates or within that range
based on the consumer’s credit history
and credit score. Accordingly, the
Agencies believe that 12 CFR

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226.5a(b)(1)(v) adequately addresses
concerns that consumers will be misled
when firm offers state multiple or a
range of annual percentage rates.
Similarly, although Regulation Z does
not require disclosure of the credit limit
in the Schumer Box, the Board’s
consumer testing indicates that
consumers are not misled by
solicitations stating multiple credit
limits or a range of credit limits.
Specifically, when a solicitation did not
state a specific credit limit, almost all
participants understood that the credit
limit for which they would qualify
depended on their creditworthiness. In
addition, when looking at statements
that the initial credit limit would be ‘‘up
to $2,500,’’ most participants
understood that the limit they would
receive might be lower than $2,500.172
Accordingly, the Agencies are not
taking action regarding firm offers of
credit at this time. To the extent that
specific practices regarding firm offers
of credit 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. Further, to the extent that
individual consumers do not wish to
receive firm offers of credit, they can
elect to be excluded from firm offer
lists.173
VI. Proposed Subpart Regarding
Overdraft Services

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Background
Historically, if a consumer attempted
to engage in a transaction that would
overdraw his or her deposit account, the
consumer’s depository institution used
its discretion on an ad hoc basis to
determine whether to pay the overdraft.
If an overdraft was paid, the institution
usually imposed a fee on the consumer’s
account. In recent years, many
institutions have largely automated the
overdraft payment process. Automation
is used to apply specific criteria for
determining whether to honor
overdrafts and set limits on the amount
of the coverage provided.
Overdraft services vary among
institutions but often share certain
common characteristics. In general,
172 In the May 2008 Proposal, the Agencies noted
that prior consumer testing by the Board indicated
that consumers who read solicitations that did not
state a specific credit limit generally understood
that the limit they would receive depended on their
creditworthiness. This testing did not, however,
specifically focus on firm offers of credit that
contain statements that the consumer has been
selected for the offer. Accordingly, after the May
2008 Proposal, the Board conducted additional
testing using such an offer, which produced similar
results.
173 12 U.S.C. 1681b(e).

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consumers who meet the institution’s
criteria are automatically enrolled in
overdraft services.174 While institutions
generally do not underwrite on an
individual account basis when enrolling
the consumer in the service, most
institutions will review individual
accounts periodically to determine
whether the consumer continues to
qualify for the service, and the amounts
that may be covered. Most institutions
disclose to consumers that the payment
of overdrafts is discretionary, and that
the institution has no legal obligation to
pay any overdraft.
In the past, institutions generally
provided overdraft coverage only for
check transactions. In recent years,
however, the service has been extended
to cover overdrafts resulting from noncheck transactions, including
withdrawals at ATMs, automated
clearinghouse (ACH) transactions, debit
card transactions at point-of-sale (POS),
pre-authorized automatic debits from a
consumer’s account, telephone-initiated
funds transfers, and online banking
transactions.175
Institutions charge a flat fee each time
an overdraft is paid, regardless of the
amount of the overdraft. Institutions
commonly charge the same amount for
paying the overdraft as they would if
they returned the item unpaid.176 A
daily fee also may apply for each day
the account remains overdrawn.
174 These criteria may include whether the
account has been open a certain number of days,
whether the account is in ‘‘good standing,’’ and
whether deposits are regularly made to the account.
175 According to the FDIC’s Study of Bank
Overdraft Programs (FDIC Study), nearly 70 percent
of banks surveyed implemented their automated
overdraft program after 2001. In addition, 81
percent of banks surveyed that operate automated
programs allow overdrafts to be paid at ATMs and
POS debit card terminals. See FDIC Study of Bank
Overdraft Programs 8, 10 (Nov. 2008) (hereinafter,
FDIC Study) (available at: http://www.fdic.gov/
bank/analytical/overdraft/
FDIC138_Report_FinalTOC.pdf). See also Overdraft
Protection: Fair Practices for Consumers: Hearing
before the House Subcomm. on Financial
Institutions and Consumer Credit, House Comm. on
Financial Services, 110th Cong., at 72 (2007)
(hereinafter, Overdraft Protection Hearing)
(available at http://www.house.gov/apps/list/
hearing/financialsvcs_dem/hr0705072.shtml)
(stating that as recently as 2004, 80 percent of banks
still declined ATM and debit card transactions
without charging a fee when account holders did
not have sufficient funds in their account).
176 See Bank Fees: Federal Banking Regulators
Could Better Ensure That Consumers Have
Required Disclosure Documents Prior to Opening
Checking or Savings Accounts, GAO Report 08–281,
at 14 (Jan. 2008) (reporting that the average cost of
overdraft and insufficient funds fees was just over
$26 per item in 2007). See also Bankrate 2008
Checking Account Study, posted October 27, 2008
(available at: http://www.bankrate.com/brm/news/
chk/chkstudy/20081027-bounced-check-feesa1.asp?caret=2) (reporting an average overdraft fee
of approximately $29 per item).

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In the May 2008 Proposal, the
Agencies proposed to establish a new
Subpart D to their respective FTC Act
regulations which would adopt rules
prohibiting specific unfair acts or
practices with respect to overdraft
services. One provision (discussed in
more detail below) would have
prohibited institutions from assessing
any fees on a consumer’s account in
connection with an overdraft service,
unless the consumer is given notice and
a reasonable opportunity to opt out of
the service, and the consumer does not
opt out.177 The Agencies also proposed
to prohibit institutions from assessing
an overdraft fee where the overdraft
would not have occurred but for a hold
placed on funds that exceeds the actual
purchase or transaction amount.
Based on the comments received and
further analysis, the Agencies are not
taking action regarding overdraft
services or debit holds at this time. As
noted above, the Board has proposed
rules regarding overdraft services under
Regulation E elsewhere in today’s
Federal Register.178 The Agencies will
review information obtained during that
rulemaking to determine whether to
take further action.
A. Proposed Section l.32(a)—
Consumer Right To Opt Out
The Agencies proposed in § l.32(a)
to prohibit institutions from assessing
any fees on a consumer’s account in
connection with an overdraft service,
unless the consumer is given notice and
a reasonable opportunity to opt out of
the service, and the consumer does not
opt out. The proposed opt-out right
would have applied to overdrafts
resulting from all methods of payment,
including check, ACH transactions,
ATM withdrawals and debit card
transactions (full opt-out). In addition,
the proposal would have required
institutions to provide consumers with
the option of opting out of only those
overdrafts resulting from ATM
withdrawals and debit card transactions
at POS (partial opt-out). In a separate
proposal under TISA and Regulation
DD, the Board proposed additional
amendments regarding the form,
content, and timing requirements for the
opt-out notice.
177 As noted above, the Board also separately
published a proposal under its authority under
TISA and Regulation DD setting forth requirements
regarding the form, content and timing for the optout notice. 73 FR 28739 (May 19, 2008).
178 The proposed provisions under Regulation DD
regarding the form, content and timing of delivery
for the opt-out notice are not included in that final
rule, but instead are included with certain revisions
in the Regulation E proposal. Both rulemakings are
published elsewhere in today’s Federal Register.

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Comments received. The Agencies
received approximately 1,500 comment
letters on the overdraft services portion
of the May 2008 Proposal. Banks,
savings associations, credit unions, and
industry trade associations, generally,
but not uniformly, opposed the
proposed requirement to provide
consumers with the right to opt out of
an institution’s payment of overdrafts.
Industry commenters stated that the cost
of complying with the rule would far
exceed any consumer benefits. Rather
than causing consumer harm, industry
commenters asserted that overdraft
services provide consumers substantial
benefits, particularly with respect to
check transactions. These industry
commenters observed that the payment
of overdrafts for checks enables
consumers to avoid more significant
injuries, such as merchant fees, negative
credit reports, and violations of bad
check laws. Industry commenters and
the OCC stated that if the opt-out right
applied to check transactions, more
checks would be returned unpaid.
Industry commenters and the OCC also
noted a potential unintended
consequence of the rule could be that
institutions would lengthen their
availability schedules to the extent
permitted by the Board’s Regulation CC,
12 CFR Part 229, to ensure that a
deposited check was written on good
funds. As a result, consumers would
have to wait longer than they do today
before gaining access to deposited
funds.
Industry commenters also raised a
number of operational concerns
regarding the proposed partial opt-out
for ATM and POS transactions. These
commenters noted that most systems
may not be able to differentiate POS
debit card transactions from other types
of debit card transactions. Some
industry commenters, however, argued
that the opt-out should be limited to
ATM withdrawals and debit card
transactions. These commenters stated
that the majority of consumer
complaints about overdraft fees arise in
connection with debit card purchases in
which the amount of the overdraft fee is
significantly higher than the amount of
the overdraft.
Finally, industry commenters
believed that it was inappropriate to
address overdraft practices under the
Agencies’ FTC Act authority. In
particular, industry commenters
disputed the suggestion that overdraft
services were unfair in light of the
consumer benefits when overdrafts are
paid, such as the avoidance of merchant
fees. Industry commenters also argued
that consumers could reasonably avoid
overdraft fees even without being given

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an opportunity to opt out by properly
managing their accounts. Lastly,
industry commenters noted that the
federal banking agencies have not
previously indicated that institutions’
payment of overdrafts pursuant to nonpromoted overdraft services raise
significant supervisory concerns, and
asserted that the Agencies’ proposal
would subject institutions to potential
litigation risks. Accordingly, many
industry commenters recommended that
the Board address any concerns about
overdraft services under other
regulatory authority, such as Regulation
E and Regulation DD.
Consumer groups, members of
Congress, the FDIC, individual
consumers, and others supported the
Agencies’ proposal to prohibit
institutions from assessing fees for
overdraft services, unless the consumer
is given notice and the opportunity to
opt out. However, most of these
commenters argued that the rule should
instead require institutions to obtain the
consumer’s affirmative consent (that is,
opt-in) before overdrafts could be paid
and fees assessed. These commenters
also stated that overdrafts are extensions
of credit and should be subject to
Regulation Z. Specifically, they asserted
that institutions should be required to
disclose the cost of an overdraft service
as an annual percentage rate to allow
consumers to compare those costs with
other forms of credit.
Consumer testing. The Agencies noted
in the May 2008 Proposal that, as part
of the rulemaking process, the Board
would conduct consumer testing on a
proposed opt-out form (set forth in the
accompanying May 2008 Regulation DD
Proposal) to ensure that the notice can
be easily understood by consumers.
After considering the comments
received in response to both proposals,
Board staff worked with a testing
consultant, Macro International (Macro),
to revise the proposed model form and
to create a short-form opt-out notice that
would appear on the periodic statement.
In September 2008, Macro conducted
two rounds of one-on-one interviews
with a diverse group of consumers.
In general, after reviewing the model
disclosures, testing participants
generally understood the concept of
overdraft coverage, and that they would
be charged fees if their institution paid
their overdrafts. Participants also
appeared to understand that if they
opted out of overdraft coverage, this
meant their checks would not be paid
and they could be charged fees by both
their institution and by the merchant.179
179 See Review and Testing of Overdraft Notices,
Macro International (Dec. 8, 2008).

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During the first round of testing,
Macro tested an opt-out form that
allowed consumers to opt out of the
payment of overdrafts for all transaction
types, including checks and recurring
debits. During both rounds, virtually all
of the participants indicated that they
would not opt out if their checks would
be returned unpaid. However, when
asked if they would opt out if the choice
was limited to opting out of overdrafts
in connection with ATM withdrawals
and debit card purchases, half of the
participants indicated that they would
consider doing so.
Conclusion. Based on the comments
received and further analysis, the Board
is publishing a proposal elsewhere in
today’s Federal Register under
Regulation E that would require that an
institution provide its consumers the
right to opt out of the institution’s
payment of ATM withdrawals and onetime debit card transactions pursuant to
the institution’s overdraft service. The
Board is also proposing an alternative
approach that would require an
institution to obtain a consumer’s
affirmative consent (that is, opt-in)
before the institution could pay
overdrafts for ATM withdrawals and
one-time debit card transactions and
assess a fee. Additional comments
received in response to the Agencies’
May 2008 Proposal and the Board’s
Regulation DD Proposal regarding the
content, timing, and format of the optout notice are further discussed in the
Board’s Regulation E proposal. The
Board also anticipates conducting
further consumer testing following its
review of the comments received on the
Regulation E proposal.
Accordingly, the Agencies are not
taking action regarding overdraft
services at this time. The Agencies will
review information obtained from the
Board’s rulemaking to determine
whether to take further action.
B. Proposed Section l.32(b)—Debit
Holds
When a consumer uses a debit card to
make a purchase, a hold may be placed
on funds in the consumer’s account to
ensure that the consumer has sufficient
funds in the account when the
transaction is presented for settlement.
This is commonly referred to as a ‘‘debit
hold.’’ During the time the debit hold
remains in place, which may be up to
three days after authorization, those
funds may be unavailable for the
consumer’s use for other transactions.
In some cases, the actual purchase
amount is not known at the time the
transaction is authorized, such as when
a consumer uses a debit card to pay for
gas at the pump or pay for a meal at a

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restaurant. Consequently, a debit hold
may be placed for an estimated amount
which may exceed the actual
transaction amount. The consumer may
engage in subsequent transactions
reasonably assuming that the account
has only been debited for the actual
transaction amount. Because of the
excess hold, however, the consumer
may incur overdraft fees for those
subsequent transactions.
In May 2008, the Agencies proposed
in § l.32(b) to prohibit institutions
from assessing an overdraft fee where
the overdraft would not have occurred
but for a hold placed on funds in the
consumer’s account that exceeds the
actual purchase or transaction amount.
The proposed prohibition was intended
to enable consumers to avoid the
assessment of fees when the consumer
would not have overdrawn his or her
account had the actual transaction
amount been presented for payment in
a timely manner.
Consumer groups supported the
proposed prohibition. However, they
recommended that the Agencies also
address check holds and prohibit the
assessment of overdraft fees if a
consumer has deposited funds that have
not yet cleared, but where the deposit
would have been sufficient to cover the
overdraft. Alternatively, consumer
groups urged the Board to use its
authority under the Expedited Funds
Availability Act (EFAA) to shorten the
funds availability schedule for
deposited items.
Industry commenters, however,
opposed the debit hold proposal, stating
that it would present significant
operational difficulties. For example,
industry commenters noted that
institutions authorize transactions in
real time, taking into account
transactions subject to a debit hold.
Because the actual purchase amount for
certain transactions subject to a debit
hold will not be known until the
transaction is presented for payment,
some industry commenters expressed
concern that the rule would require
institutions to monitor accounts
retroactively and manually adjust
transactions and fees that have posted to
the account to determine whether an
overdraft was caused by an excess hold.
Otherwise, institutions would have to
stop placing holds altogether which,
industry commenters argued, raised
potential safety and soundness
concerns. Nonetheless, a few financial
institution commenters stated that for
fuel purchases, they do not place holds
beyond the $1 pre-authorization
amount, and one large financial
institution commenter stated that it does
not currently place holds of any amount

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on authorizations coming from gas
stations, hotels, or rental car companies.
Rather than using their FTC Act
authority, industry commenters urged
the Agencies to use other existing
regulatory authority. For example,
industry commenters recommended that
the Board exercise its authority under
Regulation E to require merchants to
disclose at the point-of-sale when holds
may be placed on debit card
transactions.
As discussed above, the Board is
proposing to address concerns about
debit holds pursuant to the Board’s
authority under the EFTA and
Regulation E in a separate proposal
published elsewhere in today’s Federal
Register. Accordingly, the Agencies are
not taking action regarding overdraft
services at this time. The Agencies will
review information obtained from the
Board’s rulemaking to determine
whether to take further action.180
Other Overdraft Practices
Balance disclosures. The Agencies
also noted their concerns in the
proposal regarding how consumer
balances are disclosed. In particular, the
Agencies observed that consumers
could be misled by balance disclosures
that include additional funds that the
institution may provide to cover an
overdraft. The Board is addressing this
issue in the final rule under Regulation
DD published contemporaneously in
today’s Federal Register.
Transaction clearing practices. The
May 2008 Proposal also noted the
Agencies’ concerns about the impact of
transaction clearing practices on the
amount of overdraft fees that may be
incurred by the consumer. The February
2005 overdraft guidance recommends as
a best practice that institutions explain
the impact of transaction clearing
policies to consumers. For example,
institutions could disclose that
transactions may not be processed in the
order in which they occurred and that
the order in which transactions are
received by the institution and
processed can affect the total amount of
overdraft fees incurred by the
consumer.181 In its Guidance on
Overdraft Protection Programs, the OTS
also recommended as best practices: (1)
Clearly disclosing rules for processing
and clearing transactions; and (2) having
transaction clearing rules that are not
administered unfairly or manipulated to
inflate fees.182
180 Additional

comments received on the
proposed FTC Act debit hold provision are
discussed in more detail in the Board’s Regulation
E proposal where relevant.
181 70 FR at 8431; 70 FR at 9132.
182 70 FR at 8431.

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The May 2008 Proposal did not
propose any rules addressing
transaction clearing practices. Instead,
the Agencies solicited comment on the
impact of requiring institutions to pay
smaller-dollar items before larger-dollar
items when received on the same day
for purposes of assessing overdraft fees
on a consumer’s account. The Agencies
also solicited comment on how such a
rule would impact an institution’s
ability to process transactions on a realtime basis.
Industry commenters urged the
Agencies not to engage in a rulemaking
relating to transaction clearing practices.
First, they argued that state law under
the Uniform Commercial Code 183
specifically provides institutions
flexibility in determining posting
order.184 Second, industry commenters
stated that each transaction clearing
method has inherent flaws, and that
most customers prefer high-to-low
posting order because it results in
consumers’ largest bills—typically their
higher priority payments—being paid
first. Third, these commenters argued
that transaction clearing processes are
more complex than high-to-low or lowto-high decisions. Industry commenters
stated, for example, that institutions use
a variety of other clearing methods
based on different processing
capabilities, such as real-time
processing or processing in check
number order. In addition, an
institution may use a combination of
posting order methods based on the
capabilities of its processing system and
the transaction type. For example, an
institution may clear some items in realtime and others on a high-to-low basis
during batch processing, depending on
how the item is presented and
depending on applicable funds
availability and payment decision
requirements. Industry commenters also
expressed concern that requiring a
particular processing order would create
significant litigation risk given the
complexity of items processing. Finally,
industry commenters stated that it
would be technologically impracticable
to permit a small subset of consumers to
opt in to a particular processing order
and to treat their transactions differently
than other consumers’ transactions.
Consumer groups and some members
of Congress urged the Agencies to ban
institutions from engaging in
183 U.C.C. § 4–303. The commentary to § 4–303
states that any posting order is permitted because
(1) it is impossible to state a rule that would be fair
in all circumstances, and (2) a drawer should have
sufficient funds on deposit at all times, he or she
should thus be indifferent as to posting order.
184 See also OCC Interp. Letter No. 916 (May 22,
2001).

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manipulative clearing practices. In
particular, they asserted that institutions
use transaction processing order to
maximize revenue from overdrafts
because more overdraft fees can be
levied if largest debits are processed
first and cause other small debits to
overdraw the account multiple times.
They also argued that the justification
favoring high-to-low payment order
because higher-priority items are paid
first is undermined by the fact that all
items are paid via the institution’s
overdraft protection program.
The Agencies are not addressing
transaction processing order at this
time. The Agencies believe that it would
be difficult to set forth a bright-line rule
that would clearly result in the best
outcome for all or most consumers. For
example, requiring institutions to pay
smaller dollar items first may cause an
institution to return unpaid a large
dollar nondiscretionary item, such as a
mortgage payment, if there is an
insufficient amount of overdraft
coverage remaining to cover the large
dollar item after the smaller items have
been paid. The Agencies also
acknowledge the inherent complexity of
payments processing and recognize that
mandating a particular posting order
could create complications for
institutions seeking to move toward
real-time transaction processing.
VII. Effective Date
The May 2008 Proposal solicited
comment on whether the rules should
become effective one year after issuance
or whether a different period was
appropriate. Although some industry
commenters agreed that a one-year
period was appropriate, most urged the
Agencies to allow 18 or 24 months due
to the difficulty of redesigning systems
and procedures to comply with the
rules. In contrast, some consumer
advocates requested a shorter period.
The final rule is effective on July 1,
2010. Compliance with the provisions of
the final rule is not required before the
effective date. Accordingly, the final
rule and the Agencies’ accompanying
analysis should have no bearing on
whether or not acts or practices
restricted or prohibited under this rule
are unfair or deceptive before the
effective date of this rule.
Unfair acts or practices can be
addressed through case-by-case
enforcement actions against specific
institutions, through regulations
applying to all institutions, or both. An
enforcement action concerns a specific
institution’s conduct and is based on all
of the facts and circumstances
surrounding that conduct. By contrast, a
regulation is prospective and applies to

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the market as a whole, drawing bright
lines that distinguish broad categories of
conduct.
Because broad regulations, such as
those in the final rule, can require large
numbers of institutions to make major
adjustments to their practices, there
could be more harm to consumers than
benefit if the regulations were effective
earlier than the effective date. If
institutions were not provided a
reasonable time to make changes to their
operations and systems to comply with
the final rule, they would either incur
excessively large expenses, which
would be passed on to consumers, or
cease engaging in the regulated activity
altogether, to the detriment of
consumers. And because the Agencies
find an act or practice unfair only when
the harm outweighs the benefits to
consumers or to competition, the
implementation period preceding the
effective date set forth in the final rule
is integral to the Agencies’ decision to
restrict or prohibit certain acts or
practices by regulation.
For these reasons, acts or practices
occurring before the effective date of the
final rule will be judged on the totality
of the circumstances under applicable
laws or regulations. Similarly, acts or
practices occurring after the rule’s
effective date that are not governed by
these rules will continue to be judged
on the totality of the circumstances
under applicable laws or regulations.
Some industry commenters requested
that, because existing accounts were
established with the expectation that
institutions could engage in the
practices prohibited by the final rule,
those accounts (or existing balances on
those accounts) be exempted from the
final rule. The Agencies recognize that,
as discussed above with respect to
specific prohibitions, the final rule
prohibits some long-standing practices
that have been expressly or implicitly
permitted under state or federal law or
the guidance of the federal banking
agencies. As noted above, the final rule
is not intended to suggest that these
practices are unfair or deceptive prior to
the effective date. However, the
Agencies do not believe the requested
exemption is necessary because
institutions will have sufficient time
prior to the effective date to adjust their
pricing and other practices with respect
to existing accounts and balances.
Indeed, prior to the effective date,
institutions may change interest rates on
existing balances and take other actions
that will be prohibited once the final
rule is effective. However, in light of the
significant nature of the changes
required by the final rule (including
training staff), the Agencies anticipate

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that institutions will need to begin the
compliance process long before the
effective date. Although institutions are
not required to comply with the final
rule before the effective date, the
Agencies strongly encourage institutions
to use their best efforts to conform their
practices to the final rule before July 1,
2010.
VIII. Regulatory Analysis
A. Regulatory Flexibility Act
Board: The Regulatory Flexibility Act
(5 U.S.C. 601 et seq.) (RFA) generally
requires an agency to perform an
assessment of the impact a rule is
expected to have on small entities.
Under section 605(b) of the RFA, 5
U.S.C. 605(b), the regulatory flexibility
analysis otherwise required under
section 604 of the RFA is not required
if an agency certifies, along with a
statement providing the factual basis for
such certification, that the rule will not
have a significant economic impact on
a substantial number of small entities.
The Board prepared an initial regulatory
flexibility analysis in connection with
the May 2008 Proposal, which reached
the preliminary conclusion that the
proposed rule would not have a
significant economic impact on a
substantial number of small entities. See
73 FR 28933–28934 (May 19, 2008). The
Board received no comments
specifically addressing its initial
regulatory flexibility analysis. However,
industry commenters generally stated
that the overall proposal would impose
significant implementation costs and
result in a loss of revenue from interest
charges and overdraft fees.
Based on the comments and further
analysis, the Board has concluded that
the final rule will have a significant
economic impact on a substantial
number of small entities. Accordingly,
the Board has prepared the following
final regulatory flexibility analysis
pursuant to section 604 of the RFA.
1. Succinct statement of the need for,
and objectives of, the rule. The Federal
Trade Commission Act (15 U.S.C. 41 et
seq.) (FTC Act) prohibits unfair or
deceptive acts or practices in or
affecting commerce. 15 U.S.C. 45(a)(1).
The FTC Act provides that the Board
(with respect to banks), OTS (with
respect to savings associations), and the
NCUA (with respect to federal credit
unions) are responsible for prescribing
regulations prohibiting such acts or
practices. 15 U.S.C. 57a(f)(1). The Board,
OTS, and NCUA are jointly issuing
regulations under the FTC Act to protect
consumers from specific unfair or
deceptive acts or practices regarding
consumer credit card accounts. The

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Board’s final rule will amend Regulation
AA.
The SUPPLEMENTARY INFORMATION
above describes in detail the need for,
and objectives of, the final rule.
2. Summary of the significant issues
raised by public comments in response
to the Board’s initial analysis, the
Board’s assessment of such issues, and
a statement of any changes made as a
result of such comments. As discussed
above, the Board’s initial regulatory
flexibility analysis reached the
preliminary conclusion that the
proposed rule would not have a
significant economic impact on a
substantial number of small entities. See
73 FR 28933–28934 (May 19, 2008). The
Board received no comments
specifically addressing this analysis.
3. Description and estimate of the
number of small entities to which the
final rule applies. The Board’s final rule
applies to banks and their subsidiaries,
except savings associations as defined
in 12 U.S.C. 1813(b). Based on 2008 call
report data, there are approximately 709
banks with assets of $175 million or less
that offer credit cards and are therefore
required to comply with the Board’s
final rule.
4. Description of the recordkeeping,
reporting, and other compliance
requirements of the final rule. The final
rule does not impose any new
recordkeeping or reporting
requirements. The final rule does,
however, impose new compliance
requirements.
Section 227.22 will require some
small entities to extend the period of
time provided to consumers to make
payments on consumer credit card
accounts. One commenter estimated the
cost of compliance at $30,000 per
institution, although this cost will vary
depending on the size of the institution.
Based on the comments, however, many
credit card issuers already send periodic
statements 21 days in advance of the
payment due date, which constitutes a
reasonable amount of time under the
rule. Indeed, a trade association
representing community banks (many of
which are small entities under the RFA)
stated in its comment that 90 percent of
its members currently mail or deliver
periodic statements more than 21 days
before the payment due date.
Section 227.23 will require small
entities that provide consumer credit
card accounts with multiple balances at
different rates to alter their payment
allocation systems and, in some cases,
develop new systems for allocating
payments among different balances. The
cost of such changes will depend on the
size of the institution and the
composition of its portfolio. Compliance

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with this provision will also reduce
interest revenue for small entities that
currently allocate payments first to
balances with the lowest annual
percentage rate. The economic impact,
however, will be mitigated to the extent
that small entities adjust other terms to
compensate for the loss of revenue (such
as by increasing the dollar amount of
fees and the annual percentage rates
offered to consumers when an account
is opened).
Section 227.24 generally prohibits
small entities from increasing annual
percentage rates, except in certain
circumstances. This provision will
reduce interest revenue, although—as
noted above—small entities can mitigate
the economic impact by increasing the
dollar amount of fees, increasing the
annual percentage rates offered to
consumers when an account is opened,
or otherwise adjusting account terms. In
addition, § 227.24 permits small entities
to increase the rates applicable to new
transactions after the first year and to
increase the rates on outstanding
balances pursuant to an increase in an
index and when the consumer’s
payment has not been received within
30 days after the due date.
Section 227.25 may require some
small entities to change the way finance
charges are calculated. The Board
understands, however, that few
institutions still use the prohibited
method.
Section 227.26 will reduce the
revenue that some small entities derive
from security deposits and fees. These
costs, however, will be borne only by
those entities offering cards with
security deposits and fees that currently
consume a majority of the credit limit.
Accordingly, the Board believes that,
in the aggregate, the provisions in its
final rule will have a significant
economic impact on a substantial
number of small entities.
5. Description of the steps the Board
has taken to minimize the significant
economic impact on small entities
consistent with the stated objectives of
the FTC Act. As discussed above in this
SUPPLEMENTARY INFORMATION, the Board
has considered a wide variety of
alternatives and has concluded that the
restrictions in the final rule achieve the
appropriate balance between providing
effective protections for consumers
against unfair or deceptive acts or
practices (which are prohibited by the
FTC Act) and minimizing the burden on
institutions that offer credit cards
(including small entities). In the May
2008 Proposal, the Board considered
whether small entities should be
exempted from the proposed rules. The
Board indicated, however, that such an

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5549

exemption would not be appropriate
because the FTC Act neither exempts
small entities from the prohibition
against engaging in unfair or deceptive
acts or practices nor provides the Board
with authority to create such an
exemption. Furthermore, the Board
noted that whether an act or practice is
unfair or deceptive should not depend
on the size of the institution. See 73 FR
at 28934. The Board did not receive any
comments regarding this preliminary
conclusion. Accordingly, the Board has
not exempted small entities from the
final rule.
The Board also believes that the final
rule, where appropriate, provides
sufficient flexibility and choice for
institutions, including small entities. As
such, any institution, regardless of size,
may tailor its operations to its
individual needs and thereby mitigate to
some degree any burdens created by the
final rule. For instance, although
§ 227.23 prohibits institutions from
applying payments in excess of the
minimum payment first to the balance
with the lowest interest rate, it allows
institutions to choose between two
permissible allocation methods and
does not place any limitations on
institutions’ ability to allocate the
minimum payment. In addition,
although § 227.24 generally prohibits
institutions from increasing the annual
percentage rates on outstanding
balances, it provides reasonable
exceptions and does not restrict the
ability of institutions to increase rates
on future transactions after the first
year.
OTS: The Regulatory Flexibility Act
(5 U.S.C. 601 et seq.) (RFA) generally
requires an agency to perform an
assessment of the impact a rule is
expected to have on small entities. For
purposes of the RFA and OTS-regulated
entities, a ‘‘small entity’’ is a savings
association with assets of $175 million
or less. Under section 605(b) of the RFA,
5 U.S.C. 605(b), the regulatory flexibility
analysis otherwise required under
section 604 of the RFA is not required
if an agency certifies, along with a
statement providing the factual basis for
such certification, that the rule will not
have a significant economic impact on
a substantial number of small entities.
OTS certified that the proposed rule
would not have a significant economic
impact on a substantial number of small
entities but prepared an initial
regulatory flexibility analysis in
connection with the May 2008 Proposal
anyway. See 73 FR 28934–28935 (May
19, 2008). OTS received no comments
specifically addressing its initial
regulatory flexibility analysis.

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OTS certifies that this final rule will
not have a significant economic impact
on a substantial number of small
entities. OTS is the primary federal
regulator for 817 federally- and statechartered savings associations. Of these
817 savings associations, only 116
report any credit card assets. Of these
116, only 22 have assets of $175 million
or less.
NCUA: The Regulatory Flexibility Act
(5 U.S.C. 601 et seq.) (RFA) generally
requires an agency to perform an
assessment of the impact a rule is
expected to have on small entities. For
purposes of the RFA and NCUA, a
‘‘small entity’’ is a credit union with
assets of $10 million or less. Under
section 605(b) of the RFA, 5 U.S.C.
605(b), the regulatory flexibility analysis
otherwise required under section 604 of
the RFA is not required if an agency
certifies, along with a statement
providing the factual basis for such
certification, that the rule will not have
a significant economic impact on a
substantial number of small entities.
NCUA certified that the proposed rule
would not have a significant economic
impact on a substantial number of small
entities, but prepared an initial
regulatory flexibility analysis in
connection with the May 2008 Proposal
anyway. See 73 FR 28904, 28935 (May
19, 2008). NCUA received no comments
specifically addressing its initial
regulatory flexibility analysis.
Accordingly, NCUA certifies that this
final rule will not have a significant
economic impact on a substantial
number of small entities. NCUA
regulates approximately 5036 federal
credit unions. Only 2427 federal credit
unions report credit card assets. Of
those federal credit unions offering loan
products, 2363 small federal credit
unions offer loans, and 425 small
federal credit unions offer credit cards
to members.
B. Paperwork Reduction Act
Board: In accordance with the
Paperwork Reduction Act (PRA) of 1995
(44 U.S.C. 3506; 5 CFR part 1320
Appendix A.1), the Board has reviewed
the final rule under the authority
delegated to the Board by the Office of
Management and Budget (OMB). The
collections of information that are
required by this proposed rule are found
in 12 CFR 227.14 and 227.24(b)(2).
This information collection is
required to provide benefits for
consumers and is mandatory (15 U.S.C.
4301 et seq.). The respondents/
recordkeepers are for-profit financial
institutions, including small businesses.
Regulation AA establishes consumer
complaint procedures and defines

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unfair or deceptive acts or practices in
extending credit to consumers. As
discussed above, the final rule amends
Regulation AA to prohibit institutions
from engaging in certain acts or
practices in connection with consumer
credit card accounts. This proposal
evolved from the Board’s June 2007
Regulation Z Proposal. This final rule is
coordinated with the Board’s final rule
under the Truth in Lending Act and
Regulation Z, which is published
elsewhere in today’s Federal Register.
Under § 227.24(a) (Unfair acts or
practices regarding increases in annual
percentage rates), banks are generally
required to disclose at account opening
the annual percentage rates that will
apply to the account. In addition, under
§ 227.24(b)(3), banks must disclose in
advance any increase in the rate that
applies to new transactions pursuant to
12 CFR 226.9. The Board anticipates
that banks will, with no additional
burden, incorporate the disclosure
requirements under § 227.24(a) with the
disclosure requirements regarding credit
and charge cards in Regulation Z, 12
CFR 226.5a and 226.6. Thus, in order to
avoid double-counting, the Board will
account for the burden associated with
proposed Regulation AA § 227.24(a)
under Regulation Z (OMB No. 7100–
0199) §§ 226.5a and 226.6. Similarly,
because the Board anticipates that banks
will, with no additional burden,
incorporate the disclosure requirement
under § 227.24(b)(3) with the disclosure
requirements in Regulation Z, 12 CFR
226.9, the Board will account for the
burden associated with proposed
Regulation AA § 227.24(b)(2) under
Regulation Z (OMB No. 7100–0199)
§ 226.9.
Under Regulation AA § 227.14(b)
(Unfair and deceptive practices
involving cosigners), a clear and
conspicuous disclosure statement shall
be given in writing to the cosigner prior
to being obligated. The disclosure
statement must be substantively similar
to the example provided in § 227.14(b).
The Board will also account for the
burden associated with Regulation AA
§ 227.14(b) under Regulation Z. The title
of the Regulation Z information
collection will be updated to account for
this section of Regulation AA.
In May 2008, the Board proposed
§ 227.28, which would have prohibited
banks from engaging in certain
marketing practices in relation to
prescreened firm offers of credit for
consumer credit card accounts unless a
disclaimer sufficiently explained the
limitations of the offer. As discussed
elsewhere in the SUPPLEMENTARY
INFORMATION, the Board has not taken
action on proposed § 227.28 at this time

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because, among other reasons, the
disclosures required by Regulation Z
will address the Board’s concerns. The
burden increase of 1,808 hours
associated with proposed § 227.28
would have been accounted for under
Regulation Z (OMB No. 7100–0199)
§ 226.5a; however, it has been removed
from the Regulation Z burden estimate.
In May 2008, the Board proposed
§ 227.32, which would have provided
that a consumer could not be assessed
a fee or charge for paying an overdraft
unless the consumer was provided with
the right to opt out of the payment of
overdrafts and a reasonable opportunity
to exercise that right but did not do so.
The Board stated that the burden
associated with proposed § 227.32
would be accounted for under
Regulation DD (OMB No. 7100–0271).
However, as discussed elsewhere in the
SUPPLEMENTARY INFORMATION, the Board
is not taking action on proposed
§ 227.32 at this time.
OTS and NCUA: In accordance with
section 3512 of the Paperwork
Reduction Act of 1995, 44 U.S.C. 3501–
3521 (‘‘PRA’’), the Agencies may not
conduct or sponsor, and the respondent
is not required to respond to, an
information collection unless it displays
a currently valid Office of Management
and Budget (‘‘OMB’’) control number.
The information requirements contained
in this joint final rule have been
submitted by the OTS and NCUA to
OMB for review and approval under
section 3507 of the PRA and section
1320.11 of OMB’s implementing
regulations (5 CFR part 1320). The
review and authorization information
for the Board is provided earlier in this
section along with the Board’s burden
estimates. The collections of
information that are required by this
final rule are found in 12 CFR l.13 and
l.24. Collections of information that
were required by the proposed rule in
§ l.28 and § l.32 are not included in
the final rule.
OTS: Savings associations and their
subsidiaries.
NCUA: Federal credit unions.
Abstract: Under section 18(f) of the
FTC Act, the Agencies are responsible
for prescribing rules to prevent unfair or
deceptive acts or practices in or
affecting commerce, including acts or
practices that are unfair or deceptive to
consumers. Under the final rule, the
Agencies are incorporating their existing
Credit Practices Rules, which govern
unfair or deceptive acts or practices
involving consumer credit, into new,
more comprehensive rules that also
address unfair or deceptive acts or
practices involving credit cards.

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Under § l.24(a) (Unfair acts or
practices regarding increases in annual
percentage rates), institutions are
generally required to disclose at account
opening the annual percentage rates that
will apply to the account. In addition,
under § l.24(b)(3), institutions must
disclose in advance any increase in the
rate that applies to new transactions
pursuant to 12 CFR 226.9 in Regulation
Z. The OTS and NCUA anticipate that
institutions would, with little additional
burden, incorporate the proposed
disclosure requirement under § l.24(a)
with the existing disclosure
requirements regarding credit and
charge cards in Regulation Z, 12 CFR
226.5a, and 226.6. Similarly, the OTS
and NCUA anticipate that institutions
will, with little additional burden,
incorporate the disclosure requirement
under § l.24(b)(3) with the disclosure
requirements in Regulation Z, 12 CFR
226.9.
Under the existing Credit Practices
Rule, 12 CFR 535.3 (to be recodified at
12 CFR 535.13) and 12 CFR 706.3, (to
be recodified at 12 CFR 706.13) both
entitled ‘‘Unfair or deceptive cosigner
practices,’’ a clear and conspicuous
disclosure statement shall be given in
writing to the cosigner prior to being
obligated. The disclosure statement
must be substantively similar to the
example provided in the section of the
rule. Since this is not a new
requirement, the OTS and NCUA
anticipate little additional burden
associated with this section of the rule.
In May 2008, the OTS, NCUA and the
Board proposed § l.28, which would
have prohibited financial institutions
from engaging in certain marketing
practices in relation to prescreened firm
offers of credit for consumer credit card
accounts unless a disclaimer sufficiently
explained the limitations of the offer. As
discussed elsewhere in this
SUPPLEMENTARY INFORMATION, the
Agencies are not taking action on
proposed § l.28 at this time. The
burden increases of 8,260 for OTS and
50,360 for NCUA have been removed
from the burden estimate.
In May 2008, the Agencies’ proposed
§ l.32, which would have provided
that a consumer could not be assessed
a fee or charge for paying an overdraft
unless the consumer was provided with
the right to opt out of the payment of
overdrafts and a reasonable opportunity
to exercise that right but did not do so.
The OTS stated that the burden
associated with proposed § 535.32
would be 8,260 hours. OTS’s burden
estimate was based on the effect of this
rule on all of its institutions because
they are all depository institutions, most
of which offer overdraft services. By not

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including provisions on overdrafts,
OTS’s rule affects only the 116 OTSsupervised institutions that issue credit
cards. The NCUA stated that the burden
associated with proposed § 706.32
would be 50,360 hours. As discussed
elsewhere in this SUPPLEMENTARY
INFORMATION, the Agencies are not taking
action on proposed § l.32 at this time.
Accordingly, the OTS and NCUA
remove their respective burden increase.
Estimated Burden: The burden
associated with this collection of
information may be summarized as
follows.
OTS:
Estimated number of respondents:
116.
Estimated time for developing
disclosures: 4 hours.
Estimated time for training: 4 hours.
Total estimated time per respondent:
8 hours.
Total estimated annual burden: 928
hours.
NCUA:
Estimated number of respondents:
2,427.
Estimated time for developing
disclosures: 4 hours.
Estimated time for training: 4 hours.
Total estimated time per respondent:
8 hours.
Total estimated annual burden:
19,416 hours.
C. OTS Executive Order 12866
Determination
Executive Order 12866 requires
federal agencies to prepare a regulatory
impact analysis for agency actions that
are found to be ‘‘significant regulatory
actions.’’ ‘‘Significant regulatory
actions’’ include, among other things,
rulemakings that ‘‘have an annual effect
on the economy of $100 million or more
or adversely affect in a material way the
economy, a sector of the economy,
productivity, competition, jobs, the
environment, public health or safety, or
State, local, or tribal governments or
communities.’’ 185
Based on the prediction of industry
commenters, OTS anticipates that the
final rule will exceed the $100 million
threshold. However, OTS believes that
these estimates may overstate the actual
costs borne by institutions under OTS
jurisdiction for a number of reasons.
First, OTS-supervised institutions
account for only a small portion of the
entire credit card market. Second,
several provisions included in the
proposed rulemaking are not being
finalized at this time, which reduces the
overall economic impact of the final
185 See 58 FR 51735 (October 4, 1993), as
amended.

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rule. Third, OTS-supervised institutions
already refrain from engaging in many
of the practices prohibited by this final
rule. Issuing a rule to prevent
institutions from taking up these
practices will help ensure that market
conduct standards remain high, but it
will not cause significant economic
impact on these institutions.
OTS acknowledges that several
provisions of the rules may carry
operational costs, although the general
information provided by commenters on
this point does not permit the OTS to
quantify such costs with any precision.
Moreover, commenter suggestions about
the effect that two provisions of the rule
may have on the fee and interest income
may be overestimated. Notably, these
suggestions blend the effects of this
rulemaking with those of a related
Board rulemaking on Regulation Z.
Further, given the continuing
contraction in the economy since the
May 2008 proposal and the close of the
August 2008 comment period, OTS
anticipates that the economic effect on
credit card issuers will be lower than
projected by commenters as the industry
itself shrinks.186
OTS has provided the Administrator
of the Office of Management and
Budget’s (OMB) Office of Information
and Regulatory Affairs (OIRA) an
economic analysis. As required by
Executive Order 12866, it addresses: (1)
The need for the regulatory action and
how the rule meets that need, (2) the
costs and benefits of the rule and its
consistency with a statutory mandate
that avoids interference with State, local
and tribal governments, (3) the benefits
anticipated from the regulation, (4) the
costs anticipated from the regulation,
and (5) alternatives to the regulation.
1. The Need for the Regulatory Action
and How the Rule Meets That Need
The OTS final rule, like the rules
issued by the Board and NCUA, consists
of five provisions intended to protect
consumers from unfair acts or practices
with respect to consumer credit card
accounts. The identified unfair acts or
practices inhibit or prevent a consumer
from accurately assessing the costs and
benefits of their actions and thus
produce a market failure. The rule
should permit cardholders to better
predict how their actions will affect
their costs and benefits. Presently, they
cannot do so effectively.187 The final
186 See National Bureau of Economic Research,
Determination of the December 2007 Peak in
Economic Activity (Dec. 1, 2008) (available at:
http://www.dev.nber.org/dec2008.html).
187 ‘‘Although they work well for many
consumers, credit card plans have become more

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rule should also promote the safe and
sound operation of institutions that
issue credit cards by better aligning the
interests of the financial markets and
consumers to ensure that credit card
loans will be repaid.
Regulatory Background
OTS issued an Advance Notice of
Proposed Rulemaking on August 6,
2007, requesting comment on possible
changes to its rules under section 5 of
the FTC Act. See 72 FR 43570 (OTS
ANPR). OTS received comments from
consumers, the industry and Congress.
Industry commenters suggested that
OTS should use guidance rather than
rules, arguing OTS would create an
unlevel playing field for OTS-regulated
institutions and that uniformity among
the federal banking agencies and the
NCUA is essential, and that the possible
practices listed in the ANPR were
neither unfair nor deceptive under the
FTC standards.
In contrast, the consumer 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.

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The May 2008 Proposal
To address the issue of lack of
uniformity if only OTS issued a rule,
and to best ensure that all entities that
offer consumer credit card accounts and
overdraft services on deposit accounts
are treated in a like manner, the OTS,
Board, and NCUA joined together to
issue the May 2008 Proposal.188 This
proposal was based on outreach
conducted by the Agencies, consumer
testing and Congressional hearings.189 It
was accompanied by complementary
complex. The greater complexity has reduced
transparency in credit card pricing and increased
the risk that consumers will not understand key
terms that affect the cost of using the account. The
Federal Reserve has used consumer testing to make
great strides in developing improved disclosures
under the Truth in Lending Act. However, based on
our review of consumers’ response to the Board’s
recent regulatory initiative, it seems clear that
improved disclosures alone cannot solve all of the
problems consumers face in trying to manage their
credit card accounts.’’ Statement by Federal Reserve
Board Chairman Ben S. Bernanke (May 2, 2008)
(available at: http://www.federalreserve.gov/
newsevents/press/bcreg/
bernankecredit20080502.htm).
188 See 73 FR 28904 (May 19, 2008) (May 2008
Proposal).
189 See 73 FR at 28905–07.

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proposals by the Board under
Regulation Z with respect to consumer
credit card accounts and Regulation DD
with respect to deposit accounts.190
The Final Rule
A description of the five provisions in
this final rule follows. It includes
observations about how each provision
responds to a specific unfair practice.
First, § 535.22 prohibits savings
associations from treating a payment as
late for any purpose unless consumers
have been provided a reasonable
amount of time to make that payment.
The rule provides that 21 days is a safe
harbor. Consumers have complained
that they encountered situations where
they did not have enough time to make
payments and that this was an unfair
practice. This provision will prevent
card issuers from providing an
insufficient time for consumers to make
payments, and then charging fees or
increasing interest rates because the
payment was late. The largest issuers
under OTS supervision already provide
at least a 20 day period to pay.
Second, when an account has
balances with different annual
percentage rates, § 535.23 requires
savings associations to allocate amounts
paid in excess of the minimum payment
using one of two specified methods:
either allocating the excess payment to
the highest interest balance or
proportionately to all balances. This
provision addresses the unfairness that
consumers experience when they accept
low-rate promotional offers, but do not
appreciate that card issuers now allocate
their payments to minimize the benefits
of the offer and maximize interest
charges.
Third, § 535.24 prohibits savings
associations from increasing the APR
during the first year unless the planned
increase has been disclosed at account
opening, the APR varies with an index,
the card holder fails to pay within 30
days of the due date, or the card holder
fails to comply with a workout
arrangement. After the first year, the
rule also allows savings associations to
increase the annual percentage rate on
transactions that occur more than seven
days after the institution provides a
notice of the APR increase under
Regulation Z. This section addresses the
unfairness consumers experience when
a creditor increases interest rates at any
time and for any reason, and where a
creditor applies a new rate to purchases
that have already been made. The rule
will allow consumers to more accurately
190 See 73 FR 28866 (May 19, 2008) (May 2008
Regulation Z Proposal); 73 FR 28739 (May 19, 2008)
(May 2008 Regulation DD Proposal).

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estimate their costs and to predict the
consequences of their decisions and
actions.
Fourth, § 535.25 prohibits savings
associations from using the practice
sometimes referred to as two-cycle
billing, in which, as a result of the loss
of a grace period, a savings association
imposes finance charges based on
balances associated with previous
billing cycles. Research conducted by
the Board showed that consumers do
not understand disclosures that attempt
to explain this billing practice. As a
result, consumers could not avoid cards
that feature this practice. However, this
practice is now rare, especially for OTSsupervised issuers.
Fifth, to address concerns regarding
subprime credit cards with high fees
and low credit limits, § 535.26 prohibits
savings associations from charging to
the account security deposits and fees
for the issuance or availability of credit
that constitute a majority of the initial
credit limit in the first year or more than
25 percent of the initial credit limit in
the first month. In addition the rule
requires that if the fees and security
deposit charges exceed 25% of the
available credit, repayment would be
spread over at least the first six months.
These cards impose multiple fees when
the consumer opens the card account
and those amounts are billed to the
consumer in the first statement. These
large initial billings substantially reduce
the amount of credit that the consumer
has available on the card. For example,
a card with a credit line of $250 may
have only $100 available after security
deposits or fees have been billed and
consumers will pay interest on these
billings until they are paid in full.
Consumers have complained that they
were not aware of how little available
credit they would have after the
assessment of security deposits and fees.
This rule prevents this practice and
provides that consumers will have a
sizeable percentage of the initial credit
on the card available for use.
2. The Costs and Benefits of the Rule,
Consistency With Statutory Mandate
and Non-Interference With State, Local
and Tribal Governments
Costs and Benefits
Both the costs and the benefits of the
rule are difficult to measure with
precision. As noted above, OTS has
relied on cost projections submitted by
industry commenters, but has reduced
these estimates where they appear to be
overstated. Benefits, such as protecting
consumers from unfairness, are more
intangible and more difficult to
quantify. Moreover, the monetary costs

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and benefits of this rule have a net effect
in some important ways. The approach
taken by the OTS with respect to these
issues is explained in subsequent
sections of this statement.
Consistency With Statutory Mandate
and Non-Interference With State, Local
and Tribal Governments
Section 18(f)(1) of the FTC Act
provides that OTS (with respect to
savings associations), as well as the
Board (with respect to banks) and the
NCUA (with respect to federal credit
unions) are responsible for prescribing
‘‘regulations defining with specificity
* * * unfair or deceptive acts or
practices, and containing requirements
prescribed for the purpose of preventing
such acts or practices.’’ 191 The FTC Act
allocates responsibility for enforcing
compliance with regulations prescribed
under section 18 with respect to savings
associations, banks, and federal credit
unions among OTS, the Board, and
NCUA, as well as the OCC and FDIC.192
Consistent with the FTC Act, this final
rule is intended to prevent the unfair
practices discussed more fully
elsewhere in the SUPPLEMENTARY
INFORMATION.
Also, as discussed in the
SUPPLEMENTARY INFORMATION that
accompanied the OTS August 6, 2007
ANPR,193 reflected in the proposed
rule,194 and explained in detail in the
SUPPLEMENTARY INFORMATION to today’s
issuance, HOLA serves as an
independent basis for the final OTS
final rule. HOLA provides authority for
both safety and soundness and
consumer protection regulations.
Consistent with HOLA, this final rule is
intended to prevent unsafe and unsound
practices and to protect consumers as
discussed more fully elsewhere in the
SUPPLEMENTARY INFORMATION.
Issuing the rule on an interagency
basis is consistent with section 303 of
the Riegle Community Development and
Regulatory Improvement Act of 1994.195
Section 303(a)(3) 196 directs the federal
banking agencies to work jointly to
make uniform all regulations and
guidelines implementing common
statutory or supervisory policies. Two
191 15

U.S.C. 57a(f)(1).
15 U.S.C. 57a(f)(2)–(4). The FTC Act grants
the FTC rulemaking and enforcement authority
with respect to other persons and entities, subject
to certain exceptions and limitations. See 15 U.S.C.
45(a)(2); 15 U.S.C. 57a(a). The FTC Act, however,
sets forth specific rulemaking procedures for the
FTC that do not apply to OTS, the Board, or the
NCUA. See 15 U.S.C. 57a(b)–(e), (g)–(j); 15 U.S.C.
57a-3.
193 72 FR at 43572–73.
194 See 73 FR at 28910 and 28948.
195 See 12 U.S.C. 4803.
196 12 U.S.C. 4803(a)(3).

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192 See

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federal banking agencies—the Board
and OTS—are primarily implementing
the same statutory provision, section
18(f) of the FTC Act, as is the NCUA.
Accordingly, the Agencies endeavored
to finalize rules that are as uniform as
possible. This rule will not interfere
with State, local, or tribal governments
in the exercise of their governmental
functions.

5553

The most important benefit of the rule
is that it will protect consumers from
certain practices that meet well
established standards for unfairness. In
so doing, the rule will increase
consumer confidence in the financial
system.
Since the rule was proposed in May
2008, exigent market circumstances
have arisen which necessitate
immediate liquidity in consumer credit
cards. These circumstances are reflected
in the announcement on November 25,
2008 of the Treasury Department and
Federal Reserve Board Term AssetBacked Securities Loan Facility (TALF)
program.197 This final rule furthers
liquidity in the consumer credit card
market by providing certainty to the
industry, consumers, and other
members of the public as to rules
governing such transactions in the
future. In addition, OTS anticipates that
provisions of the final rule that are
designed to ensure greater safety and
soundness for financial institutions may
also yield a beneficial economic result
for the taxpayers who ultimately bear
the cost of a program such as the TALF,
which will make and insure loans
backed by credit card securities.
However, because this rule provides
more rationality and integrity to the
credit card system, its broader benefits
are more qualitative than quantitative.
For example, the rule will promote more
efficient functioning of the economy by
creating more transparency for
consumers as they make credit card
agreements. Consumers currently are
confused by the complexity of credit
card agreements, and are surprised by
unexpected terms. In several of the areas
addressed by the rule, disclosures have
been inadequate to make the terms
understandable.198 Consequently, the

clear standards set by this rule will
promote more efficient credit decisions
by consumers.
The monetary costs and benefits of
this rule have a net effect. Particularly
as a result of the payment allocation and
retroactive rate increase provisions,
some card issuers will experience
reduced revenues and additional
expenses, but the cost of credit will be
substantially reduced for many
consumers. Moreover, the rule will
create stability, predictability, and
standardization in the credit card
market and its receivables, and will help
foster steady sources of funding that
would otherwise avoid some risk and
uncertainty.
Another benefit of the rule is that it
will create a uniform playing field for
credit card issuers, not only because the
federal financial regulators are issuing
consistent rules, but also because of its
clarity. As the Board and the NCUA are
simultaneously issuing virtually
identical rules governing credit card
practices for other types of federally
insured financial institutions, the OTS
final rule will ensure that consistent
rules apply among banks, federal credit
unions, and savings associations.
Significantly, issuers that have tried
to provide better and clearer terms for
consumers will no longer face a
competitive disadvantage for doing so.
Consumers will have more confidence
in the credit card system because of the
uniform protections.199
By substantially limiting behavioral
risk pricing, the rule will foster more
efficient risk-based pricing by credit
card issuers at the initial underwriting
stage. Consequently, this rule will
improve credit risk management. Issuer
interest in assessing the cost of risk will
be more closely aligned with the
consumer interest in taking on more
credit and being able to repay it.
Finally, because the rule clearly
defines several examples of unfair
practices, the federal financial
institution regulatory agencies will be
able to monitor and supervise the credit
card market more efficiently. Similarly,
the reduced uncertainty will simplify
issuer efforts to act in compliance with
the law.

197 See November 25, 2008 announcements by the
Department of Treasury and Board of the TALF
under the authority in the Emergency Economic
Stabilization Act of 2008, Pub. L. 110–343 and
section 13(3) of the Federal Reserve Act (12 U.S.C.
343) (available at http://www.treas.gov/press/
releases/hp1292.htm and http://
www.federalreserve.gov/newsevents/press/
monetary/monetary20081125a1.pdf).
198 See ‘‘Design and Testing of Effective Truth in
Lending Disclosures’’ (available at: http://

www.federalreserve.gov/dcca/regulationz/
20070523/Execsummary.pdf).
199 See Furletti, Mark, Payment System
Regulation and How It Causes Consumer Confusion,
Discussion Paper, Payment Cards Center,
Philadelphia Federal Reserve, Nov 2004, at 7,
quoting Professor Mark Budnitz of Georgia State
University School of Law (available at: http://
www.philadelphiafed.org/payment-cards-center/
publications/discussion-papers/2004/
PaymentSystemRegulation_112004.pdf).

3. Benefits of the Regulation

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4. Anticipated Costs of the Regulation
It is helpful to put the share of OTS
supervised issuers in context. OTS is
the primary federal regulator for 817
federally- and state-chartered savings
associations. Of these 817 savings
associations, only 116 report any credit
card assets. Among the 116 savings
associations that offer credit cards, only
18 have more than 1% of their total
assets in credit card receivables.
Moreover, credit card assets comprise
only 3% of all assets held by savings
associations. With respect to the share
of the overall credit card market held by
OTS supervised institutions, it is
notable that savings associations hold
only 3.5% of credit card receivables.200
In part, this figure is attributable to the
fact that two large savings associations,
one with $10.6 billion in credit card
receivables, have failed since OTS
proposed these rules in May 2008 and
do not currently operate under OTS
supervision.201 In sum, most provisions
of the rulemaking would have no
economic effect on the vast majority of
the institutions under OTS jurisdiction,
since the vast majority simply does not
issue credit cards.

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Limited Economic Effect: Several
Affected Practices Are Uncommon
The majority of the practices covered
by this rulemaking have been included
as a prophylactic measure to ensure that
institutions do not begin to use or
expand the use of activities deemed
unfair or deceptive. Since most OTSsupervised institutions do not currently
engage in these practices, the costs of
complying with the provisions of the
final rules are likely to be minimal.
Unfair time to make payments. This
section prohibits treating a payment on
a consumer credit card account as late
for any purpose unless consumers have
been provided a reasonable amount of
time to make payment with 21 days
serving as a safe harbor.
200 Federal Reserve Board, Statistical Supplement
to the November Federal Reserve Bulletin, Nov. 7,
2008, G.19, Consumer Credit (available at: http://
www.federalreserve.gov/releases/g19/Current/).
201 IndyMac Bank was closed on July 11, 2008.
The Federal Deposit Insurance Corporation is
running the successor institution that holds
IndyMac’s assets. See OTS Release OTS 08–029
(available at: http://www.ots.treas.gov/index.cfm?p=
PressReleases&ContentRecord_id=37f10b00-1e0b8562-ebdd-d5d38f67934c&ContentType_
id=4c12f337-b5b6-4c87-b45c-838958422bf3&
MonthDisplay=7&YearDisplay=2008).
After Washington Mutual Bank was closed on
Sept. 25, 2008, JPMorganChase, a national bank
regulated by the Office of the Comptroller of the
Currency, acquired its assets. OTS Release 08–046
(available at: http://www.ots.treas.gov/index.cfm?p=
PressReleases&ContentRecord_id=9c306c81-1e0b8562-eb0c-fed5429a3a56&ContentType_
id=4c12f337-b5b6-4c87-b45c-838958422bf3&
MonthDisplay=9&YearDisplay=2008).

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Although some commenters indicated
that implementing this provision would
entail operational costs, OTS
supervisory observations and
experience indicates that most savings
associations generally mail or deliver
periodic statements to their customers at
least 20 days before the due date,
including the ten largest.202 Therefore, a
rule that requires institutions to provide
a reasonable amount of time to make
payment, such as by complying with the
safe harbor for mailing or delivering
periodic statements to customers at least
21 days in advance of the payment due
date, should have insignificant or no
economic impact on institutions under
OTS jurisdiction.
Unfair balance computation method.
OTS has adopted this section
substantially as proposed in May 2008.
It prohibits institutions from imposing
finance charges on consumer credit card
accounts based on balances for days in
billing cycles that precede the most
recent billing cycle. This rule is
intended to prohibit the balance
computation method sometimes referred
to as ‘‘two-cycle billing’’ or ‘‘doublecycle billing.’’ The final rule contains an
added exception permitting adjustments
to finance charges following the return
of a payment for insufficient funds.
OTS notes that many institutions no
longer use the two-cycle balance
computation method and very few
institutions compute balances using any
method other than a single-cycle
method and according to the
Government Accountability Office, of
the six largest card issuers, only two
used the double-cycle billing method
between 2003 and 2005.203 Because few
other institutions still use this
practice,204 the prohibition on two-cycle
billing should not have a significant
202 One commenter noted that some institutions
could incur up to $30,000 in operational costs if
procedural changes are needed to comply with the
final rules. It is unclear whether this is an accurate
estimate of the cost of those changes and whether
the size of the bank would affect the actual cost.
Furthermore, as a mitigating economic factor,
consumers should incur fewer fees and interest
charges as a result of receiving a reasonable amount
of time to pay.
203 ‘‘In our review of 28 popular cards from the
six largest issuers, we found that two of the six
issuers used the double-cycle billing method on one
or more popular cards between 2003 and 2005. The
other four issuers indicated they would only go
back one cycle to impose finance charges.’’ ‘‘Credit
Cards, Increased Complexity in Rates and Fees
Heightens Need for More Effective Disclosures to
Consumers,’’ Government Accountability Office,
Sept. 2006 at 28. Neither of the two issuers referred
to is supervised by OTS.
204 Based on OTS supervisory observations and
experience, only one large savings association
engaged in this practice at the time that this
provision was proposed. That institution was
closed in September 2008 and is no longer subject
to rules issued by the OTS, as noted above.

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impact on institutions under OTS
jurisdiction.
Unfair charging to the account of
security deposits and fees for the
issuance or availability of credit. This
section prohibits institutions from
charging high security deposits and fees
for issuing a credit card to the account’s
credit limit if those fees amounted to
more than half of the credit available
over the first year. Further, those fees
cannot exceed 25% of the available
credit in the first month; fees above that
limit would have to be spread out over
at least the first 6 months.
This section does not apply to
security deposits and fees for the
issuance or availability of credit that are
not charged to the account, i.e., not
financed through the credit card, except
to the extent such an arrangement is a
mere evasion of the prohibition.
Further, this provision does not set any
ceiling on the amount of security
deposits and fees that may be charged
to the account. Rather, any limit is
calculated as a percentage of the credit
line (a majority or 25%) and changes
with the credit line. Since the rule does
not limit the credit line that a creditor
may offer on high fee accounts, it
necessarily does not set a ceiling on the
security deposits or fees, either. The
final rule contains a new paragraph (d)
prohibiting evasions of the section. The
paragraph is modeled after the antievasion provisions in Regulation Z.205
Credit cards to which security
deposits and high account opening
related fees are charged against the
credit line are found predominately in
the subprime credit card market, i.e., the
market that targets borrowers with lower
credit scores. Many of these consumers
will incur significantly lower fees as a
result of this provision.
As noted above, savings associations
have only a 3.5% share of the credit
card market generally.206 Subprime
credit cards represent just 5% of all
credit cards issued,207 and high fee
cards represent only a portion of the
subprime market. Among OTSsupervised institutions, cards of this
type are rare. In fact, based on OTS
supervisory observations and
experience, only two savings
205 See

12 CFR 226.34(a)(3) and 226.35(b)(4).
Federal Reserve Board, Statistical
Supplement to the November Federal Reserve
Bulletin, Nov. 7, 2008, G.19, Consumer Credit
(available at: http://www.federalreserve.gov/
releases/g19/Current/).
207 Outstanding credit card balances as of
February 2008 as reported by Fitch Ratings, Know
Your Risk; Asset Backed Securities Prime Credit
Card Index and Subprime Credit Card Index
(available at: http://www.fitchresearch.com/
creditdesk/sectors/surveilance/asset_backed/
credit_card).
206 See

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associations currently offer such cards
and those product lines are a small part
of their business.
Based on one commenter’s estimate,
this provision of the rule would mean
these OTS-supervised subprime issuers
would receive as much as $10,948,000
less revenue.208 This estimate is based
on the rule as it was proposed, with a
repayment schedule spread over 12
months. The final rule allows the
repayment period to be shortened to six
months. This shorter time would
mitigate some of the estimated lost
revenue. The commenter’s estimate
assumes that the issuers will experience
higher losses from making more credit
available to consumers with blemished
credit histories, and it assumes that the
issuers will make no changes in the way
that they acquire new accounts as a
result of the rule. However, with better
underwriting, issuers should be able to
target customers who are less likely to
default and thereby limit their losses.
Another strategy to limit loss would be
to offer consumers smaller lines of
credit. In sum, the limited economic
impact noted above may be overstated.
Economic Effect That Appears To
Trigger the Requirements of Executive
Order 12866
This final rule contains two other
sections with a greater economic
impact. One affects the way in which an
institution allocates customer payments
among the customer’s outstanding
balances. The other specifies the
conditions under which an institution
can raise the APR on outstanding
balances.
Unfair payment allocations. A
consumer may have multiple balances
on a consumer credit card account, each
with a different interest rate. Currently,
most institutions allocate payments they
receive from a consumer by first
covering fees and finance charges, then
allocating any remaining amount from
the lowest APR balance to the highest.
In May 2008, OTS proposed this section
in response to concerns that, by
following this practice, institutions were
applying consumers’ payments in a way
that inappropriately maximized interest
charges on consumer credit card
accounts by not allocating payments to
balances that accrue interest at higher
rates unless all balances are paid in full.
Commenters noted that some
institutions would have to alter their
systems and in some cases develop new
208 The commenter estimated that this provision
of the rule could reduce revenue to subprime
issuers by as much as $119 per account. OTS
estimates that the institutions under its jurisdiction
hold approximately 92,000 affected high fee
accounts.

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systems for allocating payments among
different balances, although the cost of
such changes is not known and will
depend on the size of the institution and
the composition of its portfolio.
Commenters further noted that this
provision would discourage
promotional rate offers to consumers
and would affect the institutions’
interest revenue. Finally, commenters
predicted that issuers would
compensate by increasing costs or
decreasing credit available to
consumers.
Based on the comments received and
OTS’s analysis, the final rule adopts the
general payment allocation rule as
proposed with a few important changes
to reduce burden and cost to the
industry. This section will prohibit
institutions from allocating payments
above the minimum required to the
balance with the lowest rate first. It will
allow institutions to split such
payments pro rata among the balances
or to allocate them to the balance with
the highest rate first. The costs of this
rule are mitigated somewhat by
providing institutions with flexibility as
to which of the allocation methods they
choose. In addition, by allowing
institutions to have a general rule for
allocating payments to all balances,
including promotional balances, the
costs to institutions have been reduced.
Due to concerns that this section as
proposed could significantly reduce or
eliminate promotional rate offers, OTS
has modified this provision. For the
most part, this is because commenters
supplied data that indicates that
promotional rates provide an overall
benefit to consumers in addition to the
marketing benefits that such rates
provide to institutions. Consequently,
OTS believes that applying the general
allocation rule to promotional rate
balances strikes the appropriate balance
by preserving promotional rate offers
that provide substantial benefits to
consumers while prohibiting the most
harmful payment allocation practices.
Accordingly, the final rule, unlike the
proposal, does not require payments
above the minimum payment to be
applied to promotional rate balances
last, after other balances are paid.
Commenters indicated that this
provision may affect institutions’
interest revenue. Based on a projection
for the total industry by a group of
credit card issuers representing 70% of
outstanding balances, the Board has
estimated that this rule could result in
an annual loss in interest revenue of
$415 million.209 Savings associations
209 The commenter projected a loss of interest
revenue of up to $930 million, based on a drop of

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currently account for a 3.5 percent share
of total credit card receivables.210 The
estimated loss of revenue for savings
associations under this provision could
be as high as $14,525,000.211 However,
neither the OTS nor the Board has the
data necessary to quantify the economic
impact of this provision with
specificity. Notably, the commenter did
not provide adequate information to
validate its assertions.
It should also be noted that while this
provision will significantly reduce
interest charges that consumers will
pay, removing requirements in the
proposed rule regarding promotional
rate balances will mitigate this effect by
reducing the estimated impact on
interest revenue. Moreover, to the extent
that the payment allocation restrictions
included in the rule impose costs,
institutions are likely to adjust initial
credit card terms to reflect those costs.
If this occurs, consumers will likely
have a clearer initial disclosure of
potential costs with which to compare
credit card offerings than they do now.
Their actual cost of credit will not be
increased by low-to-high balance
payment allocation strategies
implemented by institutions after
charges have been incurred.
Unfair annual percentage rate
increases. This section generally
prohibits institutions from increasing
the annual percentage rate on any
balance the first year and on
outstanding balances thereafter. For new
accounts, institutions would be
prohibited from increasing the APR
during the first year unless the APR
varies with an index, the card holder
fails to pay within 30 days of the due
date, or the card holder fails to comply
with a workout arrangement. After the
first year, the rule also allows savings
associations to increase the annual
percentage rate on transactions that
occur more than seven days after the
institution provides a notice of the APR
0.098 percent in income. Board and OTS staff
estimate that the removal of requirements in the
proposed rule regarding grace periods reduced the
projected loss by $100 million, and the removal of
requirements in the proposed rule regarding
promotional rate balances further decreases the
impact on interest revenue by at least 55 percent,
to approximately $415 million.
210 Outstanding revolving credit for September
2008 was $970.5 billion. Of this, savings
institutions accounted for $34.4 billion, a 3.5%
share. Federal Reserve Board, Statistical
Supplement to November 2008 Federal Reserve
Bulletin, G.19 (Nov. 7, 2008) (available at http://
www.federalreserve.gov/releases/g19/Current/).
211 This estimate may be excessive because the
OTS estimate of overall credit card receivables may
inappropriately include charge cards, which do not
carry balances and do not have different interest
rates. To the extent that outstanding balances on
charge cards are included, the economic effect of
the rule is overstated.

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increase under Regulation Z. Nothing in
the final rule prohibits issuers from
imposing late charges or other sanctions
short of increasing the APR.
The rule will not permit the
institution to increase the APR on the
outstanding balances if the consumer
defaults on other debt obligations. This
practice is sometimes referred to as
‘‘universal default.’’ Based on OTS
supervisory observations and
experience, none of the larger savings
associations practice universal default.
The final rule will also require issuers
to adjust the manner in which they offer
deferred interest rate balances to ensure
that consumers are not unfairly
surprised by the assessment of deferred
interest.
A group of credit card issuers
representing 70% of outstanding
balances submitted a comment which
projected that the overall cost to the
industry of this provision of the rule as
proposed would result in an annual loss
in interest revenue of 0.872 percent, or
$7.40 billion. This analysis stated that
banks will compensate for a loss in
interest revenue by increasing rates and/
or decreasing available credit for
consumers. Even assuming this analysis
is accurate, the OTS, Board, and NCUA
believe that the revisions to the
proposed rule may decrease the
estimated impact on interest revenue by
more than 70 percent (to an annual loss
of interest revenue of 0.242 percent, or
approximately $2.05 billion) and,
therefore, result in a proportionately
lower impact on consumers.212
However, this lower projection may still
be overstated because some of the
impact asserted by the commenter is
attributable to disclosure requirements
of Regulation Z. These Regulation Z
requirements, implemented by the
Board, require advance notice to
consumers of increased rates and delay
implementation of increased rates for 45
days.
Applying these estimates to
institutions under OTS jurisdiction, this
provision of the final rule appears to
have an economic impact on savings
associations that ranges from $71.75
million (based on a potential $2.05
billion in loss of industry revenue) 213 to
212 The issuers’ analysis does not consider the
effect of prohibiting APR changes in the first year
on new balances or the adjustments that they will
likely make to the way deferred interest rate
balances are offered.
213 Applying 3.5 percent to the $2.05 billion loss
of revenue gives an estimated revenue loss of
$71,750,000 for this provision. See Federal Reserve
Board, Statistical Supplement to November 2008
Federal Reserve Bulletin, G.19 (Nov. 7, 2008)
(available at http://www.federalreserve.gov/
releases/g19/Current/). As with the payment
allocation estimate, this estimate may be excessive

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$259 million (based on loss of industry
revenue of $7.4 billion).214
However, if such revenue is
economically justified in a competitive
environment for the allocation of credit,
then a likely longer-term outcome will
be that institutions will incorporate
such economic factors in the initial
terms of credit card contracts. If that
occurs, then consumers will have
clearer initial information than they
currently have on the comparative costs
of credit card offerings. Consequently,
the short-term disruptions to
institutions caused by this rulemaking
will likely be addressed in the longer
term by changes in disclosed credit card
account interest rates and fees, thus
making it easier for consumers to more
easily compare and consider the costs
and benefits of different credit cards.
Costs to Consumers
Commenters have suggested that
institutions will compensate for
potential losses in interest revenue by
increasing credit card rates and/or
decreasing credit available to
consumers. Even assuming this
assertion is accurate, OTS believes that
the differences between the proposed
and final rules will lead to both a
smaller loss of revenue for issuers and
decreased incentives for raising rates or
limiting credit offered to consumers. To
the extent income to savings
associations is affected, the
corresponding offset is an equally sized
consumer benefit of lower fees and
interest payments. Although OTS is
unable to estimate its precise impact,
OTS believes that many consumers will
incur significantly reduced interest
charges as a result of the rule. As a
result, the economic effects of this
rulemaking may result in transfers from
institutions to consumers, with an
overall limited net effect.
Costs to the Government
The costs to OTS from this rule are
insignificant. OTS, like the other federal
financial regulators, conducts
examinations of institutions on a regular
basis for safety, soundness and
compliance with laws and regulations.
This rule will not add to that
supervisory burden. To the contrary,
OTS anticipates that this rule, by
clarifying some of the prohibitions
since it may inappropriately include charge cards,
which do not carry balances and do not have
different interest rates. To the extent that charge
card outstanding balances are included, the effect
of the rule has been overstated.
214 Applying 3.5 percent to the $7.4 billion
estimate gives an estimated revenue loss for OTSsupervised institutions of $259 million for this
provision.

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against unfair acts and practices in
credit card lending with bright line
rules, will make the supervision of
savings associations more efficient, less
time consuming, and less burdensome.
Conclusion
Some predict that because of this rule,
issuers will raise credit card rates for
consumers and lower credit limits.
However, OTS believes that many
consumers will incur significantly
reduced interest charges as a result of
the rule.
The costs to OTS from this rule are
insignificant. In fact, this rule will make
supervision and enforcement more
efficient, less time consuming, and less
burdensome.
The cost to savings associations is
limited because of the small size of the
credit card market held by savings
associations, the reduced impact of this
rule caused by the Agencies’ decision
not to finalize several provisions, and
the small number of institutions that
presently employ the practices
prohibited in this rule. Although the
revenue loss data submitted by
commenters has not been verified, the
OTS has used it to provide the most
generous estimate of the costs of this
rule. Based on that data, the costs of this
rule range between $97,223,000 and
$284,473,000.215
5. Why the Final Regulation Is
Preferable to Alternatives
Alternative A: OTS Issues Rule Alone
In proposing this rule, OTS
considered different approaches. As
suggested in the ANPR, one approach
was for OTS to issue a rule under either
the FTC Act or as an expansion of OTS’s
Advertising rule that would cover only
OTS-supervised institutions.216
Industry commenters responded that
such an approach would create an
unlevel playing field, and put OTSsupervised institutions at a possible
competitive disadvantage. They argued
that uniformity among the federal
banking agencies and the NCUA is
essential for the efficient functioning of
the market. Consequently, the OTS has
joined with the Board and NCUA to
issue rules applicable to all banks,
federal credit unions, and savings
associations.217
215 The range is based on $10,948,000 (high fee
cards) + $14,525,000 (payment allocation) +
$71,750,000 (restriction on rate increases—with
reduced impact) = $97,223,000. The higher figure
is based on $10,948,000 (high fee cards) +
$14,525,000 (payment allocation) + $259,000,000
(restriction on rate increases—higher estimated
impact) = $284,747,000.
216 72 FR 43573.
217 The Agencies recognized that state-chartered
credit unions and any entities providing consumer

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Alternative B: Agencies Issue Rules That
Address a Range of Issues in a Variety
of Markets
In its ANPR, the OTS sought comment
on whether it should attempt to address
a broad range of potentially unfair or
deceptive practices including those
relating credit cards, residential
mortgage lending, gift cards, and deposit
accounts.218 However, the May 2008
Proposal focused on unfair and
deceptive acts or practices involving
credit cards and overdraft services,
which are generally provided only by
depository institutions such as banks,
savings associations, and credit unions.
Targeting such practices fosters a level
playing field and the efficient
functioning of the market.
Alternative C: Agencies Issue Rules
Addressing All Practices Covered in the
May 2008 Proposal

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In the May 2008 Proposal, the
Agencies proposed seven provisions
under the FTC Act regarding consumer
credit card accounts and two provisions
regarding checking account overdraft
services. These provisions were
intended to ensure that consumers were
protected from harmful practices that
they could not reasonably avoid and
have the ability to make informed
decisions about the use of credit card
accounts and checking accounts without
being subjected to unfair or deceptive
acts or practices.
However, after considering the
comments received, OTS has decided
not to address the practices covered by
four of the proposed provisions in a
final rule at this time. These provisions
concerned overdraft and overlimit fees
caused by holds, deceptive firm offers of
credit, and a provision that would have
provided a mechanism for a consumer
to opt out of overdraft protection
services.
The Board is issuing a proposal under
Regulation E published elsewhere in
today’s Federal Register to address
overdraft and overlimit fees caused by
holds and a mechanism for a consumer
to opt out of overdraft protection
services. OTS will determine whether to
address these matters in the future in
light of further information that may be
obtained through the Board’s Regulation
credit card accounts independent of a depository
institution fall within the FTC’s jurisdiction and
therefore would not be subject to the proposed
rules. However, FTC-regulated entities appear to
represent a small percentage of the market for
consumer credit card accounts and overdraft
services. See, Federal Reserve Board, Statistical
Supplement to November 2008 Federal Reserve
Bulletin, G.19 (Nov. 7, 2008) (available at http://
www.federalreserve.gov/releases/g19/Current/).
218 72 FR 43575.

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E rulemaking. The Board is also
publishing a final rule under Regulation
Z that will address firm offers of credit
containing a range of or multiple annual
percentage rates. OTS will also address
unfair or deceptive acts or practices that
are not specifically included in today’s
final rule on a case-by-case basis.
Alternative D: Agencies Issue Rules
That Address Five Unfair Credit Card
Practices
There were more than 65,000
comments on the May 2008 Proposal,
and the overwhelming majority of these
were from consumers. There were also
comments from the industry, members
of Congress 219 and other governmental
organizations. Based on the comments,
outreach and Congressional testimony,
the Agencies concluded that the final
rule should contain five provisions.
Time to make payments. Based on the
comments of consumers and on
Congressional testimony, there were
many instances of consumers who
received their statements just before the
due date, and that the consequence of
late fees and higher interest was not
avoidable. The Agencies agreed that a
consumer should have a reasonable time
to pay. A reasonable amount of time to
pay may vary depending on the
circumstances, but if a consumer is to
have the possibility of disputing errors
on the statement, that amount of time
needs to be approximately three weeks.
That allows a week to receive the
statement, a week to review it, and a
week for the payment to travel by mail.
Shorter amounts of time for mailing
would cover the majority of consumers,
but would not adequately protect the
small but significant number of
consumers whose delivery times are
longer than average.
Unfair payment allocation. This rule
requires issuers to allocate a consumer’s
payment over the required minimum to
balances with the highest interest first
or proportionately to all balances. This
provision was a response to concerns
that institutions applied consumers’
payments in a manner that
inappropriately maximized interest
219 Members of Congress have proposed several
bills addressing consumer protection issues
regarding credit cards. See, e.g., H.R. 5244 and S.
3255. See also 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).

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charges on consumer credit card
accounts with balances at different
interest rates. Interest charges were
maximized by applying payments to
balances with the lowest interest rate.
The Agencies considered an exception
for promotional rate balances, so that
they would not be paid down and
thereby lose the benefit of the
promotional rate. However, the
Agencies decided not to pursue that
alternative because it would discourage
promotional balance offers, and such
offers are a significant benefit to
consumers. The Agencies also
considered an exception for deferred
interest balances, but the need for this
exception is negated by the final rule’s
restriction on the manner in which
deferred interest rate balances are
offered. The Agencies also considered
using consumer disclosures as an
alternative to this rule. After extensive
testing by the Board, it became clear that
consumers did not understand payment
allocation practices and could not make
informed decisions on using credit
cards for different types of transactions.
Unfair annual percentage rate
increases. The rule will prohibit credit
card issuers from increasing interest
rates during the first year unless the
planned increase has been disclosed at
account opening, the annual percentage
rate varies with an index, the card
holder fails to pay within 30 days of the
due date, or the card holder fails to
comply with a workout arrangement.
After the first year, the rule also allows
card issuers to increase the annual
percentage rate on transactions that
occur more than seven days after the
institution provides a notice of the
annual percentage rate increase under
Regulation Z. This rule was a response
to changes in credit card terms that
consumers either did not expect or
could not avoid. Some changes in terms
were a response to a consumer’s
lowered credit score—caused by actions
unrelated to the credit card account
(universal default). Some changes were
a response to a payment that was late by
a day (hair trigger penalty repricing).
Some changes in terms were based on
a credit card issuer’s changed business
circumstances (any time any reason
repricing). Consumer testing showed
that many consumers did not
understand what factors, such as one
late payment, can trigger penalty
pricing.
Many consumer commenters, as well
as consumer groups, members of
Congress, the FDIC, two state attorneys
general and a state consumer protection
agency supported the proposal to limit
repricing except in very limited
situations. Some advocated providing

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the consumer with a right to opt-out of
interest rate increases.
The injury to consumers of having
their interest rate increased
substantially is difficult for most
consumers to avoid. There are several
circumstances that give rise to interest
rate changes: market conditions
(unrelated to consumer behavior),
consumer default on an unrelated
account, using a large proportion of the
available credit, or late payment or
overlimit charges. It is only the last two
that are violations of the card
agreement. Most consumers would not
avoid the rate increase because they
would not expect it in the
circumstances described.
The Agencies considered, and
rejected the alternative proposed by
some commenters to allow a consumer
to ‘‘opt out’’ of the card relationship by
closing it and transferring the balance.
This was not a good alternative because
it may not be possible for a consumer
to close the card and transfer the
balance to a comparable rate card
without paying a transfer fee. The
Agencies considered the impact on
credit card issuers by limiting this rule
to apply to outstanding balances, not to
new purchases, except for the first year
an account is open.
The Agencies considered requiring
the use of disclosures to inform
consumers about the triggers for
repricing. However, it was clear, based
on consumer testing, that consumers did
not understand how the triggers work,
and consumers do not focus on the
possibility of default at the time they
open accounts. More importantly,
disclosures would not allow consumers
to avoid credit cards with this feature,
since institutions almost uniformly
apply increased rates to prior
transactions.
Unfair balance computation method.
The final rule prohibits ‘‘double-cycle’’
billing—charging interest on credit card
balances for the days preceding the most
recent billing cycle. The effect on a
consumer is to lose the grace period for
paying the full balance when a
consumer who normally pays in full
pays less than the full balance one
month. This rule prohibits this practice
because it is so difficult for consumers
to understand. The Agencies considered
the alternative of disclosures. However,
after extensive consumer testing by the
Board, it became clear that it was not
possible to disclose this practice so that
consumers could understand it.
Unfair charging to the account of
security deposits and fees for the
issuance or availability of credit. This
rule prohibits a credit card issuer from
charging fees or security deposits to an

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account that use up more than the
majority of the available credit. If the
fees amount to more than 25% of the
initial available credit, their repayment
must be spread out over at least six
months. These cards are called high fee
accounts, or derogatorily, ‘‘fee-harvester
cards.’’
The Agencies have received many
complaints from consumers about these
cards from consumers who say they
were not aware of how little available
credit they would have after the security
deposit and fees were charged to the
card. Over 70 members of Congress,
several states, the Federal Deposit
insurance Corporation and the Office of
the Comptroller of the Currency
supported this provision. Many
commenters wanted to add more
prohibitions to this rule, by lowering fee
thresholds, prohibiting the charging of
security deposits to the cards,
enhancing disclosure and prohibiting
the marketing of these cards and credit
repair products. Many industry
commenters supported this rule.
However, some commenters who are
in this business asserted that they
provide credit to consumers who would
otherwise be unable to obtain it. In an
effort to balance the concerns of
consumers and the subprime credit card
industry, the Agencies have limited the
percentage of the fees and security
deposits that can be charged to the card.
This limit is no more than the majority.
In addition, the rule will require issuers
to spread repayment over the first six
months if the fees and security deposits
amount to more than 25 percent of the
available credit. OTS believes that its
issuers will change their underwriting,
or reduce initial credit available, in
response to this rule.
D. OTS Executive Order 13132
Determination
OTS has determined that its portion
of the rulemaking does not have any
federalism implications for purposes of
Executive Order 13132. As discussed in
section IV of this SUPPLEMENTARY
INFORMATION, OTS is removing from
codification 12 CFR 535.5. This section
had allowed OTS to grant state
exemptions from OTS’s Credit Practices
Rule if state law affords a greater or
substantially similar level of protection.
The FHLBB, OTS’s predecessor agency,
had granted an exemption to the State
or Wisconsin for substantially
equivalent provisions of the Wisconsin
Consumer Act. By removing this
section, the exemption will cease to
exist on July 1, 2010, the rule’s effective
date. As a result, state chartered savings
associations that had previously been
exempt from complying with OTS’s

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Credit Practices Rule with regard to
their Wisconsin operations but were
required to comply with equivalent
provisions of the Wisconsin Consumer
Act, will now be required to comply
with both OTS’s Credit Practices Rule
and the equivalent provisions of the
Wisconsin Consumer Act.
E. NCUA Executive Order 13132
Determination
The NCUA has determined that its
portion of the rulemaking does not have
any federalism implications for
purposes of Executive Order 13132.
F. OTS Unfunded Mandates Reform Act
of 1995 Determinations
Section 202 of the Unfunded
Mandates Reform Act of 1995, Public
Law 104–4 (Unfunded Mandates Act)
requires that an agency prepare a
budgetary impact statement before
promulgating a rule that includes a
Federal mandate that may result in
expenditure by State, local, and tribal
governments, in the aggregate, or by the
private sector, of $100 million or more
(adjusted annually for inflation) in any
one year. (The inflation adjusted
threshold is $133 million or more.) If a
budgetary impact statement is required,
section 205 of the Unfunded Mandates
Act also requires an agency to identify
and consider a reasonable number of
regulatory alternatives before
promulgating a rule.
OTS has determined that this rule
will not result in expenditures by State,
local, and tribal governments in excess
of the threshold but may result in
expenditures by the private sector in
excess of the threshold. Accordingly,
OTS has prepared a budgetary impact
statement and addressed the regulatory
alternatives considered. This is
discussed further in section VIII.C. of
this SUPPLEMENTARY INFORMATION (‘‘OTS
Executive Order 12866 Analysis’’).
G. NCUA: The Treasury and General
Government Appropriations Act, 1999—
Assessment of Federal Regulations and
Policies on Families
NCUA has determined that this final
rule will not affect family well-being
within the meaning of section 654 of the
Treasury and General Government
Appropriations Act, 1999, Pub. L. 105–
277, 112 Stat. 2681 (1998).
IX. Comments on Use of Plain Language
Section 722 of the Gramm-LeachBliley Act requires the Board and OTS
to use plain language in all proposed
and final rules published after January
1, 2000. Additionally, NCUA’s goal is to
promulgate clear and understandable
regulations that impose minimal

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Federal Register / Vol. 74, No. 18 / Thursday, January 29, 2009 / Rules and Regulations
regulatory burdens. Therefore, the
Agencies invited comment on how to
make the May 2008 Proposal easier to
understand.
The Agencies received only one
comment in response. A credit card
issuer suggested that the proposed rules
prohibiting unfair or deceptive acts or
practices with respect to consumer
credit card accounts would be easier to
understand if placed with the rules
governing credit cards in the Board’s
Regulation Z. As discussed above,
however, the Agencies have determined
that the FTC Act is the appropriate
authority for issuance of the final rule.
List of Subjects
12 CFR Part 227
Banks, Banking, Credit,
Intergovernmental relations, Trade
practices.
12 CFR Part 535
Consumer credit, Consumer
protection, Credit, Credit cards,
Deception, Intergovernmental relations,
Savings associations, Trade practices,
Unfairness.
12 CFR Part 706
Credit, Credit unions, Deception,
Intergovernmental relations, Trade
practices, Unfairness.
Board of Governors of the Federal
Reserve System
12 CFR Chapter II
Authority and Issuance
For the reasons discussed in the joint
preamble, the Board amends 12 CFR
part 227 as set forth below:

■

PART 227—UNFAIR OR DECEPTIVE
ACTS OR PRACTICES (REGULATION
AA)
1. The separate authority citations for
subparts A and B are removed and a
new authority citation for part 227 is
added to read as follows:

■

Authority: 15 U.S.C. 57a(f).

Subpart A—General Provisions
2. The heading for subpart A is
revised to read as set forth above.

■

§ 227.1
■

§ 227.11
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[Removed]

3. Section 227.1 is removed.
[Redesignated as § 227.1]

3a. Section 227.11 is redesignated as
§ 227.1 and transferred to subpart A,
and revised to read as follows:

■

§ 227.1

Authority, purpose, and scope.

(a) Authority. This part is issued by
the Board under section 18(f) of the

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Federal Trade Commission Act, 15
U.S.C. 57a(f) (section 202(a) of the
Magnuson-Moss Warranty—Federal
Trade Commission Improvement Act,
Pub. L. 93–637).
(b) Purpose. The purpose of this part
is to prohibit unfair or deceptive acts or
practices in violation of section 5(a)(1)
of the Federal Trade Commission Act,
15 U.S.C. 45(a)(1). Subparts B and C
define and contain requirements
prescribed for the purpose of preventing
specific unfair or deceptive acts or
practices of banks. The prohibitions in
subparts B and C do not limit the
Board’s or any other agency’s authority
to enforce the FTC Act with respect to
any other unfair or deceptive acts or
practices.
(c) Scope. Subparts B and C apply to
banks, including subsidiaries of banks
and other entities listed in paragraph
(c)(2) of this section. Subparts B and C
do not apply to savings associations as
defined in 12 U.S.C. 1813(b).
Compliance is to be enforced by:
(1) The Comptroller of the Currency,
in the case of national banks and federal
branches and federal agencies of foreign
banks;
(2) The Board of Governors of the
Federal Reserve System, in the case of
banks that are members of the Federal
Reserve System (other than banks
referred to in paragraph (c)(1) of this
section), branches and agencies of
foreign banks (other than federal
branches, federal agencies, and insured
state branches of foreign banks),
commercial lending companies owned
or controlled by foreign banks, and
organizations operating under section
25 or 25A of the Federal Reserve Act;
and
(3) The Federal Deposit Insurance
Corporation, in the case of banks
insured by the Federal Deposit
Insurance Corporation (other than banks
referred to in paragraphs (c)(1) and (c)(2)
of this section), and insured state
branches of foreign banks.
(d) Definitions. Unless otherwise
noted, the terms used in paragraph (c)
of this section that are not defined in the
Federal Trade Commission Act or in
section 3(s) of the Federal Deposit
Insurance Act (12 U.S.C. 1813(s)) shall
have the meaning given to them in
section 1(b) of the International Banking
Act of 1978 (12 U.S.C. 3101).
■ 4. Section 227.2 is revised to read as
follows:

(1) ‘‘Board’’ means the Board of
Governors of the Federal Reserve
System.
(2) ‘‘Consumer complaint’’ means an
allegation by or on behalf of an
individual, group of individuals, or
other entity that a particular act or
practice of a State member bank is
unfair or deceptive, or in violation of a
regulation issued by the Board pursuant
to a Federal statute, or in violation of
any other act or regulation under which
the bank must operate. Unless the
context indicates otherwise,
‘‘complaint’’ shall be construed to mean
a ‘‘consumer complaint’’ for purposes of
this section.
(3) ‘‘State member bank’’ means a
bank that is chartered by a State and is
a member of the Federal Reserve
System.
(b) Submission of complaints. (1) Any
consumer having a complaint regarding
a State member bank is invited to
submit it to the Federal Reserve System.
The complaint should be submitted in
writing, if possible, and should include
the following information:
(i) A description of the act or practice
that is thought to be unfair or deceptive,
or in violation of existing law or
regulation, including all relevant facts;
(ii) The name and address of the State
member bank that is the subject of the
complaint; and
(iii) The name and address of the
complainant.
(2) Consumer complaints should be
made to—Federal Reserve Consumer
Help Center, P.O. Box 1200,
Minneapolis, MN 55480, Toll-free
number: (888) 851–1920, Fax number:
(877) 888–2520, TDD number: (877)
766–8533, E-mail address:
ConsumerHelp@FederalReserve.gov,
Web site address:
www.federalreserveconsumerhelp.gov.
(c) Response to complaints. Within 15
business days of receipt of a written
complaint by the Board or a Federal
Reserve Bank, a substantive response or
an acknowledgment setting a reasonable
time for a substantive response will be
sent to the individual making the
complaint.
(d) Referrals to other agencies.
Complaints received by the Board or a
Federal Reserve Bank regarding an act
or practice of an institution other than
a State member bank will be forwarded
to the Federal agency having
jurisdiction over that institution.

§ 227.2

§ 227.11

Consumer-complaint procedure.

(a) Definitions. For purposes of this
section, unless the context indicates
otherwise, the following definitions
apply:

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[Added and reserved]

5. In Subpart B, § 227.11 is added and
reserved.
■ 6. A new Subpart C is added to part
227 to read as follows:
■

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Subpart C—Consumer Credit Card Account
Practices Rule
Sec.
227.21 Definitions.
227.22 Unfair acts or practices regarding
time to make payment.
227.23 Unfair acts or practices regarding
allocation of payments.
227.24 Unfair acts or practices regarding
increases in annual percentage rates.
227.25 Unfair balance computation method.
227.26 Unfair charging of security deposits
and fees for the issuance or availability
of credit to consumer credit card
accounts.

Subpart C—Consumer Credit Card
Account Practices Rule
§ 227.21

Definitions.

For purposes of this subpart, the
following definitions apply:
(a) ‘‘Annual percentage rate’’ means
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. The
term ‘‘periodic rate’’ has the same
meaning as in 12 CFR 226.2.
(b) ‘‘Consumer’’ means 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.
(c) ‘‘Consumer credit card account’’
means an account provided to a
consumer primarily for personal, family,
or household purposes under an openend credit plan that is accessed by a
credit card or charge card. The terms
‘‘open-end credit,’’ ‘‘credit card,’’ and
‘‘charge card’’ have the same meanings
as in 12 CFR 226.2. The following are
not consumer credit card accounts for
purposes of this subpart:
(1) Home equity plans subject to the
requirements of 12 CFR 226.5b that are
accessible by a credit or charge card;
(2) Overdraft lines of credit tied to
asset accounts accessed by checkguarantee cards or by debit cards;
(3) Lines of credit accessed by checkguarantee cards or by debit cards that
can be used only at automated teller
machines; and
(4) Lines of credit accessed solely by
account numbers.

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§ 227.22 Unfair acts or practices regarding
time to make payment.

(a) General rule. Except as provided in
paragraph (c) of this section, a bank
must not treat a payment on a consumer
credit card account as late for any
purpose unless the consumer has been
provided a reasonable amount of time to
make the payment.
(b) Compliance with general rule—(1)
Establishing compliance. A bank must

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be able to establish that it has complied
with paragraph (a) of this section.
(2) Safe harbor. A bank complies with
paragraph (a) of this section if it has
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.
(c) Exception for grace periods.
Paragraph (a) of this section does not
apply to any time period provided by
the bank within which the consumer
may repay any portion of the credit
extended without incurring an
additional finance charge.
§ 227.23 Unfair acts or practices regarding
allocation of payments.

When different annual percentage
rates apply to different balances on a
consumer credit card account, the bank
must allocate any amount paid by the
consumer in excess of the required
minimum periodic payment among the
balances using one of the following
methods:
(a) High-to-low method. The amount
paid by the consumer in excess of the
required minimum periodic payment is
allocated first to the balance with the
highest annual percentage rate and any
remaining portion to the other balances
in descending order based on the
applicable annual percentage rate.
(b) Pro rata method. The amount paid
by the consumer in excess of the
required minimum periodic payment is
allocated among the balances in the
same proportion as each balance bears
to the total balance.
§ 227.24 Unfair acts or practices regarding
increases in annual percentage rates.

(a) General rule. At account opening,
a bank must disclose the annual
percentage rates that will apply to each
category of transactions on the
consumer credit card account. A bank
must not increase the annual percentage
rate for a category of transactions on any
consumer credit card account except as
provided in paragraph (b) of this
section.
(b) Exceptions. The prohibition in
paragraph (a) of this section on
increasing annual percentage rates does
not apply where an annual percentage
rate may be increased pursuant to one
of the exceptions in this paragraph.
(1) Account opening disclosure
exception. An annual percentage rate for
a category of transactions may be
increased to a rate disclosed at account
opening upon expiration of a period of
time disclosed at account opening.
(2) Variable rate exception. An annual
percentage rate for a category of

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transactions that varies according to an
index that is not under the bank’s
control and is available to the general
public may be increased due to an
increase in the index.
(3) Advance notice exception. An
annual percentage rate for a category of
transactions may be increased pursuant
to a notice under 12 CFR 226.9(c) or (g)
for transactions that occur more than
seven days after provision of the notice.
This exception does not permit an
increase in any annual percentage rate
during the first year after the account is
opened.
(4) Delinquency exception. An annual
percentage rate may be increased due to
the bank not receiving the consumer’s
required minimum periodic payment
within 30 days after the due date for
that payment.
(5) Workout arrangement exception.
An annual percentage rate may be
increased due to the consumer’s failure
to comply with the terms of a workout
arrangement between the bank and the
consumer, provided that the annual
percentage rate applicable to a category
of transactions following any such
increase does not exceed the rate that
applied to that category of transactions
prior to commencement of the workout
arrangement.
(c) Treatment of protected balances.
For purposes of this paragraph,
‘‘protected balance’’ means the amount
owed for a category of transactions to
which an increased annual percentage
rate cannot be applied after the rate for
that category of transactions has been
increased pursuant to paragraph (b)(3)
of this section.
(1) Repayment. The bank must
provide the consumer with one of the
following methods of repaying a
protected balance or a method that is no
less beneficial to the consumer than one
of the following methods:
(i) An amortization period of no less
than five years, starting from the date on
which the increased rate becomes
effective for the category of transactions;
or
(ii) A required minimum periodic
payment that includes a percentage of
the protected balance that is no more
than twice the percentage required
before the date on which the increased
rate became effective for the category of
transactions.
(2) Fees and charges. The bank must
not assess any fee or charge based solely
on a protected balance.
§ 227.25 Unfair balance computation
method.

(a) General rule. Except as provided in
paragraph (b) of this section, a bank
must not impose finance charges on

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Federal Register / Vol. 74, No. 18 / Thursday, January 29, 2009 / Rules and Regulations
balances on a consumer credit card
account based on balances for days in
billing cycles that precede the most
recent billing cycle as a result of the loss
of any time period provided by the bank
within which the consumer may repay
any portion of the credit extended
without incurring a finance charge.
(b) Exceptions. Paragraph (a) of this
section does not apply to:
(1) Adjustments to finance charges as
a result of the resolution of a dispute
under 12 CFR 226.12 or 12 CFR 226.13;
or
(2) Adjustments to finance charges as
a result of the return of a payment for
insufficient funds.

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§ 227.26 Unfair charging of security
deposits and fees for the issuance or
availability of credit to consumer credit card
accounts.

(a) Limitation for first year. During the
first year, a bank must not charge to a
consumer credit card account security
deposits and fees for the issuance or
availability of credit that in total
constitute a majority of the initial credit
limit for the account.
(b) Limitations for first billing cycle
and subsequent billing cycles. (1) First
billing cycle. During the first billing
cycle, the bank must not charge to a
consumer credit card account security
deposits and fees for the issuance or
availability of credit that in total
constitute more than 25 percent of the
initial credit limit for the account.
(2) Subsequent billing cycles. Any
additional security deposits and fees for
the issuance or availability of credit
permitted by paragraph (a) of this
section must be charged to the account
in equal portions in no fewer than the
five billing cycles immediately
following the first billing cycle.
(c) Evasion prohibited. A bank must
not evade the requirements of this
section by providing the consumer with
additional credit to fund the payment of
security deposits and fees for the
issuance or availability of credit that
exceed the total amounts permitted by
paragraphs (a) and (b) of this section.
(d) Definitions. For purposes of this
section, the following definitions apply:
(1) ‘‘Fees for the issuance or
availability of credit’’ means:
(i) Any annual or other periodic fee
that may be imposed for the issuance or
availability of a consumer credit card
account, including any fee based on
account activity or inactivity; and
(ii) Any non-periodic fee that relates
to opening an account.
(2) ‘‘First billing cycle’’ means the
first billing cycle after a consumer credit
card account is opened.
(3) ‘‘First year’’ means the period
beginning with the date on which a

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consumer credit card account is opened
and ending twelve months from that
date.
(4) ‘‘Initial credit limit’’ means the
credit limit in effect when a consumer
credit card account is opened.
■ 7. A new Supplement I is added to
part 227 as follows:
Supplement I to Part 227—Official Staff
Commentary
Subpart A—General Provisions for
Consumer Protection Rules
Section 227.1—Authority, Purpose, and
Scope
1(c) Scope
1. Penalties for noncompliance.
Administrative enforcement of the rule for
banks may involve actions under section 8 of
the Federal Deposit Insurance Act (12 U.S.C.
1818), including cease-and-desist orders
requiring that actions be taken to remedy
violations and civil money penalties.
2. Industrial loan companies. Industrial
loan companies that are insured by the
Federal Deposit Insurance Corporation are
covered by the Board’s rule.
Subpart C—Consumer Credit Card Account
Practices Rule
Section 227.22—Unfair Acts or Practices
Regarding Time To Make Payment
22(a) General Rule
1. Treating a payment as late for any
purpose. 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 to make that payment under this
section.
2. Reasonable amount of time to make
payment. Whether an amount of time is
reasonable for purposes of making a payment
is determined from the perspective of the
consumer, not the bank. Under § 227.22(b)(2),
a bank provides a reasonable amount of time
to make a payment if it has 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.
22(b) Compliance with General Rule
1. Reasonable procedures. A bank is not
required to determine the specific date on
which periodic statements are mailed or
delivered to each individual consumer. A
bank provides a reasonable amount of time
to make a payment if it has adopted
reasonable procedures designed to ensure
that periodic statements are mailed or
delivered to consumers no later than a
certain number of days after the closing date
of the billing cycle and adds that number of
days to the 21-day period in § 227.24(b)(2)
when determining the payment due date. For
example, if a bank has adopted reasonable
procedures designed to ensure that periodic
statements are mailed or delivered to

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5561

consumers no later than three days after the
closing date of the billing cycle, the payment
due date on the periodic statement must be
no less than 24 days after the closing date of
the billing cycle.
2. Payment due date. For purposes of
§ 227.22(b)(2), ‘‘payment due date’’ means
the date by which the bank requires the
consumer to make the required minimum
periodic payment in order to avoid being
treated as late for any purpose, except as
provided in § 227.22(c).
3. Example of alternative method of
compliance. Assume that, for a particular
type of consumer credit card account, a bank
only provides periodic statements
electronically and only accepts payments
electronically (consistent with applicable law
and regulatory guidance). Under these
circumstances, the bank could comply with
§ 227.22(a) even if it does not provide
periodic statements 21 days before the
payment due date consistent with
§ 227.22(b)(2).
Section 227.23—Unfair Acts or Practices
Regarding Allocation of Payments
1. Minimum periodic payment. Section
227.23 addresses the allocation of amounts
paid by the consumer in excess of the
minimum periodic payment required by the
bank. Section 227.23 does not limit or
otherwise address the bank’s ability to
determine, consistent with applicable law
and regulatory guidance, the amount of the
required minimum periodic payment or how
that payment is allocated. A bank may, but
is not required to, allocate the required
minimum periodic payment consistent with
the requirements in § 227.23 to the extent
consistent with other applicable law or
regulatory guidance.
2. Adjustments of one dollar or less
permitted. When allocating payments, the
bank may adjust amounts by one dollar or
less. For example, if a bank is allocating $100
pursuant to § 227.23(b) among balances of
$1,000, $2,000, and $4,000, the bank may
apply $14 to the $1,000 balance, $29 to the
$2,000 balance, and $57 to the $4,000
balance.
3. Applicable balances and annual
percentage rates. Section 227.23 permits a
bank to allocate an amount paid by the
consumer in excess of the required minimum
periodic payment based on the balances and
annual percentage rates on the date the
preceding billing cycle ends, on the date the
payment is credited to the account, or on any
day in between those two dates. For example,
assume that the billing cycles for a consumer
credit card account start on the first day of
the month and end on the last day of the
month. On the date the March billing cycle
ends (March 31), the account has a purchase
balance of $500 at a variable annual
percentage rate of 14% and a cash advance
balance of $200 at a variable annual
percentage rate of 18%. On April 1, the rate
for purchases increases to 16% and the rate
for cash advances increases to 20%
consistent with § 227.24(b)(2). On April 15,
the purchase balance increases to $700. On
April 25, the bank credits to the account $400
paid by the consumer in excess of the
required minimum periodic payment. Under

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§ 227.23, the bank may allocate the $400
based on the balances in existence and rates
in effect on any day from March 31 through
April 25.
4. Use of permissible allocation methods.
A bank is not prohibited from changing the
allocation method for a consumer credit card
account or from using different allocation
methods for different consumer credit card
accounts, so long as the methods used are
consistent with § 227.23. For example, a bank
may change from allocating to the highest
rate balance first pursuant to § 227.23(a) to
allocating pro rata pursuant to § 227.23(b) or
vice versa. Similarly, a bank may allocate to
the highest rate balance first pursuant to
§ 227.23(a) on some of its accounts and
allocate pro rata pursuant to § 227.23(b) on
other accounts.
5. Claims or defenses under Regulation Z,
12 CFR 226.12(c). When a consumer has
asserted a claim or defense against the card
issuer pursuant to 12 CFR 226.12(c), the bank
must allocate consistent with 12 CFR 226.12
comment 226.12(c)–4.
6. Balances with the same annual
percentage rate. When the same annual
percentage rate applies to more than one
balance on an account and a different annual
percentage rate applies to at least one other
balance on that account, § 227.23 does not
require that any particular method be used
when allocating among the balances with the
same annual percentage rate. Under these
circumstances, a bank may treat the balances
with the same rate as a single balance or
separate balances. See comments 23(a)–1.iv
and 23(b)–2.iv.
23(a) High-to-Low Method
1. Examples. For purposes of the following
examples, assume that none of the required
minimum periodic payment is allocated to
the balances discussed (unless otherwise
stated).
i. Assume that a consumer’s account has a
cash advance balance of $500 at an annual
percentage rate of 20% and a purchase
balance of $1,500 at an annual percentage
rate of 15% and that the consumer pays $800
in excess of the required minimum periodic
payment. A bank using this method would
allocate $500 to pay off the cash advance
balance and then allocate the remaining $300
to the purchase balance.
ii. Assume that a consumer’s account has
a cash advance balance of $500 at an annual
percentage rate of 20% and a purchase
balance of $1,500 at an annual percentage
rate of 15% and that the consumer pays $400
in excess of the required minimum periodic
payment. A bank using this method would
allocate the entire $400 to the cash advance
balance.
iii. Assume that a consumer’s account has
a cash advance balance of $100 at an annual
percentage rate of 20%, a purchase balance
of $300 at an annual percentage rate of 18%,
and a $600 protected balance on which the
12% annual percentage rate cannot be
increased pursuant to § 227.24. If the
consumer pays $500 in excess of the required
minimum periodic payment, a bank using
this method would allocate $100 to pay off
the cash advance balance, $300 to pay off the
purchase balance, and $100 to the protected
balance.

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iv. Assume that a consumer’s account has
a cash advance balance of $500 at an annual
percentage rate of 20%, a purchase balance
of $1,000 at an annual percentage rate of
15%, and a transferred balance of $2,000 that
was previously at a discounted annual
percentage rate of 5% but is now at an annual
percentage rate of 15%. Assume also that the
consumer pays $800 in excess of the required
minimum periodic payment. A bank using
this method would allocate $500 to pay off
the cash advance balance and allocate the
remaining $300 among the purchase balance
and the transferred balance in the manner the
bank deems appropriate.
23(b) Pro Rata Method
1. Total balance. A bank may, but is not
required to, deduct amounts paid by the
consumer’s required minimum periodic
payment when calculating the total balance
for purposes of § 227.23(b)(3). See comment
23(b)–2.iii.
2. Examples. For purposes of the following
examples, assume that none of the required
minimum periodic payment is allocated to
the balances discussed (unless otherwise
stated) and that the amounts allocated to
each balance are rounded to the nearest
dollar.
i. Assume that a consumer’s account has a
cash advance balance of $500 at an annual
percentage rate of 20% and a purchase
balance of $1,500 at an annual percentage
rate of 15% and that the consumer pays $555
in excess of the required minimum periodic
payment. A bank using this method would
allocate 25% of the amount ($139) to the cash
advance balance and 75% of the amount
($416) to the purchase balance.
ii. Assume that a consumer’s account has
a cash advance balance of $100 at an annual
percentage rate of 20%, a purchase balance
of $300 at an annual percentage rate of 18%,
and a $600 protected balance on which the
12% annual percentage rate cannot be
increased pursuant to § 227.24. If the
consumer pays $130 in excess of the required
minimum periodic payment, a bank using
this method would allocate 10% of the
amount ($13) to the cash advance balance,
30% of the amount ($39) to the purchase
balance, and 60% of the amount ($78) to the
protected balance.
iii. Assume that a consumer’s account has
a cash advance balance of $300 at an annual
percentage rate of 20% and a purchase
balance of $600 at an annual percentage rate
of 15%. Assume also that the required
minimum periodic payment is $50 and that
the bank allocates this payment first to the
balance with the lowest annual percentage
rate (the $600 purchase balance). If the
consumer pays $300 in excess of the $50
minimum payment, a bank using this method
could allocate based on a total balance of
$850 (consisting of the $300 cash advance
balance plus the $550 purchase balance after
application of the $50 minimum payment). In
this case, the bank would apply 35% of the
$300 ($105) to the cash advance balance and
65% of that amount ($195) to the purchase
balance. In the alternative, the bank could
allocate based on a total balance of $900
(which does not reflect the $50 minimum
payment). In that case, the bank would apply
one third of the $300 excess payment ($100)

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to the cash advance balance and two thirds
($200) to the purchase balance.
iv. Assume that a consumer’s account has
a cash advance balance of $500 at an annual
percentage rate of 20%, a purchase balance
of $1,000 at an annual percentage rate of
15%, and a transferred balance of $2,000 that
was previously at a discounted annual
percentage rate of 5% but is now at an annual
percentage rate of 15%. Assume also that the
consumer pays $800 in excess of the required
minimum periodic payment. A bank using
this method would allocate 14% of the
excess payment ($112) to the cash advance
balance and allocate the remaining 86%
($688) among the purchase balance and the
transferred balance in the manner the bank
deems appropriate.
Section 227.24—Unfair Acts or Practices
Regarding Increases in Annual Percentage
Rates
1. Relationship to Regulation Z, 12 CFR
part 226. A bank that complies with the
applicable disclosure requirements in
Regulation Z, 12 CFR part 226, has complied
with the disclosure requirements in § 227.24.
See 12 CFR 226.5a, 226.6, 226.9. For
example, a bank may comply with the
requirement in § 227.24(a) to disclose at
account opening the annual percentage rates
that will apply to each category of
transactions by complying with the
disclosure requirements in 12 CFR 226.5a
regarding applications and solicitations and
the requirements in 12 CFR 226.6 regarding
account-opening disclosures. Similarly, in
order to increase an annual percentage rate
on new transactions pursuant to
§ 227.24(b)(3), a bank must comply with the
disclosure requirements in 12 CFR 226.9(c)
or (g). However, nothing in § 227.24 alters the
requirements in 12 CFR 226.9(c) and (g) that
creditors provide consumers with written
notice at least 45 days prior to the effective
date of certain increases in the annual
percentage rates on open-end (not homesecured) credit plans.
24(a) General Rule
1. Rates that will apply to each category of
transactions. Section 227.24(a) requires
banks to disclose, at account opening, the
annual percentage rates that will apply to
each category of transactions on the account.
A bank cannot satisfy this requirement by
disclosing at account opening only a range of
rates or that a rate will be ‘‘up to’’ a particular
amount.
2. Application of prohibition on increasing
rates. Section 227.24(a) prohibits banks from
increasing the annual percentage rate for a
category of transactions on any consumer
credit card account unless specifically
permitted by one of the exceptions in
§ 227.24(b). The following examples illustrate
the application of the rule:
i. Assume that, at account opening on
January 1 of year one, a bank discloses that
the annual percentage rate for purchases is a
non-variable rate of 15% and will apply for
six months. The bank also discloses that,
after six months, the annual percentage rate
for purchases will be a variable rate that is
currently 18% and will be adjusted quarterly
by adding a margin of 8 percentage points to
a publicly available index not under the

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bank’s control. Finally, the bank discloses
that the annual percentage rate for cash
advances is the same variable rate that will
apply to purchases after six months. The
payment due date for the account is the
twenty-fifth day of the month and the
required minimum periodic payments are
applied to accrued interest and fees but do
not reduce the purchase and cash advance
balances.
A. On January 15, the consumer uses the
account to make a $2,000 purchase and a
$500 cash advance. No other transactions are
made on the account. At the start of each
quarter, the bank adjusts the variable rate that
applies to the $500 cash advance consistent
with changes in the index (pursuant to
§ 227.24(b)(2)). All required minimum
periodic payments are received on or before
the payment due date until May of year one,
when the payment due on May 25 is received
by the bank on May 28. The bank is
prohibited by § 227.24 from increasing the
rates that apply to the $2,000 purchase, the
$500 cash advance, or future purchases and
cash advances. Six months after account
opening (July 1), the bank begins accruing
interest on the $2,000 purchase at the
previously disclosed variable rate determined
using an 8-point margin (pursuant to
§ 227.24(b)(1)). Because no other increases in
rate were disclosed at account opening, the
bank may not subsequently increase the
variable rate that applies to the $2,000
purchase and the $500 cash advance (except
due to increases in the index pursuant to
§ 227.24(b)(2)). On November 16, the bank
provides a notice pursuant to 12 CFR 226.9(c)
informing the consumer of a new variable
rate that will apply on January 1 of year two
(calculated using the same index and an
increased margin of 12 percentage points).
On January 1 of year two, the bank increases
the margin used to determine the variable
rate that applies to new purchases to 12
percentage points (pursuant to
§ 227.24(b)(3)). On January 15 of year two,
the consumer makes a $300 purchase. The
bank applies the variable rate determined
using the 12-point margin to the $300
purchase but not the $2,000 purchase.
B. Same facts as above except that the
required minimum periodic payment due on
May 25 of year one is not received by the
bank until June 30 of year one. Because the
bank received the required minimum
periodic payment more than 30 days after the
payment due date, § 227.24(b)(4) permits the
bank to increase the annual percentage rate
applicable to the $2,000 purchase, the $500
cash advance, and future purchases and cash
advances. However, the bank must first
comply with the notice requirements in 12
CFR 226.9(g). Thus, if the bank provided a 12
CFR 226.9(g) notice on June 25 stating that
all rates on the account would be increased
to a non-variable penalty rate of 30%, the
bank could apply that 30% rate beginning on
August 9 to all balances and future
transactions.
ii. Assume that, at account opening on
January 1 of year one, a bank discloses that
the annual percentage rate for purchases will
increase as follows: A non-variable rate of
5% for six months; a non-variable rate of
10% for an additional six months; and

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thereafter a variable rate that is currently
15% and will be adjusted monthly by adding
a margin of 5 percentage points to a publicly
available index not under the bank’s control.
The payment due date for the account is the
fifteenth day of the month and the required
minimum periodic payments are applied to
accrued interest and fees but do not reduce
the purchase balance. On January 15, the
consumer uses the account to make a $1,500
purchase. Six months after account opening
(July 1), the bank begins accruing interest on
the $1,500 purchase at the previously
disclosed 10% non-variable rate (pursuant to
§ 227.24(b)(1)). On September 15, the
consumer uses the account for a $700
purchase. On November 16, the bank
provides a notice pursuant to 12 CFR 226.9(c)
informing the consumer of a new variable
rate that will apply on January 1 of year two
(calculated using the same index and an
increased margin of 8 percentage points).
One year after account opening (January 1 of
year two), the bank begins accruing interest
on the $2,200 purchase balance at the
previously disclosed variable rate determined
using a 5-point margin (pursuant to
§ 227.24(b)(1)). Because the variable rate
determined using the 8-point margin was not
disclosed at account opening, the bank may
not apply that rate to the $2,200 purchase
balance. Furthermore, because no other
increases in rate were disclosed at account
opening, the bank may not subsequently
increase the variable rate that applies to the
$2,200 purchase balance (except due to
increases in the index pursuant to
§ 227.24(b)(2)). The bank may, however,
apply the variable rate determined using the
8-point margin to purchases made on or after
January 1 of year two (pursuant to
§ 227.24(b)(3)).
iii. Assume that, at account opening on
January 1 of year one, a bank discloses that
the annual percentage rate for purchases is a
variable rate determined by adding a margin
of 6 percentage points to a publicly available
index outside of the bank’s control. The bank
also discloses that, to the extent consistent
with § 227.24 and other applicable law, a
non-variable penalty rate of 28% may apply
if the consumer makes a late payment. The
due date for the account is the fifteenth of the
month. On May 30 of year two, the account
has a purchase balance of $1,000. On May 31,
the creditor provides a notice pursuant to 12
CFR 226.9(c) informing the consumer of a
new variable rate that will apply on July 16
for all purchases made on or after June 8
(calculated by using the same index and an
increased margin of 8 percentage points). On
June 7, the consumer makes a $500 purchase.
On June 8, the consumer makes a $200
purchase. On June 25, the bank has not
received the payment due on June 15 and
provides the consumer with a notice
pursuant to 12 CFR 226.9(g) stating that the
penalty rate of 28% will apply as of
August 9 to all transactions made on or after
July 3. On July 4, the consumer makes a $300
purchase.
A. The payment due on June 15 of year two
is received on June 26. On July 16,
§ 227.24(b)(3) permits the bank to apply the
variable rate determined using the 8-point
margin to the $200 purchase made on June

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8 but does not permit the bank to apply this
rate to the $1,500 purchase balance. On
August 9, § 227.24(b)(3) permits the bank to
apply the 28% penalty rate to the $300
purchase made on July 4 but does not permit
the bank to apply this rate to the $1,500
purchase balance (which remains at the
variable rate determined using the 6-point
margin) or the $200 purchase (which remains
at the variable rate determined using the 8point margin).
B. Same facts as above except the payment
due on September 15 of year two is received
on October 20. Section 227.24(b)(4) permits
the bank to apply the 28% penalty rate to all
balances on the account and to future
transactions because it has not received
payment within 30 days after the due date.
However, in order to apply the 28% penalty
rate to the entire $2,000 purchase balance,
the bank must provide an additional notice
pursuant to 12 CFR 226.9(g). This notice
must be sent no earlier than October 16,
which is the first day the account became
more than 30 days’ delinquent.
C. Same facts as paragraph A. above except
the payment due on June 15 of year two is
received on July 20. Section 227.24(b)(4)
permits the bank to apply the 28% penalty
rate to all balances on the account and to
future transactions because it has not
received payment within 30 days after the
due date. Because the bank provided a 12
CFR 226.9(g) notice on June 24 stating the
28% penalty rate, the bank may apply the
28% penalty rate to all balances on the
account as well as any future transactions on
August 9 without providing an additional
notice pursuant to 12 CFR 226.9(g).
24(b) Exceptions
24(b)(1) Account Opening Disclosure
Exception
1. Prohibited increases in rate. Section
227.24(b)(1) permits an increase in the
annual percentage rate for a category of
transactions to a rate disclosed at account
opening upon expiration of a period of time
that was also disclosed at account opening.
Section 227.24(b)(1) does not permit
application of increased rates that are
disclosed at account opening but are
contingent on a particular event or
occurrence or may be applied at the bank’s
discretion. The following examples illustrate
rate increases that are not permitted by
§ 227.24(a):
i. Assume that a bank discloses at account
opening on January 1 of year one that a nonvariable rate of 15% applies to purchases but
that all rates on an account may be increased
to a non-variable penalty rate of 30% if a
consumer’s required minimum periodic
payment is received after the payment due
date, which is the fifteenth of the month. On
March 1, the account has a $2,000 purchase
balance. The payment due on March 15 is not
received until March 20. Section 227.24 does
not permit the bank to apply the 30% penalty
rate to the $2,000 purchase balance.
However, pursuant to § 227.24(b)(3), the bank
could provide a 12 CFR 226.9(c) or (g) notice
on November 16 informing the consumer
that, on January 1 of year two, the 30% rate
(or a different rate) will apply to new
transactions.

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ii. Assume that a bank discloses at account
opening on January 1 of year one that a nonvariable rate of 5% applies to transferred
balances but that this rate will increase to a
non-variable rate of 18% if the consumer
does not use the account for at least $200 in
purchases each billing cycle. On July 1, the
consumer transfers a balance of $4,000 to the
account. During the October billing cycle, the
consumer uses the account for $150 in
purchases. Section 227.24 does not permit
the bank to apply the 18% rate to the $4,000
transferred balance. However, pursuant to
§ 227.24(b)(3), the bank could provide a 12
CFR 226.9(c) or (g) notice on November 16
informing the consumer that, on January 1 of
year two, the 18% rate (or a different rate)
will apply to new transactions.
iii. Assume that a bank discloses at account
opening on January 1 of year one that interest
on purchases will be deferred for one year,
although interest will accrue on purchases
during that year at a non-variable rate of
20%. The bank further discloses that, if all
purchases made during year one are not paid
in full by the end of that year, the bank will
begin charging interest on the purchase
balance and new purchases at 20% and will
retroactively charge interest on the purchase
balance at a rate of 20% starting on the date
of each purchase made during year one. On
January 1 of year one, the consumer makes
a purchase of $1,500. No other transactions
are made on the account. On January 1 of
year two, $500 of the $1,500 purchase
remains unpaid. Section 227.24 does not
permit the bank to reach back to charge
interest on the $1,500 purchase from January
1 through December 31 of year one. However,
the bank may apply the previously disclosed
20% rate to the $500 purchase balance
beginning on January 1 of year two (pursuant
to § 227.24(b)(1)).
2. Loss of grace period. Nothing in § 227.24
prohibits a bank from assessing interest due
to the loss of a grace period to the extent
consistent with § 227.25.
3. Application of rate that is lower than
disclosed rate. Section 227.24(b)(1) permits
an increase in the annual percentage rate for
a category of transactions to a rate disclosed
at account opening upon expiration of a
period of time that was also disclosed at
account opening. Nothing in § 227.24
prohibits a bank from applying a rate that is
lower than the disclosed rate upon expiration
of the period. However, if a lower rate is
applied to an existing balance, the bank
cannot subsequently increase the rate on that
balance unless it has provided the consumer
with advance notice of the increase pursuant
to 12 CFR 226.9(c). Furthermore, the bank
cannot increase the rate on that existing
balance to a rate that is higher than the
increased rate disclosed at account opening.
The following example illustrates the
application of this rule:
i. Assume that, at account opening on
January 1 of year one, a bank discloses that
a non-variable annual percentage rate of 15%
will apply to purchases for one year and
discloses that, after the first year, the bank
will apply a variable rate that is currently
20% and is determined by adding a margin
of 10 percentage points to a publicly
available index not under the bank’s control.

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On December 31 of year one, the account has
a purchase balance of $3,000.
A. On November 16 of year one, the bank
provides a notice pursuant to 12 CFR 226.9(c)
informing the consumer of a new variable
rate that will apply on January 1 of year two
(calculated using the same index and a
reduced margin of 8 percentage points). The
notice further states that, on July 1 of year
two, the margin will increase to the margin
disclosed at account opening (10 percentage
points). On July 1 of year two, the bank
increases the margin used to determine the
variable rate that applies to new purchases to
10 percentage points and applies that rate to
any remaining portion of the $3,000 purchase
balance (pursuant to § 227.24(b)(1)).
B. Same facts as above except that the bank
does not send a notice on November 16 of
year one. Instead, on January 1 of year two,
the bank lowers the margin used to
determine the variable rate to 8 percentage
points and applies that rate to the $3,000
purchase balance and to new purchases. 12
CFR 226.9 does not require advance notice in
these circumstances. However, unless the
account becomes more than 30 days’
delinquent, the bank may not subsequently
increase the rate that applies to the $3,000
purchase balance except due to increases in
the index (pursuant to § 227.24(b)(2)).
24(b)(2) Variable Rate Exception
1. Increases due to increase in index.
Section 227.24(b)(2) provides that an annual
percentage rate for a category of transactions
that varies according to an index that is not
under the bank’s control and is available to
the general public may be increased due to
an increase in the index. This section does
not permit a bank to increase the annual
percentage rate by changing the method used
to determine a rate that varies with an index
(such as by increasing the margin), even if
that change will not result in an immediate
increase.
2. External index. A bank may increase the
annual percentage rate if the increase is
based on an index or indices outside the
bank’s control. A bank may not increase the
rate based on its own prime rate or cost of
funds. A bank is permitted, however, to use
a published prime rate, such as that in the
Wall Street Journal, even if the bank’s own
prime rate is one of several rates used to
establish the published rate.
3. Publicly available. The index or indices
must be available to the public. A publicly
available index need not be published in a
newspaper, but it must be one the consumer
can independently obtain (by telephone, for
example) and use to verify the rate applied
to the outstanding balance.
4. Changing a non-variable rate to a
variable rate. Section 227.24 generally
prohibits a bank from changing a nonvariable annual percentage rate to a variable
rate because such a change can result in an
increase in rate. However, § 227.24(b)(1)
permits a bank to change a non-variable rate
to a variable rate if the change was disclosed
at account opening. Furthermore, following
the first year after the account is opened,
§ 227.24(b)(3) permits a bank to change a
non-variable rate to a variable rate with
respect to new transactions (after complying
with the notice requirements in 12 CFR

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226.9(c) or (g)). Finally, § 227.24(b)(4)
permits a bank to change a non-variable rate
to a variable rate if the required minimum
periodic payment is not received within 30
days of the payment due date (after
complying with the notice requirements in
12 CFR 226.9(g)).
5. Changing a variable annual percentage
rate to a non-variable annual percentage rate.
Nothing in § 227.24 prohibits a bank from
changing a variable annual percentage rate to
an equal or lower non-variable rate. Whether
the non-variable rate is equal to or lower than
the variable rate is determined at the time the
bank provides the notice required by 12 CFR
226.9(c). For example, assume that on March
1 a variable rate that is currently 15% applies
to a balance of $2,000 and the bank sends a
notice pursuant to 12 CFR 226.9(c) informing
the consumer that the variable rate will be
converted to a non-variable rate of 14%
effective April 17. On April 17, the bank may
apply the 14% non-variable rate to the $2,000
balance and to new transactions even if the
variable rate on March 2 or a later date was
less than 14%.
6. Substitution of index. A bank may
change the index and margin used to
determine the annual percentage rate under
§ 227.24(b)(2) if the original index becomes
unavailable, as long as historical fluctuations
in the original and replacement indices were
substantially similar, and as long as the
replacement index and margin will produce
a rate similar to the rate that was in effect at
the time the original index became
unavailable. If the replacement index is
newly established and therefore does not
have any rate history, it may be used if it
produces a rate substantially similar to the
rate in effect when the original index became
unavailable.
24(b)(3) Advance Notice Exception
1. First year after the account is opened. A
bank may not increase an annual percentage
rate pursuant to § 227.24(b)(3) during the first
year after the account is opened. This
limitation does not apply to accounts opened
prior to July 1, 2010.
2. Transactions that occur more than seven
days after notice provided. Section
227.24(b)(3) generally prohibits a bank from
applying an increased rate to transactions
that occur within seven days after provision
of the 12 CFR 226.9(c) or (g) notice. This
prohibition does not, however, apply to
transactions that are authorized within seven
days after provision of the 12 CFR 226.9(c)
or (g) notice but are settled more than seven
days after the notice was provided.
3. Examples.
i. Assume that a consumer credit card
account is opened on January 1 of year one.
On March 14 of year two, the account has a
purchase balance of $2,000 at a non-variable
annual percentage rate of 15%. On March 15,
the bank provides a notice pursuant to 12
CFR 226.9(c) informing the consumer that the
rate for new purchases will increase to a nonvariable rate of 18% on May 1. The notice
further states that the 18% rate will apply for
six months (until November 1) and states that
thereafter the bank will apply a variable rate
that is currently 22% and is determined by
adding a margin of 12 percentage points to
a publicly-available index that is not under

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the bank’s control. The seventh day after
provision of the notice is March 22 and, on
that date, the consumer makes a $200
purchase. On March 24, the consumer makes
a $1,000 purchase. On May 1, § 227.24(b)(3)
permits the bank to begin accruing interest at
18% on the $1,000 purchase made on March
24. The bank is not permitted to apply the
18% rate to the $2,200 purchase balance as
of March 22. After six months (November 2),
the bank may begin accruing interest on any
remaining portion of the $1,000 purchase at
the previously-disclosed variable rate
determined using the 12-point margin.
ii. Same facts as above except that the $200
purchase is authorized by the bank on March
22 but is not settled until March 23. On May
1, § 227.24(b)(3) permits the bank to start
charging interest at 18% on both the $200
purchase and the $1,000 purchase. The bank
is not permitted to apply the 18% rate to the
$2,000 purchase balance as of March 22.
iii. Same facts as in paragraph i. above
except that on September 17 of year two
(which is 45 days before expiration of the
18% non-variable rate), the bank provides a
notice pursuant to 12 CFR 226.9(c) informing
the consumer that, on November 2, a new
variable rate will apply to new purchases and
any remaining portion of the $1,000 balance
(calculated by using the same index and a
reduced margin of 10 percentage points). The
notice further states that, on May 1 of year
three, the margin will increase to the margin
disclosed at account opening (12 percentage
points). On May 1 of year three,
§ 227.24(b)(3) permits the bank to increase
the margin used to determine the variable
rate that applies to new purchases to 12
percentage points and to apply that rate to
any remaining portion of the $1,000 purchase
as well as to new purchases. See comment
24(b)(1)–3. The bank is not permitted to
apply this rate to any remaining portion of
the $2,200 purchase balance as of March 22.
24(b)(5) Workout Arrangement Exception
1. Scope of exception. Nothing in
§ 227.24(b)(5) permits a bank to alter the
requirements of § 227.24 pursuant to a
workout arrangement between a consumer
and the bank. For example, a bank cannot
increase an annual percentage rate pursuant
to a workout arrangement unless otherwise
permitted by § 227.24. In addition, a bank
cannot require the consumer to make
payments with respect to a protected balance
that exceed the payments permitted under
§ 227.24(c).
2. Variable annual percentage rates. If the
annual percentage rate that applied to a
category of transactions prior to
commencement of the workout arrangement
varied with an index consistent with
§ 227.24(b)(2), the rate applied to that
category of transactions following an increase
pursuant to § 227.24(b)(5) must be
determined using the same formula (index
and margin).
3. Example. Assume that, consistent with
§ 227.24(b)(4), the margin used to determine
a variable annual percentage rate that applies
to a $5,000 balance is increased from 5
percentage points to 15 percentage points.
Assume also that the bank and the consumer
subsequently agree to a workout arrangement
that reduces the margin back to 5 points on

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the condition that the consumer pay a
specified amount by the payment due date
each month. If the consumer does not pay the
agreed-upon amount by the payment due
date, the bank may increase the margin for
the variable rate that applies to the $5,000
balance up to 15 percentage points. 12 CFR
226.9 does not require advance notice of this
type of increase.
24(c) Treatment of Protected Balances
1. Protected balances. Because rates cannot
be increased pursuant to § 227.24(b)(3)
during the first year after account opening,
§ 227.24(c) does not apply to balances during
the first year. Instead, the requirements in
§ 227.24(c) apply only to ‘‘protected
balances,’’ which are amounts owed for a
category of transactions to which an
increased annual percentage rate cannot be
applied after the rate for that category of
transactions has been increased pursuant to
§ 227.24(b)(3). For example, assume that, on
March 15 of year two, an account has a
purchase balance of $1,000 at a non-variable
rate of 12% and that, on March 16, the bank
sends a notice pursuant to 12 CFR 226.9(c)
informing the consumer that the rate for new
purchases will increase to a non-variable rate
of 15% on May 2. On March 20, the
consumer makes a $100 purchase. On March
24, the consumer makes a $150 purchase. On
May 2, § 227.24(b)(3) permits the bank to
start charging interest at 15% on the $150
purchase made on March 24 but does not
permit the bank to apply that 15% rate to the
$1,100 purchase balance as of March 23.
Accordingly, § 227.24(c) applies to the $1,100
purchase balance as of March 23 but not the
$150 purchase made on March 24.
24(c)(1) Repayment
1. No less beneficial to the consumer. A
bank may provide a method of repaying the
protected balance that is different from the
methods listed in § 227.24(c)(1) so long as the
method used is no less beneficial to the
consumer than one of the listed methods. A
method is no less beneficial to the consumer
if the method amortizes the protected balance
in five years or longer or if the method results
in a required minimum periodic payment
that is equal to or less than a minimum
payment calculated consistent with
§ 227.24(c)(1)(ii). For example, a bank could
increase the percentage of the protected
balance included in the required minimum
periodic payment from 2% to 5% so long as
doing so would not result in amortization of
the protected balance in less than five years.
Alternatively, a bank could require a
consumer to make a minimum payment that
amortizes the protected balance in less than
five years so long as the payment does not
include a percentage of the balance that is
more than twice the percentage included in
the minimum payment before the effective
date of the increased rate. For example, a
bank could require the consumer to make a
minimum payment that amortizes the
protected balance in four years so long as
doing so would not more than double the
percentage of the balance included in the
minimum payment prior to the effective date
of the increased rate.
2. Lower limit for required minimum
periodic payment. If the required minimum

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periodic payment under § 227.24(c)(1)(i) or
(c)(1)(ii) is less than the lower dollar limit for
minimum payments established in the
cardholder agreement before the effective
date of the rate increase, the bank may set the
minimum payment consistent with that limit.
For example, if at account opening the
cardholder agreement stated that the required
minimum periodic payment would be either
the total of fees and interest charges plus 1%
of the total amount owed or $20 (whichever
is greater), the bank may require the
consumer to make a minimum payment of
$20 even if doing so would pay off the
protected balance in less than five years or
constitute more than 2% of the protected
balance plus fees and interest charges.
Paragraph 24(c)(1)(i)
1. Amortization period starting from date
on which increased rate becomes effective.
Section 227.24(c)(1)(i) provides for an
amortization period for the protected balance
of no less than five years, starting from the
date on which the increased annual
percentage rate becomes effective. A bank is
not required to recalculate the required
minimum periodic payment for the protected
balance if, during the amortization period,
that balance is reduced as a result of the
allocation of amounts paid by the consumer
in excess of the minimum payment
consistent with § 227.23 or any other practice
permitted by these rules and other applicable
law.
2. Amortization when applicable annual
percentage rate is variable. If the annual
percentage rate that applies to the protected
balance varies with an index consistent with
§ 227.24(b)(2), the bank may adjust the
interest charges included in the required
minimum periodic payment for that balance
accordingly in order to ensure that the
outstanding balance is amortized in five
years. For example, assume that a variable
rate that is currently 15% applies to a
protected balance and that, in order to
amortize that balance in five years, the
required minimum periodic payment must
include a specific amount of principal plus
all accrued interest charges. If the 15%
variable rate increases due to an increase in
the index, the bank may increase the required
minimum periodic payment to include the
additional interest charges.
Paragraph 24(c)(1)(ii)
1. Required minimum periodic payment on
other balances. Section 227.24(c)(1)(ii)
addresses the required minimum periodic
payment on the protected balance. Section
227.24(c)(1)(ii) does not limit or otherwise
address the bank’s ability to determine the
amount of the required minimum periodic
payment for other balances.
2. Example. Assume that the method used
by a bank to calculate the required minimum
periodic payment for a consumer credit card
account requires the consumer to pay either
the total of fees and interest charges plus 1%
of the total amount owed or $20, whichever
is greater. Assume also that the account has
a purchase balance of $2,000 at an annual
percentage rate of 15% and a cash advance
balance of $500 at an annual percentage rate
of 20% and that the bank increases the rate
for purchases to 18% but does not increase

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the rate for cash advances. Under
§ 227.24(c)(1)(ii), the bank may require the
consumer to pay fees and interest plus 2%
of the $2,000 purchase balance. Section
227.24(c)(1)(ii) does not prohibit the bank
from increasing the required minimum
periodic payment for the cash advance
balance.
24(c)(2) Fees and Charges
1. Fee or charge based solely on the
protected balance. A bank is prohibited from
assessing a fee or charge based solely on
balances to which § 227.24(c) applies. For
example, a bank is prohibited from assessing
a monthly maintenance fee that would not be
charged if the account did not have a
protected balance. A bank is not, however,
prohibited from assessing fees such as late
payment fees or fees for exceeding the credit
limit even if such fees are based in part on
the protected balance.
Section 227.25—Unfair Balance
Computation Method
25(a) General Rule
1. Two-cycle method prohibited. When a
consumer ceases to be eligible for a time
period provided by the bank within which
the consumer may repay any portion of the
credit extended without incurring a finance
charge (a grace period), the bank is
prohibited from computing the finance
charge using the so-called two-cycle average
daily balance computation method. This
method calculates the finance charge using a
balance that is the sum of the average daily
balances for two billing cycles. The first
balance is for the current billing cycle, and
is calculated by adding the total balance
(including or excluding new purchases and
deducting payments and credits) for each day
in the billing cycle, and then dividing by the
number of days in the billing cycle. The
second balance is for the preceding billing
cycle.
2. Examples.
i. Assume that the billing cycle on a
consumer credit card account starts on the
first day of the month and ends on the last
day of the month. The payment due date for
the account is the twenty-fifth day of the
month. Under the terms of the account, the
consumer will not be charged interest on
purchases if the balance at the end of a
billing cycle is paid in full by the following
payment due date. The consumer uses the
credit card to make a $500 purchase on
March 15. The consumer pays the balance for
the February billing cycle in full on March
25. At the end of the March billing cycle
(March 31), the consumer’s balance consists
only of the $500 purchase and the consumer
will not be charged interest on that balance
if it is paid in full by the following due date
(April 25). The consumer pays $400 on April
25, leaving a $100 balance. The bank may
charge interest on the $500 purchase from the
start of the April billing cycle (April 1)
through April 24 and interest on the
remaining $100 from April 25 through the
end of the April billing cycle (April 30). The
bank is prohibited, however, from reaching
back and charging interest on the $500
purchase from the date of purchase (March
15) to the end of the March billing cycle
(March 31).

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ii. Assume the same circumstances as in
the previous example except that the
consumer does not pay the balance for the
February billing cycle in full on March 25
and therefore, under the terms of the account,
is not eligible for a time period within which
to repay the $500 purchase without incurring
a finance charge. With respect to the $500
purchase, the bank may charge interest from
the date of purchase (March 15) through
April 24 and interest on the remaining $100
from April 25 through the end of the April
billing cycle (April 30).
Section 227.26—Unfair Charging of Security
Deposits and Fees for the Issuance or
Availability of Credit to Consumer Credit
Card Accounts
26(a) Limitation for First Year
1. Majority of the credit limit. The total
amount of security deposits and fees for the
issuance or availability of credit constitutes
a majority of the initial credit limit if that
total is greater than half of the limit. For
example, assume that a consumer credit card
account has an initial credit limit of $500.
Under § 227.26(a), a bank may charge to the
account security deposits and fees for the
issuance or availability of credit totaling no
more than $250 during the first year
(consistent with § 227.26(b)).
26(b) Limitations for First Billing Cycle and
Subsequent Billing Cycles
1. Adjustments of one dollar or less
permitted. When dividing amounts pursuant
to § 227.26(b)(2), a bank may adjust amounts
by one dollar or less. For example, if a bank
is dividing $87 over five billing cycles, the
bank may charge $18 for two months and $17
for the remaining three months.
2. Examples.
i. Assume that a consumer credit card
account opened on January 1 has an initial
credit limit of $500. Assume also that the
billing cycles for this account begin on the
first day of the month and end on the last day
of the month. Under § 227.26(a), the bank
may charge to the account no more than $250
in security deposits and fees for the issuance
or availability of credit during the first year
after the account is opened. If it charges
$250, the bank may charge up to $125 during
the first billing cycle. If it charges $125
during the first billing cycle, it may then
charge no more than $25 in each of the next
five billing cycles. If it chooses, the bank may
spread the additional security deposits and
fees over a longer period, such as by charging
$12.50 in each of the ten billing cycles
following the first billing cycle.
ii. Same facts as above except that on July
1 the bank increases the credit limit on the
account from $500 to $750. Because the
prohibition in § 227.26(a) is based on the
initial credit limit of $500, the increase in
credit limit does not permit the bank to
charge to the account additional security
deposits and fees for the issuance or
availability of credit (such as a fee for
increasing the credit limit).
26(c) Evasion Prohibited
1. Evasion. Section 227.26(c) prohibits a
bank from evading the requirements of this
section by providing the consumer with
additional credit to fund the consumer’s

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payment of security deposits and fees that
exceed the total amounts permitted by
§ 227.26(a) and (b). For example, assume that
on January 1 a consumer opens a consumer
credit card account with an initial credit
limit of $400 and the bank charges to that
account $100 in fees for the issuance or
availability of credit. Assume also that the
billing cycles for the account coincide with
the days of the month and that the bank will
charge $20 in fees for the issuance or
availability of credit in the February, March,
April, May, and June billing cycles. The bank
violates § 227.26(c) if it provides the
consumer with a separate credit product to
fund additional security deposits or fees for
the issuance or availability of credit.
2. Payment with funds not obtained from
the bank. A bank does not violate § 227.26(c)
if it requires the consumer to pay security
deposits or fees for the issuance or
availability of credit using funds that are not
obtained, directly or indirectly, from the
bank. For example, a bank does not violate
§ 227.26(c) if a $400 security deposit paid by
a consumer to obtain a consumer credit card
account with a credit line of $400 is not
charged to a credit account provided by the
bank or its affiliate.
26(d) Definitions
1. Membership fees. Membership fees for
opening an account are fees for the issuance
or availability of credit. A membership fee to
join an organization that provides a credit or
charge card as a privilege of membership is
a fee for the issuance or availability of credit
only if the card is issued automatically upon
membership. If membership results merely in
eligibility to apply for an account, then such
a fee is not a fee for the issuance or
availability of credit.
2. Enhancements. Fees for optional
services in addition to basic membership
privileges in a credit or charge card account
(for example, travel insurance or cardregistration services) are not fees for the
issuance or availability of credit if the basic
account may be opened without paying such
fees. Issuing a card to each primary
cardholder (not authorized users) is
considered a basic membership privilege and
fees for additional cards, beyond the first
card on the account, are fees for the issuance
or availability of credit. Thus, a fee to obtain
an additional card on the account beyond the
first card (so that each cardholder would
have his or her own card) is a fee for the
issuance or availability of credit even if the
fee is optional; that is, if the fee is charged
only if the cardholder requests one or more
additional cards.
3. One-time fees. Non-periodic fees related
to opening an account (such as application
fees or one-time membership or participation
fees) are fees for the issuance or availability
of credit. Fees for reissuing a lost or stolen
card, statement reproduction fees, and fees
for late payment or other violations of the
account terms are examples of fees that are
not fees for the issuance or availability of
credit.

8. The Federal Reserve System Board
of Governors’ Staff Guidelines on the
Credit Practices Rule, published
November 14, 1985 at 50 FR 47036, is

■

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Federal Register / Vol. 74, No. 18 / Thursday, January 29, 2009 / Rules and Regulations
amended by revising paragraph 3 to
read as follows:

PART 535—UNFAIR OR DECEPTIVE
ACTS OR PRACTICES

Staff Guidelines on the Credit Practices
Rule

Subpart A—General Provisions
Sec.
535.1 Authority, purpose, and scope.

Effective January 1, 1986; as amended
effective July 1, 2010.
Introduction
*

*
*
*
*
3. Scope; enforcement. As stated in
subpart A of Regulation AA, this rule
applies to all banks and their
subsidiaries, except savings associations
as defined in 12 U.S.C. 1813(b). The
Board has enforcement responsibility
for state-chartered banks that are
members of the Federal Reserve System.
The Office of the Comptroller of the
Currency has enforcement responsibility
for national banks. The Federal Deposit
Insurance Corporation has enforcement
responsibility for insured statechartered banks that are not members of
the Federal Reserve System.
*
*
*
*
*
■ 9. The following portions of the
Federal Reserve System Board of
Governors’ Staff Guidelines on the
Credit Practices Rule, published
November 14, 1985 at 50 FR 47036, are
removed:
Section 227.11
and Scope

Authority, Purpose,

Q11(c)–1: Penalties for
noncompliance. What are the penalties
for noncompliance with the rule?
A: Administrative enforcement of the
rule for banks may involve actions
under section 8 of the Federal Deposit
Insurance Act (12 U.S.C. 1818),
including cease-and-desist orders
requiring that actions be taken to
remedy violations. If the terms of the
order are violated, the federal
supervisory agency may impose
penalties of up to $1,000 per day for
every day that the bank is in violation
of the order.
Q11(c)–2: Industrial loan companies.
Are industrial loan companies subject to
the Board’s rule?
A: Industrial loan companies that are
insured by the Federal Deposit
Insurance Corporation are covered by
the Board’s rule.
*
*
*
*
*

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Department of the Treasury

Subpart B—Consumer Credit Practices
535.11 Definitions.
535.12 Unfair credit contract provisions.
535.13 Unfair or deceptive cosigner
practices.
535.14 Unfair late charges.
Subpart C—Consumer Credit Card Account
Practices
535.21 Definitions.
535.22 Unfair time to make payment.
535.23 Unfair allocation of payments.
535.24 Unfair increases in annual
percentage rates.
535.25 Unfair balance computation method.
535.26 Unfair charging of security deposits
and fees for the issuance or availability
of credit to consumer credit card
accounts.
Appendix A to Part 535—Official Staff
Commentary
Authority: 12 U.S.C. 1462a, 1463, 1464; 15
U.S.C. 57a.

Subpart A—General Provisions
§ 535.1

Authority, purpose and scope.

(a) Authority. This part is issued by
OTS under section 18(f) of the Federal
Trade Commission Act, 15 U.S.C. 57a(f)
(section 202(a) of the Magnuson-Moss
Warranty—Federal Trade Commission
Improvement Act, Pub. L. 93–637) and
the Home Owners’ Loan Act, 12 U.S.C.
1461 et seq.
(b) Purpose. The purpose of this part
is to prohibit unfair or deceptive acts or
practices in violation of section 5(a)(1)
of the Federal Trade Commission Act,
15 U.S.C. 45(a)(1). Subparts B and C
define and contain requirements
prescribed for the purpose of preventing
specific unfair or deceptive acts or
practices of savings associations. The
prohibitions in subparts B and C do not
limit OTS’s authority to enforce the FTC
Act with respect to any other unfair or
deceptive acts or practices. The purpose
of this part is also to prohibit unsafe and
unsound practices and protect
consumers under the Home Owners’
Loan Act, 12 U.S.C. 1461 et seq.
(c) Scope. This part applies to savings
associations and subsidiaries owned in
whole or in part by a savings association
(‘‘you’’).

Office of Thrift Supervision

Subpart B—Consumer Credit Practices

12 CFR Chapter V

§ 535.11

Authority and Issuance

For purposes of this subpart, the
following definitions apply:
(a) Consumer means a natural person
who seeks or acquires goods, services,
or money for personal, family, or

For the reasons discussed in the joint
preamble, OTS revises 12 CFR part 535
to read as follows:

■

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Definitions.

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household purposes, other than for the
purchase of real property, and who
applies for or is extended consumer
credit.
(b) Consumer credit means credit
extended to a natural person for
personal, family, or household
purposes. It includes consumer loans;
educational loans; unsecured loans for
real property alteration, repair or
improvement, or for the equipping of
real property; overdraft loans; and credit
cards. It also includes loans secured by
liens on real estate and chattel liens
secured by mobile homes and leases of
personal property to consumers that
may be considered the functional
equivalent of loans on personal security
but only if you rely substantially upon
other factors, such as the general credit
standing of the borrower, guaranties, or
security other than the real estate or
mobile home, as the primary security for
the loan.
(c) Earnings means compensation
paid or payable to an individual or for
the individual’s account for personal
services rendered or to be rendered by
the individual, whether denominated as
wages, salary, commission, bonus, or
otherwise, including periodic payments
pursuant to a pension, retirement, or
disability program.
(d) Obligation means an agreement
between you and a consumer.
(e) Person means an individual,
corporation, or other business
organization.
§ 535.12

Unfair credit contract provisions.

It is an unfair act or practice for you,
directly or indirectly, to enter into a
consumer credit obligation that
constitutes or contains, or to enforce in
a consumer credit obligation you
purchased, any of the following
provisions:
(a) Confession of judgment. A
cognovit or confession of judgment (for
purposes other than executory process
in the State of Louisiana), warrant of
attorney, or other waiver of the right to
notice and the opportunity to be heard
in the event of suit or process thereon.
(b) Waiver of exemption. An
executory waiver or a limitation of
exemption from attachment, execution,
or other process on real or personal
property held, owned by, or due to the
consumer, unless the waiver applies
solely to property subject to a security
interest executed in connection with the
obligation.
(c) Assignment of wages. An
assignment of wages or other earnings
unless:
(1) The assignment by its terms is
revocable at the will of the debtor;

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(2) The assignment is a payroll
deduction plan or preauthorized
payment plan, commencing at the time
of the transaction, in which the
consumer authorizes a series of wage
deductions as a method of making each
payment; or
(3) The assignment applies only to
wages or other earnings already earned
at the time of the assignment.
(d) Security interest in household
goods. A nonpossessory security interest
in household goods other than a
purchase-money security interest. For
purposes of this paragraph, household
goods:
(1) Means clothing, furniture,
appliances, linens, china, crockery,
kitchenware, and personal effects of the
consumer and the consumer’s
dependents.
(2) Does not include:
(i) Works of art;
(ii) Electronic entertainment
equipment (except one television and
one radio);
(iii) Antiques (any item over one
hundred years of age, including such
items that have been repaired or
renovated without changing their
original form or character); or
(iv) Jewelry (other than wedding
rings).
§ 535.13 Unfair or deceptive cosigner
practices.

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(a) Prohibited deception. It is a
deceptive act or practice for you,
directly or indirectly in connection with
the extension of credit to consumers, to
misrepresent the nature or extent of
cosigner liability to any person.
(b) Prohibited unfairness. It is an
unfair act or practice for you, directly or
indirectly in connection with the
extension of credit to consumers, to
obligate a cosigner unless the cosigner is
informed, before becoming obligated, of
the nature of the cosigner’s liability.
(c) Disclosure requirement—(1)
Disclosure statement. A clear and
conspicuous statement must be given in
writing to the cosigner before becoming
obligated. In the case of open-end credit,
the disclosure statement must be given
to the cosigner before the time that the
cosigner becomes obligated for any fees
or transactions on the account. The
disclosure statement must contain the
following statement or one that is
substantially similar:
Notice of Cosigner
You are being asked to guarantee this debt.
Think carefully before you do. If the
borrower doesn’t pay the debt, you will have
to. Be sure you can afford to pay if you have
to, and that you want to accept this
responsibility.
You may have to pay up to the full amount
of the debt if the borrower does not pay. You

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may also have to pay late fees or collection
costs, which increase this amount.
The creditor can collect this debt from you
without first trying to collect from the
borrower. The creditor can use the same
collection methods against you that can be
used against the borrower, such as suing you,
garnishing your wages, etc. If this debt is ever
in default, that fact may become a part of
your credit record.

(2) Compliance. Compliance with
paragraph (d)(1) of this section
constitutes compliance with the
consumer disclosure requirement in
paragraph (b) of this section.
(3) Additional content limitations. If
the notice is a separate document,
nothing other than the following items
may appear with the notice:
(i) Your name and address;
(ii) An identification of the debt to be
cosigned (e.g., a loan identification
number);
(iii) The date (of the transaction); and
(iv) The statement, ‘‘This notice is not
the contract that makes you liable for
the debt.’’
(d) Cosigner defined—(1) Cosigner
means a natural person who assumes
liability for the obligation of a consumer
without receiving goods, services, or
money in return for the obligation, or,
in the case of an open-end credit
obligation, without receiving the
contractual right to obtain extensions of
credit under the account.
(2) Cosigner includes any person
whose signature is requested as a
condition to granting credit to a
consumer, or as a condition for
forbearance on collection of a
consumer’s obligation that is in default.
The term does not include a spouse or
other person whose signature is
required on a credit obligation to perfect
a security interest pursuant to state law.
(3) A person who meets the definition
in this paragraph is a cosigner, whether
or not the person is designated as such
on a credit obligation.
§ 535.14

Unfair late charges.

(a) Prohibition. In connection with
collecting a debt arising out of an
extension of credit to a consumer, it is
an unfair act or practice for you, directly
or indirectly, to levy or collect any
delinquency charge on a payment, when
the only delinquency is attributable to
late fees or delinquency charges
assessed on earlier installments and the
payment is otherwise a full payment for
the applicable period and is paid on its
due date or within an applicable grace
period.
(b) Collecting a debt defined—
Collecting a debt means, for the
purposes of this section, any activity,
other than the use of judicial process,

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that is intended to bring about or does
bring about repayment of all or part of
money due (or alleged to be due) from
a consumer.
Subpart C—Consumer Credit Card
Account Practices
§ 535.21

Definitions.

For purposes of this subpart, the
following definitions apply:
(a) Annual percentage rate means 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. The term
‘‘periodic rate’’ has the same meaning as
in 12 CFR 226.2.
(b) Consumer means 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.
(c) Consumer credit card account
means an account provided to a
consumer primarily for personal, family,
or household purposes under an openend credit plan that is accessed by a
credit card or charge card. The terms
open-end credit, credit card, and charge
card have the same meanings as in 12
CFR 226.2. The following are not
consumer credit card accounts for
purposes of this subpart:
(1) Home equity plans subject to the
requirements of 12 CFR 226.5b that are
accessible by a credit or charge card;
(2) Overdraft lines of credit tied to
asset accounts accessed by checkguarantee cards or by debit cards;
(3) Lines of credit accessed by checkguarantee cards or by debit cards that
can be used only at automated teller
machines; and
(4) Lines of credit accessed solely by
account numbers.
§ 535.22

Unfair time to make payment.

(a) General rule. Except as provided in
paragraph (c) of this section, you must
not treat a payment on a consumer
credit card account as late for any
purpose unless you have provided the
consumer a reasonable amount of time
to make the payment.
(b) Compliance with general rule—
(1) Establishing compliance. You must
be able to establish that you have
complied with paragraph (a) of this
section.
(2) Safe harbor. You comply with
paragraph (a) of this section if you 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.

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(c) Exception for grace periods.
Paragraph (a) of this section does not
apply to any time period you provided
within which the consumer may repay
any portion of the credit extended
without incurring an additional finance
charge.
§ 535.23

Unfair allocation of payments.

When different annual percentage
rates apply to different balances on a
consumer credit card account, you must
allocate any amount paid by the
consumer in excess of the required
minimum periodic payment among the
balances using one of the following
methods:
(a) High-to-low method. The amount
paid by the consumer in excess of the
required minimum periodic payment is
allocated first to the balance with the
highest annual percentage rate and any
remaining portion to the other balances
in descending order based on the
applicable annual percentage rate.
(b) Pro rata method. The amount paid
by the consumer in excess of the
required minimum periodic payment is
allocated among the balances in the
same proportion as each balance bears
to the total balance.

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§ 535.24 Unfair increases in annual
percentage rates.

(a) General rule. At account opening,
you must disclose the annual percentage
rates that will apply to each category of
transactions on the consumer credit
card account. You must not increase the
annual percentage rate for a category of
transactions on any consumer credit
card account except as provided in
paragraph (b) of this section.
(b) Exceptions. The prohibition in
paragraph (a) of this section on
increasing annual percentage rates does
not apply where an annual percentage
rate may be increased pursuant to one
of the exceptions in this paragraph.
(1) Account opening disclosure
exception. An annual percentage rate for
a category of transactions may be
increased to a rate disclosed at account
opening upon expiration of a period of
time disclosed at account opening.
(2) Variable rate exception. An annual
percentage rate for a category of
transactions that varies according to an
index that is not under your control and
is available to the general public may be
increased due to an increase in the
index.
(3) Advance notice exception. An
annual percentage rate for a category of
transactions may be increased pursuant
to a notice under 12 CFR 226.9(c) or (g)
for transactions that occur more than
seven days after provision of the notice.
This exception does not permit an

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increase in any annual percentage rate
during the first year after the account is
opened.
(4) Delinquency exception. An annual
percentage rate may be increased due to
your not receiving the consumer’s
required minimum periodic payment
within 30 days after the due date for
that payment.
(5) Workout arrangement exception.
An annual percentage rate may be
increased due to the consumer’s failure
to comply with the terms of a workout
arrangement between you and the
consumer, provided that the annual
percentage rate applicable to a category
of transactions following any such
increase does not exceed the rate that
applied to that category of transactions
prior to commencement of the workout
arrangement.
(c) Treatment of protected balances.
For purposes of this paragraph,
‘‘protected balance’’ means the amount
owed for a category of transactions to
which an increased annual percentage
rate cannot be applied after the rate for
that category of transactions has been
increased pursuant to paragraph (b)(3)
of this section.
(1) Repayment. You must provide the
consumer with one of the following
methods of repaying a protected balance
or a method that is no less beneficial to
the consumer than one of the following
methods:
(i) An amortization period of no less
than five years, starting from the date on
which the increased rate becomes
effective for the category of transactions;
or
(ii) A required minimum periodic
payment that includes a percentage of
the protected balance that is no more
than twice the percentage required
before the date on which the increased
rate became effective for the category of
transactions.
(2) Fees and charges. You must not
assess any fee or charge based solely on
a protected balance.
§ 535.25 Unfair balance computation
method.

(a) General rule. Except as provided in
paragraph (b) of this section, you must
not impose finance charges on balances
on a consumer credit card account
based on balances for days in billing
cycles that precede the most recent
billing cycle as a result of the loss of any
time period you provided within which
the consumer may repay any portion of
the credit extended without incurring a
finance charge.
(b) Exceptions. Paragraph (a) of this
section does not apply to:
(1) Adjustments to finance charges as
a result of the resolution of a dispute

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under 12 CFR 226.12 or 12 CFR 226.13;
or
(2) Adjustments to finance charges as
a result of the return of a payment for
insufficient funds.
§ 535.26 Unfair charging of security
deposits and fees for the issuance or
availability of credit to consumer credit card
accounts.

(a) Limitation for first year. During the
first year, you must not charge to a
consumer credit card account security
deposits and fees for the issuance or
availability of credit that in total
constitute a majority of the initial credit
limit for the account.
(b) Limitations for first billing cycle
and subsequent billing cycles—(1) First
billing cycle. During the first billing
cycle, you must not charge to a
consumer credit card account security
deposits and fees for the issuance or
availability of credit that in total
constitute more than 25 percent of the
initial credit limit for the account.
(2) Subsequent billing cycles. Any
additional security deposits and fees for
the issuance or availability of credit
permitted by paragraph (a) of this
section must be charged to the account
in equal portions in no fewer than the
five billing cycles immediately
following the first billing cycle.
(c) Evasion prohibited. You must not
evade the requirements of this section
by providing the consumer with
additional credit to fund the payment of
security deposits and fees for the
issuance or availability of credit that
exceed the total amounts permitted by
paragraphs (a) and (b) of this section.
(d) Definitions. For purposes of this
section, the following definitions apply:
(1) Fees for the issuance or
availability of credit means:
(i) Any annual or other periodic fee
that may be imposed for the issuance or
availability of a consumer credit card
account, including any fee based on
account activity or inactivity; and
(ii) Any non-periodic fee that relates
to opening an account.
(2) First billing cycle means the first
billing cycle after a consumer credit
card account is opened.
(3) First year means the period
beginning with the date on which a
consumer credit card account is opened
and ending twelve months from that
date.
(4) Initial credit limit means the credit
limit in effect when a consumer credit
card account is opened.

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Appendix A to Part 535—Official Staff
Commentary
Subpart A—General Provisions for
Consumer Protection Rules
Section 535.1—Authority, Purpose, and
Scope
1(c) Scope
1. Penalties for noncompliance.
Administrative enforcement of the rule for
savings associations may involve actions
under section 8 of the Federal Deposit
Insurance Act (12 U.S.C. 1818), including
cease-and-desist orders requiring that actions
be taken to remedy violations and civil
money penalties.
2. Application to subsidiaries. The term
‘‘savings association’’ as used in this
Appendix also includes subsidiaries owned
in whole or in part by a savings association.

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Subpart C—Consumer Credit Card Account
Practices
Section 535.22—Unfair Time To Make
Payment
22(a) General Rule
1. Treating a payment as late for any
purpose. 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 to make that payment under this
section.
2. Reasonable amount of time to make
payment. Whether an amount of time is
reasonable for purposes of making a payment
is determined from the perspective of the
consumer, not the savings association. Under
§ 535.22(b)(2), a savings association provides
a reasonable amount of time to make a
payment if it has 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.
22(b) Compliance with General Rule
1. Reasonable procedures. A savings
association is not required to determine the
specific date on which periodic statements
are mailed or delivered to each individual
consumer. A savings association provides a
reasonable amount of time to make a
payment if it has adopted reasonable
procedures designed to ensure that periodic
statements are mailed or delivered to
consumers no later than a certain number of
days after the closing date of the billing cycle
and adds that number of days to the 21-day
period in § 535.24(b)(2) when determining
the payment due date. For example, if a
savings association has adopted reasonable
procedures designed to ensure that periodic
statements are mailed or delivered to
consumers no later than three days after the
closing date of the billing cycle, the payment
due date on the periodic statement must be
no less than 24 days after the closing date of
the billing cycle.
2. Payment due date. For purposes of
§ 535.22(b)(2), ‘‘payment due date’’ means
the date by which the savings association

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requires the consumer to make the required
minimum periodic payment in order to avoid
being treated as late for any purpose, except
as provided in § 535.22(c).
3. Example of alternative method of
compliance. Assume that, for a particular
type of consumer credit card account, a
savings association only provides periodic
statements electronically and only accepts
payments electronically (consistent with
applicable law and regulatory guidance).
Under these circumstances, the savings
association could comply with § 535.22(a)
even if it does not provide periodic
statements 21 days before the payment due
date consistent with § 535.22(b)(2).
Section 535.23—Unfair Allocation of
Payments
1. Minimum periodic payment. Section
535.23 addresses the allocation of amounts
paid by the consumer in excess of the
minimum periodic payment required by the
savings association. Section 535.23 does not
limit or otherwise address the savings
association’s ability to determine, consistent
with applicable law and regulatory guidance,
the amount of the required minimum
periodic payment or how that payment is
allocated. A savings association may, but is
not required to, allocate the required
minimum periodic payment consistent with
the requirements in § 535.23 to the extent
consistent with other applicable law or
regulatory guidance.
2. Adjustments of one dollar or less
permitted. When allocating payments, the
savings association may adjust amounts by
one dollar or less. For example, if a savings
association is allocating $100 pursuant to
§ 535.23(b) among balances of $1,000, $2,000,
and $4,000, the savings association may
apply $14 to the $1,000 balance, $29 to the
$2,000 balance, and $57 to the $4,000
balance.
3. Applicable balances and annual
percentage rates. Section 535.23 permits a
savings association to allocate an amount
paid by the consumer in excess of the
required minimum periodic payment based
on the balances and annual percentage rates
on the date the preceding billing cycle ends,
on the date the payment is credited to the
account, or on any day in between those two
dates. For example, assume that the billing
cycles for a consumer credit card account
start on the first day of the month and end
on the last day of the month. On the date the
March billing cycle ends (March 31), the
account has a purchase balance of $500 at a
variable annual percentage rate of 14% and
a cash advance balance of $200 at a variable
annual percentage rate of 18%. On April 1,
the rate for purchases increases to 16% and
the rate for cash advances increases to 20%
consistent with § 535.24(b)(2). On April 15,
the purchase balance increases to $700. On
April 25, the savings association credits to
the account $400 paid by the consumer in
excess of the required minimum periodic
payment. Under § 535.23, the savings
association may allocate the $400 based on
the balances in existence and rates in effect
on any day from March 31 through April 25.
4. Use of permissible allocation methods.
A savings association is not prohibited from

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changing the allocation method for a
consumer credit card account or from using
different allocation methods for different
consumer credit card accounts, so long as the
methods used are consistent with § 535.23.
For example, a savings association may
change from allocating to the highest rate
balance first pursuant to § 535.23(a) to
allocating pro rata pursuant to § 535.23(b) or
vice versa. Similarly, a savings association
may allocate to the highest rate balance first
pursuant to § 535.23(a) on some of its
accounts and allocate pro rata pursuant to
§ 535.23(b) on other accounts.
5. Claims or defenses under Regulation Z,
12 CFR 226.12(c). When a consumer has
asserted a claim or defense against the card
issuer pursuant to 12 CFR 226.12(c), the
savings association must allocate consistent
with 12 CFR 226.12 comment 226.12(c)–4.
6. Balances with the same annual
percentage rate. When the same annual
percentage rate applies to more than one
balance on an account and a different annual
percentage rate applies to at least one other
balance on that account, § 535.23 does not
require that any particular method be used
when allocating among the balances with the
same annual percentage rate. Under these
circumstances, a savings association may
treat the balances with the same rate as a
single balance or separate balances. See
comments 23(a)–1.iv and 23(b)–2.iv.
23(a) High-to-Low Method
1. Examples. For purposes of the following
examples, assume that none of the required
minimum periodic payment is allocated to
the balances discussed (unless otherwise
stated).
i. Assume that a consumer’s account has a
cash advance balance of $500 at an annual
percentage rate of 20% and a purchase
balance of $1,500 at an annual percentage
rate of 15% and that the consumer pays $800
in excess of the required minimum periodic
payment. A savings association using this
method would allocate $500 to pay off the
cash advance balance and then allocate the
remaining $300 to the purchase balance.
ii. Assume that a consumer’s account has
a cash advance balance of $500 at an annual
percentage rate of 20% and a purchase
balance of $1,500 at an annual percentage
rate of 15% and that the consumer pays $400
in excess of the required minimum periodic
payment. A savings association using this
method would allocate the entire $400 to the
cash advance balance.
iii. Assume that a consumer’s account has
a cash advance balance of $100 at an annual
percentage rate of 20%, a purchase balance
of $300 at an annual percentage rate of 18%,
and a $600 protected balance on which the
12% annual percentage rate cannot be
increased pursuant to § 535.24. If the
consumer pays $500 in excess of the required
minimum periodic payment, a savings
association using this method would allocate
$100 to pay off the cash advance balance,
$300 to pay off the purchase balance, and
$100 to the protected balance.
iv. Assume that a consumer’s account has
a cash advance balance of $500 at an annual
percentage rate of 20%, a purchase balance
of $1,000 at an annual percentage rate of
15%, and a transferred balance of $2,000 that

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was previously at a discounted annual
percentage rate of 5% but is now at an annual
percentage rate of 15%. Assume also that the
consumer pays $800 in excess of the required
minimum periodic payment. A savings
association using this method would allocate
$500 to pay off the cash advance balance and
allocate the remaining $300 among the
purchase balance and the transferred balance
in the manner the savings association deems
appropriate.
23(b) Pro Rata Method
1. Total balance. A savings association
may, but is not required to, deduct amounts
paid by the consumer’s required minimum
periodic payment when calculating the total
balance for purposes of § 535.23(b)(3). See
comment 23(b)–2.iii.
2. Examples. For purposes of the following
examples, assume that none of the required
minimum periodic payment is allocated to
the balances discussed (unless otherwise
stated) and that the amounts allocated to
each balance are rounded to the nearest
dollar.
i. Assume that a consumer’s account has a
cash advance balance of $500 at an annual
percentage rate of 20% and a purchase
balance of $1,500 at an annual percentage
rate of 15% and that the consumer pays $555
in excess of the required minimum periodic
payment. A savings association using this
method would allocate 25% of the amount
($139) to the cash advance balance and 75%
of the amount ($416) to the purchase balance.
ii. Assume that a consumer’s account has
a cash advance balance of $100 at an annual
percentage rate of 20%, a purchase balance
of $300 at an annual percentage rate of 18%,
and a $600 protected balance on which the
12% annual percentage rate cannot be
increased pursuant to § 535.24. If the
consumer pays $130 in excess of the required
minimum periodic payment, a savings
association using this method would allocate
10% of the amount ($13) to the cash advance
balance, 30% of the amount ($39) to the
purchase balance, and 60% of the amount
($78) to the protected balance.
iii. Assume that a consumer’s account has
a cash advance balance of $300 at an annual
percentage rate of 20% and a purchase
balance of $600 at an annual percentage rate
of 15%. Assume also that the required
minimum periodic payment is $50 and that
the savings association allocates this
payment first to the balance with the lowest
annual percentage rate (the $600 purchase
balance). If the consumer pays $300 in excess
of the $50 minimum payment, a savings
association using this method could allocate
based on a total balance of $850 (consisting
of the $300 cash advance balance plus the
$550 purchase balance after application of
the $50 minimum payment). In this case, the
savings association would apply 35% of the
$300 ($105) to the cash advance balance and
65% of that amount ($195) to the purchase
balance. In the alternative, the savings
association could allocate based on a total
balance of $900 (which does not reflect the
$50 minimum payment). In that case, the
savings association would apply one third of
the $300 excess payment ($100) to the cash
advance balance and two thirds ($200) to the
purchase balance.

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iv. Assume that a consumer’s account has
a cash advance balance of $500 at an annual
percentage rate of 20%, a purchase balance
of $1,000 at an annual percentage rate of
15%, and a transferred balance of $2,000 that
was previously at a discounted annual
percentage rate of 5% but is now at an annual
percentage rate of 15%. Assume also that the
consumer pays $800 in excess of the required
minimum periodic payment. A savings
association using this method would allocate
14% of the excess payment ($112) to the cash
advance balance and allocate the remaining
86% ($688) among the purchase balance and
the transferred balance in the manner the
savings association deems appropriate.
Section 535.24—Unfair Increases in Annual
Percentage Rates
1. Relationship to Regulation Z, 12 CFR
part 226. A savings association that complies
with the applicable disclosure requirements
in Regulation Z, 12 CFR part 226, has
complied with the disclosure requirements in
§ 535.24. See 12 CFR 226.5a, 226.6, 226.9.
For example, a savings association may
comply with the requirement in § 535.24(a)
to disclose at account opening the annual
percentage rates that will apply to each
category of transactions by complying with
the disclosure requirements in 12 CFR 226.5a
regarding applications and solicitations and
the requirements in 12 CFR 226.6 regarding
account-opening disclosures. Similarly, in
order to increase an annual percentage rate
on new transactions pursuant to
§ 535.24(b)(3), a savings association must
comply with the disclosure requirements in
12 CFR 226.9(c) or (g). However, nothing in
§ 535.24 alters the requirements in 12 CFR
226.9(c) and (g) that creditors provide
consumers with written notice at least 45
days prior to the effective date of certain
increases in the annual percentage rates on
open-end (not home-secured) credit plans.
24(a) General Rule
1. Rates that will apply to each category of
transactions. Section 535.24(a) requires
savings associations to disclose, at account
opening, the annual percentage rates that will
apply to each category of transactions on the
account. A savings association cannot satisfy
this requirement by disclosing at account
opening only a range of rates or that a rate
will be ‘‘up to’’ a particular amount.
2. Application of prohibition on increasing
rates. Section 535.24(a) prohibits savings
associations from increasing the annual
percentage rate for a category of transactions
on any consumer credit card account unless
specifically permitted by one of the
exceptions in § 535.24(b). The following
examples illustrate the application of the
rule:
i. Assume that, at account opening on
January 1 of year one, a savings association
discloses that the annual percentage rate for
purchases is a non-variable rate of 15% and
will apply for six months. The savings
association also discloses that, after six
months, the annual percentage rate for
purchases will be a variable rate that is
currently 18% and will be adjusted quarterly
by adding a margin of 8 percentage points to
a publicly-available index not under the
savings association’s control. Finally, the

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savings association discloses that the annual
percentage rate for cash advances is the same
variable rate that will apply to purchases
after six months. The payment due date for
the account is the twenty-fifth day of the
month and the required minimum periodic
payments are applied to accrued interest and
fees but do not reduce the purchase and cash
advance balances.
A. On January 15, the consumer uses the
account to make a $2,000 purchase and a
$500 cash advance. No other transactions are
made on the account. At the start of each
quarter, the savings association adjusts the
variable rate that applies to the $500 cash
advance consistent with changes in the index
(pursuant to § 535.24(b)(2)). All required
minimum periodic payments are received on
or before the payment due date until May of
year one, when the payment due on May 25
is received by the savings association on May
28. The savings association is prohibited by
§ 535.24 from increasing the rates that apply
to the $2,000 purchase, the $500 cash
advance, or future purchases and cash
advances. Six months after account opening
(July 1), the savings association begins
accruing interest on the $2,000 purchase at
the previously-disclosed variable rate
determined using an 8-point margin
(pursuant to § 535.24(b)(1)). Because no other
increases in rate were disclosed at account
opening, the savings association may not
subsequently increase the variable rate that
applies to the $2,000 purchase and the $500
cash advance (except due to increases in the
index pursuant to § 535.24(b)(2)). On
November 16, the savings association
provides a notice pursuant to 12 CFR 226.9(c)
informing the consumer of a new variable
rate that will apply on January 1 of year two
(calculated using the same index and an
increased margin of 12 percentage points).
On January 1 of year two, the savings
association increases the margin used to
determine the variable rate that applies to
new purchases to 12 percentage points
(pursuant to § 535.24(b)(3)). On January 15 of
year two, the consumer makes a $300
purchase. The savings association applies the
variable rate determined using the 12-point
margin to the $300 purchase but not the
$2,000 purchase.
B. Same facts as above except that the
required minimum periodic payment due on
May 25 of year one is not received by the
savings association until June 30 of year one.
Because the savings association received the
required minimum periodic payment more
than 30 days after the payment due date,
§ 535.24(b)(4) permits the savings association
to increase the annual percentage rate
applicable to the $2,000 purchase, the $500
cash advance, and future purchases and cash
advances. However, the savings association
must first comply with the notice
requirements in 12 CFR 226.9(g). Thus, if the
savings association provided a 12 CFR
226.9(g) notice on June 25 stating that all
rates on the account would be increased to
a non-variable penalty rate of 30%, the
savings association could apply that 30% rate
beginning on August 9 to all balances and
future transactions.
ii. Assume that, at account opening on
January 1 of year one, a savings association

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discloses that the annual percentage rate for
purchases will increase as follows: A nonvariable rate of 5% for six months; a nonvariable rate of 10% for an additional six
months; and thereafter a variable rate that is
currently 15% and will be adjusted monthly
by adding a margin of 5 percentage points to
a publicly available index not under the
savings association’s control. The payment
due date for the account is the fifteenth day
of the month and the required minimum
periodic payments are applied to accrued
interest and fees but do not reduce the
purchase balance. On January 15, the
consumer uses the account to make a $1,500
purchase. Six months after account opening
(July 1), the savings association begins
accruing interest on the $1,500 purchase at
the previously disclosed 10% non-variable
rate (pursuant to § 535.24(b)(1)). On
September 15, the consumer uses the account
for a $700 purchase. On November 16, the
savings association provides a notice
pursuant to 12 CFR 226.9(c) informing the
consumer of a new variable rate that will
apply on January 1 of year two (calculated
using the same index and an increased
margin of 8 percentage points). One year after
account opening (January 1 of year two), the
savings association begins accruing interest
on the $2,200 purchase balance at the
previously disclosed variable rate determined
using a 5-point margin (pursuant to
§ 535.24(b)(1)). Because the variable rate
determined using the 8-point margin was not
disclosed at account opening, the savings
association may not apply that rate to the
$2,200 purchase balance. Furthermore,
because no other increases in rate were
disclosed at account opening, the savings
association may not subsequently increase
the variable rate that applies to the $2,200
purchase balance (except due to increases in
the index pursuant to § 535.24(b)(2)). The
savings association may, however, apply the
variable rate determined using the 8-point
margin to purchases made on or after January
1 of year two (pursuant to § 535.24(b)(3)).
iii. Assume that, at account opening on
January 1 of year one, a savings association
discloses that the annual percentage rate for
purchases is a variable rate determined by
adding a margin of 6 percentage points to a
publicly available index outside of the
savings association’s control. The savings
association also discloses that, to the extent
consistent with § 535.24 and other applicable
law, a non-variable penalty rate of 28% may
apply if the consumer makes a late payment.
The due date for the account is the fifteenth
of the month. On May 30 of year two, the
account has a purchase balance of $1,000. On
May 31, the creditor provides a notice
pursuant to 12 CFR 226.9(c) informing the
consumer of a new variable rate that will
apply on July 16 for all purchases made on
or after June 8 (calculated by using the same
index and an increased margin of 8
percentage points). On June 7, the consumer
makes a $500 purchase. On June 8, the
consumer makes a $200 purchase. On June
25, the savings association has not received
the payment due on June 15 and provides the
consumer with a notice pursuant to 12 CFR
226.9(g) stating that the penalty rate of 28%
will apply as of August 9 to all transactions

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made on or after July 3. On July 4, the
consumer makes a $300 purchase.
A. The payment due on June 15 of year two
is received on June 26. On July 16,
§ 535.24(b)(3) permits the savings association
to apply the variable rate determined using
the 8-point margin to the $200 purchase
made on June 8 but does not permit the
savings association to apply this rate to the
$1,500 purchase balance. On August 9,
§ 535.24(b)(3) permits the savings association
to apply the 28% penalty rate to the $300
purchase made on July 4 but does not permit
the savings association to apply this rate to
the $1,500 purchase balance (which remains
at the variable rate determined using the 6point margin) or the $200 purchase (which
remains at the variable rate determined using
the 8-point margin).
B. Same facts as above except the payment
due on September 15 of year two is received
on October 20. Section 535.24(b)(4) permits
the savings association to apply the 28%
penalty rate to all balances on the account
and to future transactions because it has not
received payment within 30 days after the
due date. However, in order to apply the 28%
penalty rate to the entire $2,000 purchase
balance, the savings association must provide
an additional notice pursuant to 12 CFR
226.9(g). This notice must be sent no earlier
than October 16, which is the first day the
account became more than 30 days’
delinquent.
C. Same facts as paragraph A. above except
the payment due on June 15 of year two is
received on July 20. Section 535.24(b)(4)
permits the savings association to apply the
28% penalty rate to all balances on the
account and to future transactions because it
has not received payment within 30 days
after the due date. Because the savings
association provided a 12 CFR 226.9(g) notice
on June 24 stating the 28% penalty rate, the
savings association may apply the 28%
penalty rate to all balances on the account as
well as any future transactions on August 9
without providing an additional notice
pursuant to 12 CFR 226.9(g).
24(b) Exceptions
24(b)(1) Account Opening Disclosure
Exception
1. Prohibited increases in rate. Section
535.24(b)(1) permits an increase in the
annual percentage rate for a category of
transactions to a rate disclosed at account
opening upon expiration of a period of time
that was also disclosed at account opening.
Section 535.24(b)(1) does not permit
application of increased rates that are
disclosed at account opening but are
contingent on a particular event or
occurrence or may be applied at the savings
association’s discretion. The following
examples illustrate rate increases that are not
permitted by § 535.24(a):
i. Assume that a savings association
discloses at account opening on January 1 of
year one that a non-variable rate of 15%
applies to purchases but that all rates on an
account may be increased to a non-variable
penalty rate of 30% if a consumer’s required
minimum periodic payment is received after
the payment due date, which is the fifteenth
of the month. On March 1, the account has

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a $2,000 purchase balance. The payment due
on March 15 is not received until March 20.
Section 535.24 does not permit the savings
association to apply the 30% penalty rate to
the $2,000 purchase balance. However,
pursuant to § 535.24(b)(3), the savings
association could provide a 12 CFR 226.9(c)
or (g) notice on November 16 informing the
consumer that, on January 1 of year two, the
30% rate (or a different rate) will apply to
new transactions.
ii. Assume that a savings association
discloses at account opening on January 1 of
year one that a non-variable rate of 5%
applies to transferred balances but that this
rate will increase to a non-variable rate of
18% if the consumer does not use the
account for at least $200 in purchases each
billing cycle. On July 1, the consumer
transfers a balance of $4,000 to the account.
During the October billing cycle, the
consumer uses the account for $150 in
purchases. Section 535.24 does not permit
the savings association to apply the 18% rate
to the $4,000 transferred balance. However,
pursuant to § 535.24(b)(3), the savings
association could provide a 12 CFR 226.9(c)
or (g) notice on November 16 informing the
consumer that, on January 1 of year two, the
18% rate (or a different rate) will apply to
new transactions.
iii. Assume that a savings association
discloses at account opening on January 1 of
year one that interest on purchases will be
deferred for one year, although interest will
accrue on purchases during that year at a
non-variable rate of 20%. The savings
association further discloses that, if all
purchases made during year one are not paid
in full by the end of that year, the savings
association will begin charging interest on
the purchase balance and new purchases at
20% and will retroactively charge interest on
the purchase balance at a rate of 20% starting
on the date of each purchase made during
year one. On January 1 of year one, the
consumer makes a purchase of $1,500. No
other transactions are made on the account.
On January 1 of year two, $500 of the $1,500
purchase remains unpaid. Section 535.24
does not permit the savings association to
reach back to charge interest on the $1,500
purchase from January 1 through December
31 of year one. However, the savings
association may apply the previously
disclosed 20% rate to the $500 purchase
balance beginning on January 1 of year two
(pursuant to § 535.24(b)(1)).
2. Loss of grace period. Nothing in § 535.24
prohibits a savings association from assessing
interest due to the loss of a grace period to
the extent consistent with § 535.25.
3. Application of rate that is lower than
disclosed rate. Section § 535.24(b)(1) permits
an increase in the annual percentage rate for
a category of transactions to a rate disclosed
at account opening upon expiration of a
period of time that was also disclosed at
account opening. Nothing in § 535.24
prohibits a savings association from applying
a rate that is lower than the disclosed rate
upon expiration of the period. However, if a
lower rate is applied to an existing balance,
the savings association cannot subsequently
increase the rate on that balance unless it has
provided the consumer with advance notice

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of the increase pursuant to 12 CFR 226.9(c).
Furthermore, the savings association cannot
increase the rate on that existing balance to
a rate that is higher than the increased rate
disclosed at account opening. The following
example illustrates the application of this
rule:
i. Assume that, at account opening on
January 1 of year one, a savings association
discloses that a non-variable annual
percentage rate of 15% will apply to
purchases for one year and discloses that,
after the first year, the savings association
will apply a variable rate that is currently
20% and is determined by adding a margin
of 10 percentage points to a publicly
available index not under the savings
association’s control. On December 31 of year
one, the account has a purchase balance of
$3,000.
A. On November 16 of year one, the
savings association provides a notice
pursuant to 12 CFR 226.9(c) informing the
consumer of a new variable rate that will
apply on January 1 of year two (calculated
using the same index and a reduced margin
of 8 percentage points). The notice further
states that, on July 1 of year two, the margin
will increase to the margin disclosed at
account opening (10 percentage points). On
July 1 of year two, the savings association
increases the margin used to determine the
variable rate that applies to new purchases to
10 percentage points and applies that rate to
any remaining portion of the $3,000 purchase
balance (pursuant to § 535.24(b)(1)).
B. Same facts as above except that the
savings association does not send a notice on
November 16 of year one. Instead, on January
1 of year two, the savings association lowers
the margin used to determine the variable
rate to 8 percentage points and applies that
rate to the $3,000 purchase balance and to
new purchases. 12 CFR 226.9 does not
require advance notice in these
circumstances. However, unless the account
becomes more than 30 days’ delinquent, the
savings association may not subsequently
increase the rate that applies to the $3,000
purchase balance except due to increases in
the index (pursuant to § 535.24(b)(2)).
24(b)(2) Variable Rate Exception
1. Increases due to increase in index.
Section 535.24(b)(2) provides that an annual
percentage rate for a category of transactions
that varies according to an index that is not
under the savings association’s control and is
available to the general public may be
increased due to an increase in the index.
This section does not permit a savings
association to increase the annual percentage
rate by changing the method used to
determine a rate that varies with an index
(such as by increasing the margin), even if
that change will not result in an immediate
increase.
2. External index. A savings association
may increase the annual percentage rate if
the increase is based on an index or indices
outside the savings association’s control. A
savings association may not increase the rate
based on its own prime rate or cost of funds.
A savings association is permitted, however,
to use a published prime rate, such as that
in the Wall Street Journal, even if the savings

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association’s own prime rate is one of several
rates used to establish the published rate.
3. Publicly available. The index or indices
must be available to the public. A publiclyavailable index need not be published in a
newspaper, but it must be one the consumer
can independently obtain (by telephone, for
example) and use to verify the rate applied
to the outstanding balance.
4. Changing a non-variable rate to a
variable rate. Section 535.24 generally
prohibits a savings association from changing
a non-variable annual percentage rate to a
variable rate because such a change can
result in an increase in rate. However,
§ 535.24(b)(1) permits a savings association to
change a non-variable rate to a variable rate
if the change was disclosed at account
opening. Furthermore, following the first
year after the account is opened,
§ 535.24(b)(3) permits a savings association to
change a non-variable rate to a variable rate
with respect to new transactions (after
complying with the notice requirements in
12 CFR 226.9(c) or (g)). Finally, § 535.24(b)(4)
permits a savings association to change a
non-variable rate to a variable rate if the
required minimum periodic payment is not
received within 30 days of the payment due
date (after complying with the notice
requirements in 12 CFR 226.9(g)).
5. Changing a variable annual percentage
rate to a non-variable annual percentage rate.
Nothing in § 535.24 prohibits a savings
association from changing a variable annual
percentage rate to an equal or lower nonvariable rate. Whether the non-variable rate
is equal to or lower than the variable rate is
determined at the time the savings
association provides the notice required by
12 CFR 226.9(c). For example, assume that on
March 1 a variable rate that is currently 15%
applies to a balance of $2,000 and the savings
association sends a notice pursuant to 12
CFR 226.9(c) informing the consumer that the
variable rate will be converted to a nonvariable rate of 14% effective April 17. On
April 17, the savings association may apply
the 14% non-variable rate to the $2,000
balance and to new transactions even if the
variable rate on March 2 or a later date was
less than 14%.
6. Substitution of index. A savings
association may change the index and margin
used to determine the annual percentage rate
under § 535.24(b)(2) if the original index
becomes unavailable, as long as historical
fluctuations in the original and replacement
indices were substantially similar, and as
long as the replacement index and margin
will produce a rate similar to the rate that
was in effect at the time the original index
became unavailable. If the replacement index
is newly established and therefore does not
have any rate history, it may be used if it
produces a rate substantially similar to the
rate in effect when the original index became
unavailable.
24(b)(3) Advance Notice Exception
1. First year after the account is opened. A
savings association may not increase an
annual percentage rate pursuant to
§ 535.24(b)(3) during the first year after the
account is opened. This limitation does not
apply to accounts opened prior to July 1,
2010.

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2. Transactions that occur more than seven
days after notice provided. Section
535.24(b)(3) generally prohibits a savings
association from applying an increased rate
to transactions that occur within seven days
after provision of the 12 CFR 226.9(c) or (g)
notice. This prohibition does not, however,
apply to transactions that are authorized
within seven days after provision of the 12
CFR 226.9(c) or (g) notice but are settled
more than seven days after the notice was
provided.
3. Examples.
i. Assume that a consumer credit card
account is opened on January 1 of year one.
On March 14 of year two, the account has a
purchase balance of $2,000 at a non-variable
annual percentage rate of 15%. On March 15,
the savings association provides a notice
pursuant to 12 CFR 226.9(c) informing the
consumer that the rate for new purchases
will increase to a non-variable rate of 18% on
May 1. The notice further states that the 18%
rate will apply for six months (until
November 1) and states that thereafter the
savings association will apply a variable rate
that is currently 22% and is determined by
adding a margin of 12 percentage points to
a publicly-available index that is not under
the savings association’s control. The seventh
day after provision of the notice is March 22
and, on that date, the consumer makes a $200
purchase. On March 24, the consumer makes
a $1,000 purchase. On May 1, § 535.24(b)(3)
permits the savings association to begin
accruing interest at 18% on the $1,000
purchase made on March 24. The savings
association is not permitted to apply the 18%
rate to the $2,200 purchase balance as of
March 22. After six months (November 2),
the savings association may begin accruing
interest on any remaining portion of the
$1,000 purchase at the previously-disclosed
variable rate determined using the 12-point
margin.
ii. Same facts as above except that the $200
purchase is authorized by the savings
association on March 22 but is not settled
until March 23. On May 1, § 535.24(b)(3)
permits the savings association to start
charging interest at 18% on both the $200
purchase and the $1,000 purchase. The
savings association is not permitted to apply
the 18% rate to the $2,000 purchase balance
as of March 22.
iii. Same facts as in paragraph i. above
except that on September 17 of year two
(which is 45 days before expiration of the
18% non-variable rate), the savings
association provides a notice pursuant to 12
CFR 226.9(c) informing the consumer that, on
November 2, a new variable rate will apply
to new purchases and any remaining portion
of the $1,000 balance (calculated by using the
same index and a reduced margin of 10
percentage points). The notice further states
that, on May 1 of year three, the margin will
increase to the margin disclosed at account
opening (12 percentage points). On May 1 of
year three, § 535.24(b)(3) permits the savings
association to increase the margin used to
determine the variable rate that applies to
new purchases to 12 percentage points and
to apply that rate to any remaining portion
of the $1,000 purchase as well as to new
purchases. See comment 24(b)(1)–3. The

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savings association is not permitted to apply
this rate to any remaining portion of the
$2,200 purchase balance as of March 22.
24(b)(5) Workout Arrangement Exception
1. Scope of exception. Nothing in
§ 535.24(b)(5) permits a savings association to
alter the requirements of § 535.24 pursuant to
a workout arrangement between a consumer
and the savings association. For example, a
savings association cannot increase an
annual percentage rate pursuant to a workout
arrangement unless otherwise permitted by
§ 535.24. In addition, a savings association
cannot require the consumer to make
payments with respect to a protected balance
that exceed the payments permitted under
§ 535.24(c).
2. Variable annual percentage rates. If the
annual percentage rate that applied to a
category of transactions prior to
commencement of the workout arrangement
varied with an index consistent with
§ 535.24(b)(2), the rate applied to that
category of transactions following an increase
pursuant to § 535.24(b)(5) must be
determined using the same formula (index
and margin).
3. Example. Assume that, consistent with
§ 535.24(b)(4), the margin used to determine
a variable annual percentage rate that applies
to a $5,000 balance is increased from 5
percentage points to 15 percentage points.
Assume also that the savings association and
the consumer subsequently agree to a
workout arrangement that reduces the margin
back to 5 points on the condition that the
consumer pay a specified amount by the
payment due date each month. If the
consumer does not pay the agreed-upon
amount by the payment due date, the savings
association may increase the margin for the
variable rate that applies to the $5,000
balance up to 15 percentage points. 12 CFR
226.9 does not require advance notice of this
type of increase.
24(c) Treatment of Protected Balances
1. Protected balances. Because rates cannot
be increased pursuant to § 535.24(b)(3)
during the first year after account opening,
§ 535.24(c) does not apply to balances during
the first year. Instead, the requirements in
§ 535.24(c) apply only to ‘‘protected
balances,’’ which are amounts owed for a
category of transactions to which an
increased annual percentage rate cannot be
applied after the rate for that category of
transactions has been increased pursuant to
§ 535.24(b)(3). For example, assume that, on
March 15 of year two, an account has a
purchase balance of $1,000 at a non-variable
rate of 12% and that, on March 16, the
savings association sends a notice pursuant
to 12 CFR 226.9(c) informing the consumer
that the rate for new purchases will increase
to a non-variable rate of 15% on May 2. On
March 20, the consumer makes a $100
purchase. On March 24, the consumer makes
a $150 purchase. On May 2, § 535.24(b)(3)
permits the savings association to start
charging interest at 15% on the $150
purchase made on March 24 but does not
permit the savings association to apply that
15% rate to the $1,100 purchase balance as
of March 23. Accordingly, § 535.24(c) applies
to the $1,100 purchase balance as of March

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23 but not the $150 purchase made on March
24.
24(c)(1) Repayment
1. No less beneficial to the consumer. A
savings association may provide a method of
repaying the protected balance that is
different from the methods listed in
§ 535.24(c)(1) so long as the method used is
no less beneficial to the consumer than one
of the listed methods. A method is no less
beneficial to the consumer if the method
amortizes the protected balance in five years
or longer or if the method results in a
required minimum periodic payment that is
equal to or less than a minimum payment
calculated consistent with § 535.24(c)(1)(ii).
For example, a savings association could
increase the percentage of the protected
balance included in the required minimum
periodic payment from 2% to 5% so long as
doing so would not result in amortization of
the protected balance in less than five years.
Alternatively, a savings association could
require a consumer to make a minimum
payment that amortizes the protected balance
in less than five years so long as the payment
does not include a percentage of the balance
that is more than twice the percentage
included in the minimum payment before the
effective date of the increased rate. For
example, a savings association could require
the consumer to make a minimum payment
that amortizes the protected balance in four
years so long as doing so would not more
than double the percentage of the balance
included in the minimum payment prior to
the effective date of the increased rate.
2. Lower limit for required minimum
periodic payment. If the required minimum
periodic payment under § 535.24(c)(1)(i) or
(c)(1)(ii) is less than the lower dollar limit for
minimum payments established in the
cardholder agreement before the effective
date of the rate increase, the savings
association may set the minimum payment
consistent with that limit. For example, if at
account opening the cardholder agreement
stated that the required minimum periodic
payment would be either the total of fees and
interest charges plus 1% of the total amount
owed or $20 (whichever is greater), the
savings association may require the
consumer to make a minimum payment of
$20 even if doing so would pay off the
protected balance in less than five years or
constitute more than 2% of the protected
balance plus fees and interest charges.
Paragraph 24(c)(1)(i)
1. Amortization period starting from date
on which increased rate becomes effective.
Section 535.24(c)(1)(i) provides for an
amortization period for the protected balance
of no less than five years, starting from the
date on which the increased annual
percentage rate becomes effective. A savings
association is not required to recalculate the
required minimum periodic payment for the
protected balance if, during the amortization
period, that balance is reduced as a result of
the allocation of amounts paid by the
consumer in excess of the minimum payment
consistent with § 535.23 or any other practice
permitted by these rules and other applicable
law.
2. Amortization when applicable annual
percentage rate is variable. If the annual

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percentage rate that applies to the protected
balance varies with an index consistent with
§ 535.24(b)(2), the savings association may
adjust the interest charges included in the
required minimum periodic payment for that
balance accordingly in order to ensure that
the outstanding balance is amortized in five
years. For example, assume that a variable
rate that is currently 15% applies to a
protected balance and that, in order to
amortize that balance in five years, the
required minimum periodic payment must
include a specific amount of principal plus
all accrued interest charges. If the 15%
variable rate increases due to an increase in
the index, the savings association may
increase the required minimum periodic
payment to include the additional interest
charges.
Paragraph 24(c)(1)(ii)
1. Required minimum periodic payment on
other balances. Section 535.24(c)(1)(ii)
addresses the required minimum periodic
payment on the protected balance. Section
535.24(c)(1)(ii) does not limit or otherwise
address the savings association’s ability to
determine the amount of the required
minimum periodic payment for other
balances.
2. Example. Assume that the method used
by a savings association to calculate the
required minimum periodic payment for a
consumer credit card account requires the
consumer to pay either the total of fees and
interest charges plus 1% of the total amount
owed or $20, whichever is greater. Assume
also that the account has a purchase balance
of $2,000 at an annual percentage rate of 15%
and a cash advance balance of $500 at an
annual percentage rate of 20% and that the
savings association increases the rate for
purchases to 18% but does not increase the
rate for cash advances. Under
§ 535.24(c)(1)(ii), the savings association may
require the consumer to pay fees and interest
plus 2% of the $2,000 purchase balance.
Section 535.24(c)(1)(ii) does not prohibit the
savings association from increasing the
required minimum periodic payment for the
cash advance balance.
24(c)(2) Fees and Charges
1. Fee or charge based solely on the
protected balance. A savings association is
prohibited from assessing a fee or charge
based solely on balances to which § 535.24(c)
applies. For example, a savings association is
prohibited from assessing a monthly
maintenance fee that would not be charged
if the account did not have a protected
balance. A savings association is not,
however, prohibited from assessing fees such
as late payment fees or fees for exceeding the
credit limit even if such fees are based in part
on the protected balance.
Section 535.25—Unfair Balance
Computation Method
25(a) General Rule
1. Two-cycle method prohibited. When a
consumer ceases to be eligible for a time
period provided by the savings association
within which the consumer may repay any
portion of the credit extended without
incurring a finance charge (a grace period),
the savings association is prohibited from

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computing the finance charge using the socalled two-cycle average daily balance
computation method. This method calculates
the finance charge using a balance that is the
sum of the average daily balances for two
billing cycles. The first balance is for the
current billing cycle, and is calculated by
adding the total balance (including or
excluding new purchases and deducting
payments and credits) for each day in the
billing cycle, and then dividing by the
number of days in the billing cycle. The
second balance is for the preceding billing
cycle.
2. Examples.
i. Assume that the billing cycle on a
consumer credit card account starts on the
first day of the month and ends on the last
day of the month. The payment due date for
the account is the twenty-fifth day of the
month. Under the terms of the account, the
consumer will not be charged interest on
purchases if the balance at the end of a
billing cycle is paid in full by the following
payment due date. The consumer uses the
credit card to make a $500 purchase on
March 15. The consumer pays the balance for
the February billing cycle in full on March
25. At the end of the March billing cycle
(March 31), the consumer’s balance consists
only of the $500 purchase and the consumer
will not be charged interest on that balance
if it is paid in full by the following due date
(April 25). The consumer pays $400 on April
25, leaving a $100 balance. The savings
association may charge interest on the $500
purchase from the start of the April billing
cycle (April 1) through April 24 and interest
on the remaining $100 from April 25 through
the end of the April billing cycle (April 30).
The savings association is prohibited,
however, from reaching back and charging
interest on the $500 purchase from the date
of purchase (March 15) to the end of the
March billing cycle (March 31).
ii. Assume the same circumstances as in
the previous example except that the
consumer does not pay the balance for the
February billing cycle in full on March 25
and therefore, under the terms of the account,
is not eligible for a time period within which
to repay the $500 purchase without incurring
a finance charge. With respect to the $500
purchase, the savings association may charge
interest from the date of purchase (March 15)
through April 24 and interest on the
remaining $100 from April 25 through the
end of the April billing cycle (April 30).
Section 535.26—Unfair Charging of Security
Deposits and Fees for the Issuance or
Availability of Credit to Consumer Credit
Card Accounts
26(a) Limitation for First Year
1. Majority of the credit limit. The total
amount of security deposits and fees for the
issuance or availability of credit constitutes
a majority of the initial credit limit if that
total is greater than half of the limit. For
example, assume that a consumer credit card
account has an initial credit limit of $500.
Under § 535.26(a), a savings association may
charge to the account security deposits and
fees for the issuance or availability of credit
totaling no more than $250 during the first
year (consistent with § 535.26(b)).

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26(b) Limitations for First Billing Cycle and
Subsequent Billing Cycles
1. Adjustments of one dollar or less
permitted. When dividing amounts pursuant
to § 535.26(b)(2), a savings association may
adjust amounts by one dollar or less. For
example, if a savings association is dividing
$87 over five billing cycles, the savings
association may charge $18 for two months
and $17 for the remaining three months.
2. Examples.
i. Assume that a consumer credit card
account opened on January 1 has an initial
credit limit of $500. Assume also that the
billing cycles for this account begin on the
first day of the month and end on the last day
of the month. Under § 535.26(a), the savings
association may charge to the account no
more than $250 in security deposits and fees
for the issuance or availability of credit
during the first year after the account is
opened. If it charges $250, the savings
association may charge up to $125 during the
first billing cycle. If it charges $125 during
the first billing cycle, it may then charge no
more than $25 in each of the next five billing
cycles. If it chooses, the savings association
may spread the additional security deposits
and fees over a longer period, such as by
charging $12.50 in each of the ten billing
cycles following the first billing cycle.
ii. Same facts as above except that on July
1 the savings association increases the credit
limit on the account from $500 to $750.
Because the prohibition in § 535.26(a) is
based on the initial credit limit of $500, the
increase in credit limit does not permit the
savings association to charge to the account
additional security deposits and fees for the
issuance or availability of credit (such as a
fee for increasing the credit limit).
26(c) Evasion Prohibited
1. Evasion. Section 535.26(c) prohibits a
savings association from evading the
requirements of this section by providing the
consumer with additional credit to fund the
consumer’s payment of security deposits and
fees that exceed the total amounts permitted
by § 535.26(a) and (b). For example, assume
that on January 1 a consumer opens a
consumer credit card account with an initial
credit limit of $400 and the savings
association charges to that account $100 in
fees for the issuance or availability of credit.
Assume also that the billing cycles for the
account coincide with the days of the month
and that the savings association will charge
$20 in fees for the issuance or availability of
credit in the February, March, April, May,
and June billing cycles. The savings
association violates § 535.26(c) if it provides
the consumer with a separate credit product
to fund additional security deposits or fees
for the issuance or availability of credit.
2. Payment with funds not obtained from
the savings association. A savings association
does not violate § 535.26(c) if it requires the
consumer to pay security deposits or fees for
the issuance or availability of credit using
funds that are not obtained, directly or
indirectly, from the savings association. For
example, a savings association does not
violate § 535.26(c) if a $400 security deposit
paid by a consumer to obtain a consumer
credit card account with a credit line of $400

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is not charged to a credit account provided
by the savings association or its affiliate.
26(d) Definitions
1. Membership fees. Membership fees for
opening an account are fees for the issuance
or availability of credit. A membership fee to
join an organization that provides a credit or
charge card as a privilege of membership is
a fee for the issuance or availability of credit
only if the card is issued automatically upon
membership. If membership results merely in
eligibility to apply for an account, then such
a fee is not a fee for the issuance or
availability of credit.
2. Enhancements. Fees for optional
services in addition to basic membership
privileges in a credit or charge card account
(for example, travel insurance or cardregistration services) are not fees for the
issuance or availability of credit if the basic
account may be opened without paying such
fees. Issuing a card to each primary
cardholder (not authorized users) is
considered a basic membership privilege and
fees for additional cards, beyond the first
card on the account, are fees for the issuance
or availability of credit. Thus, a fee to obtain
an additional card on the account beyond the
first card (so that each cardholder would
have his or her own card) is a fee for the
issuance or availability of credit even if the
fee is optional; that is, if the fee is charged
only if the cardholder requests one or more
additional cards.
3. One-time fees. Non-periodic fees related
to opening an account (such as application
fees or one-time membership or participation
fees) are fees for the issuance or availability
of credit. Fees for reissuing a lost or stolen
card, statement reproduction fees, and fees
for late payment or other violations of the
account terms are examples of fees that are
not fees for the issuance or availability of
credit.

National Credit Union Administration
12 CFR Chapter VII
Authority and Issuance
■ For the reasons discussed in the joint
preamble, NCUA revises part 706 of
Title 12 of the Code of Federal
Regulations to read as follows:
PART 706—UNFAIR OR DECEPTIVE
ACTS OR PRACTICES
Subpart A—General Provisions
Sec.
706.1 Authority, purpose, and scope.
706.2–706.10 [Reserved]
Subpart B—Consumer Credit Practices
706.11 Definitions.
706.12 Unfair credit contract provisions.
706.13 Unfair or deceptive cosigner
practices.
706.14 Unfair late charges.
706.15–706.20 [Reserved]
Subpart C—Consumer Credit Card Account
Practices Rule
706.21 Definitions.
706.22 Unfair time to make payment.
706.23 Unfair allocation of payments.

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706.24 Unfair increases in annual
percentage rates.
706.25 Unfair balance computation method.
706.26 Unfair charging of security deposits
and fees for the issuance or availability
of credit to consumer credit card
accounts.
Appendix A to Part 706—Official Staff
Commentary
Authority: 15 U.S.C. 57a.

Subpart A—General Provisions
§ 706.1

Authority, purpose, and scope.

(a) Authority. This part is issued by
NCUA under section 18(f) of the Federal
Trade Commission Act, 15 U.S.C. 57a(f)
(section 202(a) of the Magnuson-Moss
Warranty—Federal Trade Commission
Improvement Act, Pub. L. 93–637).
(b) Purpose. The purpose of this part
is to prohibit unfair or deceptive acts or
practices in violation of section 5(a)(1)
of the Federal Trade Commission Act,
15 U.S.C. 45(a)(1). Subparts B and C
define and contain requirements
prescribed for the purpose of preventing
specific unfair or deceptive acts or
practices of federal credit unions. The
prohibitions in subparts B and C do not
limit NCUA’s authority to enforce the
FTC Act with respect to any other unfair
or deceptive acts or practices.
(c) Scope. This part applies to federal
credit unions.
§§ 706.2–706.10

[Reserved]

Subpart B—Consumer Credit Practices

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§ 706.11

Definitions.

For purposes of this subpart, the
following definitions apply:
Consumer means a natural person
member who seeks or acquires goods,
services, or money for personal, family,
or household purposes, other than for
the purchase of real property, and who
applies for or is extended consumer
credit.
Consumer credit means credit
extended to a natural person member for
personal, family, or household
purposes. It includes consumer loans;
educational loans; unsecured loans for
real property alteration, repair or
improvement, or for the equipping of
real property; overdraft loans; and credit
cards. It also includes loans secured by
liens on real estate and chattel liens
secured by mobile homes and leases of
personal property to consumers that
may be considered the functional
equivalent of loans on personal security
but only if the federal credit union relies
substantially upon other factors, such as
the general credit standing of the
borrower, guaranties, or security other
than the real estate or mobile home, as
the primary security for the loan.

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Earnings means compensation paid or
payable to an individual or for the
individual’s account for personal
services rendered or to be rendered by
the individual, whether denominated as
wages, salary, commission, bonus, or
otherwise, including periodic payments
pursuant to a pension, retirement, or
disability program.
Obligation means an agreement
between a consumer and a federal credit
union.
Person means an individual,
corporation, or other business
organization.
§ 706.12

Unfair credit contract provisions.

It is an unfair act or practice for a
federal credit union, directly or
indirectly, to enter into a consumer
credit obligation that constitutes or
contains, or to enforce in a consumer
credit obligation the federal credit union
purchased, any of the following
provisions:
(a) Confession of judgment. A
cognovit or confession of judgment (for
purposes other than executory process
in the State of Louisiana), warrant of
attorney, or other waiver of the right to
notice and the opportunity to be heard
in the event of suit or process thereon.
(b) Waiver of exemption. An
executory waiver or a limitation of
exemption from attachment, execution,
or other process on real or personal
property held, owned by, or due to the
consumer, unless the waiver applies
solely to property subject to a security
interest executed in connection with the
obligation.
(c) Assignment of wages. An
assignment of wages or other earnings
unless:
(1) The assignment by its terms is
revocable at the will of the debtor;
(2) The assignment is a payroll
deduction plan or preauthorized
payment plan, commencing at the time
of the transaction, in which the
consumer authorizes a series of wage
deductions as a method of making each
payment; or
(3) The assignment applies only to
wages or other earnings already earned
at the time of the assignment.
(d) Security interest in household
goods. A nonpossessory security interest
in household goods other than a
purchase-money security interest. For
purposes of this paragraph, household
goods:
(1) Means clothing, furniture,
appliances, linens, china, crockery,
kitchenware, and personal effects of the
consumer and the consumer’s
dependents.
(2) Does not include:
(i) Works of art;

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(ii) Electronic entertainment
equipment (except one television and
one radio);
(iii) Antiques (any item over one
hundred years of age, including such
items that have been repaired or
renovated without changing their
original form or character); or
(iv) Jewelry (other than wedding
rings).
§ 706.13 Unfair or deceptive cosigner
practices.

(a) Prohibited deception. It is a
deceptive act or practice for a federal
credit union, directly or indirectly in
connection with the extension of credit
to consumers, to misrepresent the
nature or extent of cosigner liability to
any person.
(b) Prohibited unfairness. It is an
unfair act or practice for a federal credit
union, directly or indirectly in
connection with the extension of credit
to consumers, to obligate a cosigner
unless the cosigner is informed, before
becoming obligated, of the nature of the
cosigner’s liability.
(c) Disclosure requirement—(1)
Disclosure statement. A clear and
conspicuous statement must be given in
writing to the cosigner before becoming
obligated. In the case of open-end credit,
the disclosure statement must be given
to the cosigner before the time that the
cosigner becomes obligated for any fees
or transactions on the account. The
disclosure statement must contain the
following statement or one that is
substantially similar:
Notice of Cosigner
You are being asked to guarantee this debt.
Think carefully before you do. If the
borrower doesn’t pay the debt, you will have
to. Be sure you can afford to pay if you have
to, and that you want to accept this
responsibility.
You may have to pay up to the full amount
of the debt if the borrower does not pay. You
may also have to pay late fees or collection
costs, which increase this amount.
The creditor can collect this debt from you
without first trying to collect from the
borrower. The creditor can use the same
collection methods against you that can be
used against the borrower, such as suing you,
garnishing your wages, etc. If this debt is ever
in default, that fact may become a part of
your credit record.

(2) Compliance. Compliance with
paragraph (c)(1) of this section
constitutes compliance with the
consumer disclosure requirement in
paragraph (b) of this section.
(3) Additional content limitations. If
the notice is a separate document,
nothing other than the following items
may appear with the notice:
(i) The federal credit union’s name
and address;

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(ii) An identification of the debt to be
cosigned (e.g., a loan identification
number);
(iii) The date (of the transaction); and
(iv) The statement, ‘‘This notice is not
the contract that makes you liable for
the debt.’’
(d) Cosigner defined—(1) Cosigner
means a natural person who assumes
liability for the obligation of a consumer
without receiving goods, services, or
money in return for the obligation, or,
in the case of an open-end credit
obligation, without receiving the
contractual right to obtain extensions of
credit under the account.
(2) Cosigner includes any person
whose signature is requested as a
condition to granting credit to a
consumer, or as a condition for
forbearance on collection of a
consumer’s obligation that is in default.
The term does not include a spouse or
other person whose signature is
required on a credit obligation to perfect
a security interest pursuant to state law.
(3) A person who meets the definition
in this paragraph is a cosigner, whether
or not the person is designated as such
on a credit obligation.
§ 706.14

Unfair late charges.

(a) Prohibition. In connection with
collecting a debt arising out of an
extension of credit to a consumer, it is
an unfair act or practice for a federal
credit union, directly or indirectly, to
levy or collect any delinquency charge
on a payment, when the only
delinquency is attributable to late fees
or delinquency charges assessed on
earlier installments and the payment is
otherwise a full payment for the
applicable period and is paid on its due
date or within an applicable grace
period.
(b) Collecting a debt defined.
Collecting a debt means, for the
purposes of this section, any activity,
other than the use of judicial process,
that is intended to bring about or does
bring about repayment of all or part of
money due (or alleged to be due) from
a consumer.
§§ 706.15–706.20

[Reserved]

Subpart C—Consumer Credit Card
Account Practices Rule

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§ 706.21

Definitions.

For purposes of this subpart, the
following definitions apply:
Annual percentage rate means 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. The term
‘‘periodic rate’’ has the same meaning as
in 12 CFR 226.2.

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Consumer means a natural person
member 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.
Consumer credit card account means
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
card or charge card. The terms ‘‘openend credit,’’ ‘‘credit card,’’ and ‘‘charge
card’’ have the same meanings as in 12
CFR 226.2. The following are not
consumer credit card accounts for
purposes of this subpart:
(1) Home equity plans subject to the
requirements of 12 CFR 226.5b that are
accessible by a credit or charge card;
(2) Overdraft lines of credit tied to
asset accounts accessed by checkguarantee cards or by debit cards;
(3) Lines of credit accessed by checkguarantee cards or by debit cards that
can be used only at automated teller
machines; and
(4) Lines of credit accessed solely by
account numbers.
§ 706.22

Unfair time to make payment.

(a) General rule. Except as provided in
paragraph (c) of this section, a federal
credit union must not treat a payment
on a consumer credit card account as
late for any purpose unless the
consumer has been provided a
reasonable amount of time to make the
payment.
(b) Compliance with general rule—(1)
Establishing compliance. A federal
credit union must be able to establish
that it has complied with paragraph (a)
of this section.
(2) Safe harbor. A federal credit union
complies with paragraph (a) of this
section if it has 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.
(c) Exception for grace periods.
Paragraph (a) of this section does not
apply to any time period a federal credit
union provides within which the
consumer may repay any portion of the
credit extended without incurring an
additional finance charge.
§ 706.23

Unfair allocation of payments.

When different annual percentage
rates apply to different balances on a
consumer credit card account, a federal
credit union must allocate any amount
paid by the consumer in excess of the
required minimum periodic payment
among the balances using one of the
following methods:

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5577

(a) High-to-low method. The amount
paid by the consumer in excess of the
required minimum periodic payment is
allocated first to the balance with the
highest annual percentage rate and any
remaining portion to the other balances
in descending order based on the
applicable annual percentage rate.
(b) Pro rata method. The amount paid
by the consumer in excess of the
required minimum periodic payment is
allocated among the balances in the
same proportion as each balance bears
to the total balance.
§ 706.24 Unfair increases in annual
percentage rates.

(a) General rule. At account opening,
a federal credit union must disclose the
annual percentage rates that will apply
to each category of transactions on the
consumer credit card account. A federal
credit union must not increase the
annual percentage rate for a category of
transactions on any consumer credit
card account except as provided in
paragraph (b) of this section.
(b) Exceptions. The prohibition in
paragraph (a) of this section on
increasing annual percentage rates does
not apply where an annual percentage
rate may be increased pursuant to one
of the exceptions in this paragraph.
(1) Account opening disclosure
exception. An annual percentage rate for
a category of transactions may be
increased to a rate disclosed at account
opening upon expiration of a period of
time disclosed at account opening.
(2) Variable rate exception. An annual
percentage rate for a category of
transactions that varies according to an
index that is not under the federal credit
union’s control and is available to the
general public may be increased due to
an increase in the index.
(3) Advance notice exception. An
annual percentage rate for a category of
transactions may be increased pursuant
to a notice under 12 CFR 226.9(c) or (g)
for transactions that occur more than
seven days after provision of the notice.
This exception does not permit an
increase in any annual percentage rate
during the first year after the account is
opened.
(4) Delinquency exception. An annual
percentage rate may be increased due to
the federal credit union not receiving
the consumer’s required minimum
periodic payment within 30 days after
the due date for that payment.
(5) Workout arrangement exception.
An annual percentage rate may be
increased due to the consumer’s failure
to comply with the terms of a workout
arrangement between the federal credit
union and the consumer, provided that
the annual percentage rate applicable to

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a category of transactions following any
such increase does not exceed the rate
that applied to that category of
transactions prior to commencement of
the workout arrangement.
(c) Treatment of protected balances.
For purposes of this paragraph,
‘‘protected balance’’ means the amount
owed for a category of transactions to
which an increased annual percentage
rate cannot be applied after the rate for
that category of transactions has been
increased pursuant to paragraph (b)(3)
of this section.
(1) Repayment. A federal credit union
must provide the consumer with one of
the following methods of repaying a
protected balance or a method that is no
less beneficial to the consumer than one
of the following methods:
(i) An amortization period of no less
than five years, starting from the date on
which the increased rate becomes
effective for the category of transactions;
or
(ii) A required minimum periodic
payment that includes a percentage of
the protected balance that is no more
than twice the percentage required
before the date on which the increased
rate became effective for the category of
transactions.
(2) Fees and charges. A federal credit
union must not assess any fee or charge
based solely on a protected balance.
§ 706.25 Unfair balance computation
method.

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(a) General rule. Except as provided in
paragraph (b) of this section, a federal
credit union must not impose finance
charges on balances on a consumer
credit card account based on balances
for days in billing cycles that precede
the most recent billing cycle as a result
of the loss of any time period provided
by the federal credit union within
which the consumer may repay any
portion of the credit extended without
incurring a finance charge.
(b) Exceptions. Paragraph (a) of this
section does not apply to:
(1) Adjustments to finance charges as
a result of the resolution of a dispute
under 12 CFR 226.12 or 12 CFR 226.13;
or
(2) Adjustments to finance charges as
a result of the return of a payment for
insufficient funds.
§ 706.26 Unfair charging of security
deposits and fees for the issuance or
availability of credit to consumer credit card
accounts.

(a) Limitation for first year. During the
first year, a federal credit union must
not charge to a consumer credit card
account security deposits and fees for
the issuance or availability of credit that

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in total constitute a majority of the
initial credit limit for the account.
(b) Limitations for first billing cycle
and subsequent billing cycles—(1) First
billing cycle. During the first billing
cycle, the federal credit union must not
charge to a consumer credit card
account security deposits and fees for
the issuance or availability of credit that
in total constitute more than 25 percent
of the initial credit limit for the account.
(2) Subsequent billing cycles. Any
additional security deposits and fees for
the issuance or availability of credit
permitted by paragraph (a) of this
section must be charged to the account
in equal portions in no fewer than the
five billing cycles immediately
following the first billing cycle.
(c) Evasion prohibited. A federal
credit union must not evade the
requirements of this section by
providing the consumer additional
credit to fund the payment of security
deposits and fees for the issuance or
availability of credit that exceed the
total amounts permitted by paragraphs
(a) and (b) of this section.
(d) Definitions. For purposes of this
section, the following definitions apply:
(1) Fees for the issuance or
availability of credit means:
(i) Any annual or other periodic fee
that may be imposed for the issuance or
availability of a consumer credit card
account, including any fee based on
account activity or inactivity; and
(ii) Any non-periodic fee that relates
to opening an account.
(2) First billing cycle means the first
billing cycle after a consumer credit
card account is opened.
(3) First year means the period
beginning with the date on which a
consumer credit card account is opened
and ending twelve months from that
date.
(4) Initial credit limit means the credit
limit in effect when a consumer credit
card account is opened.
Appendix A to Part 706—Official Staff
Commentary
Subpart A—General Provisions for
Consumer Protection Rules
Section 706.1—Authority, Purpose, and
Scope
1(c) Scope
1. Penalties for noncompliance.
Administrative enforcement of the rule for
federal credit unions may involve actions
under section 206 of the Federal Credit
Union Act (12 U.S.C. 1786), including ceaseand-desist orders requiring that actions be
taken to remedy violations and civil money
penalties.

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Subpart C—Consumer Credit Card Account
Practices Rule
Section 706.22—Unfair Time To Make
Payment
22(a) General Rule
1. Treating a payment as late for any
purpose. 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 to make that payment under this
section.
2. Reasonable amount of time to make
payment. Whether an amount of time is
reasonable for purposes of making a payment
is determined from the perspective of the
consumer, not the federal credit union.
Under § 706.22(b)(2), a federal credit union
provides a reasonable amount of time to
make a payment if it has 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.
22(b) Compliance With General Rule
1. Reasonable procedures. A federal credit
union is not required to determine the
specific date on which periodic statements
are mailed or delivered to each consumer. A
federal credit union provides a reasonable
amount of time to make a payment if it has
adopted reasonable procedures designed to
ensure that periodic statements are mailed or
delivered to consumers no later than a
certain number of days after the closing date
of the billing cycle and adds that number of
days to the 21-day period in § 706.24(b)(2)
when determining the payment due date. For
example, if a federal credit union has
adopted reasonable procedures designed to
ensure that periodic statements are mailed or
delivered to consumers no later than three
days after the closing date of the billing
cycle, the payment due date on the periodic
statement must be no less than 24 days after
the closing date of the billing cycle.
2. Payment due date. For purposes of
§ 706.22(b)(2), ‘‘payment due date’’ means
the date by which a federal credit union
requires the consumer to make the required
minimum periodic payment in order to avoid
being treated as late for any purpose, except
as provided in § 706.22(c).
3. Example of alternative method of
compliance. Assume that, for a particular
type of consumer credit card account, a
federal credit union only provides periodic
statements electronically and only accepts
payments electronically, consistent with
applicable law and regulatory guidance.
Under these circumstances, the federal credit
union could comply with § 706.22(a) even if
it does not provide periodic statements 21
days before the payment due date consistent
with § 706.22(b)(2).
Section 706.23—Unfair Allocation of
Payments
1. Minimum periodic payment. Section
706.23 addresses the allocation of amounts
paid by a consumer in excess of the
minimum periodic payment required by a

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federal credit union. Section 706.23 does not
limit or otherwise address a federal credit
union’s ability to determine, consistent with
applicable law and regulatory guidance, the
amount of the required minimum periodic
payment or how that payment is allocated. A
federal credit union may, but is not required
to, allocate the required minimum periodic
payment consistent with the requirements in
§ 706.23 to the extent consistent with other
applicable law or regulatory guidance.
2. Adjustments of one dollar or less
permitted. When allocating payments, a
federal credit union may adjust amounts by
one dollar or less. For example, if a federal
credit union is allocating $100 pursuant to
§ 706.23(b) among balances of $1,000, $2,000,
and $4,000, the federal credit union may
apply $14 to the $1,000 balance, $29 to the
$2,000 balance, and $57 to the $4,000
balance.
3. Applicable balances and annual
percentage rates. Section 706.23 permits a
federal credit union to allocate an amount
paid by the consumer in excess of the
required minimum periodic payment based
on the balances and annual percentage rates
on the date the preceding billing cycle ends,
on the date the payment is credited to the
account, or on any day between those two
dates. For example, assume that the billing
cycles for a consumer credit card account
start on the first day of the month and end
on the last day of the month. On the date the
March billing cycle ends, March 31, the
account has a purchase balance of $500 at a
variable annual percentage rate of 10% and
a cash advance balance of $200 at a variable
annual percentage rate of 13%. On April 1,
the rate for purchases increases to 13% and
the rate for cash advances increases to 15%
consistent with § 706.24(b)(2). On April 15,
the purchase balance increases to $700. On
April 25, the federal credit union credits to
the account $400 paid by the consumer in
excess of the required minimum periodic
payment. Under § 706.23, the federal credit
union may allocate the $400 based on the
balances in existence and rates in effect on
any day from March 31 through April 25.
4. Use of permissible allocation methods.
A federal credit union is not prohibited from
changing the allocation method for a
consumer credit card account or from using
different allocation methods for different
consumer credit card accounts, so long as the
methods used are consistent with § 706.23.
For example, a federal credit union may
change from allocating to the highest rate
balance first pursuant to § 706.23(a) to
allocating pro rata pursuant to § 706.23(b) or
vice versa. Similarly, a federal credit union
may allocate to the highest rate balance first
pursuant to § 706.23(a) on some of its
accounts and allocate pro rata pursuant to
§ 706.23(b) on other accounts.
5. Claims or defenses under Regulation Z,
12 CFR 226.12(c). When a consumer has
asserted a claim or defense against the card
issuer pursuant to 12 CFR 226.12(c), a federal
credit union must allocate consistent with 12
CFR 226.12 comment 226.12(c)–4.
6. Balances with the same annual
percentage rate. When the same annual
percentage rate applies to more than one
balance on an account and a different annual

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percentage rate applies to at least one other
balance on that account, § 706.23 does not
require that a federal credit union use any
particular method when allocating among the
balances with the same annual percentage
rate. Under these circumstances, a federal
credit union may treat the balances with the
same rate as a single balance or separate
balances. See comments 23(a)–1.iv and
23(b)–2.iv.
23(a) High-to-Low Method
1. Examples. For purposes of the following
examples, assume that none of the required
minimum periodic payment is allocated to
the balances discussed, unless otherwise
stated.
i. Assume that a consumer’s account has a
cash advance balance of $500 at an annual
percentage rate of 15% and a purchase
balance of $1,500 at an annual percentage
rate of 10% and that the consumer pays $800
in excess of the required minimum periodic
payment. A federal credit union using this
method would allocate $500 to pay off the
cash advance balance and then allocate the
remaining $300 to the purchase balance.
ii. Assume that a consumer’s account has
a cash advance balance of $500 at an annual
percentage rate of 15% and a purchase
balance of $1,500 at an annual percentage
rate of 10% and that the consumer pays $400
in excess of the required minimum periodic
payment. A federal credit union using this
method would allocate the entire $400 to the
cash advance balance.
iii. Assume that a consumer’s account has
a cash advance balance of $100 at an annual
percentage rate of 15%, a purchase balance
of $300 at an annual percentage rate of 13%,
and a $600 protected balance on which the
10% annual percentage rate cannot be
increased pursuant to § 706.24. If the
consumer pays $500 in excess of the required
minimum periodic payment, a federal credit
union using this method would allocate $100
to pay off the cash advance balance, $300 to
pay off the purchase balance, and $100 to the
protected balance.
iv. Assume that a consumer’s account has
a cash advance balance of $500 at an annual
percentage rate of 15%, a purchase balance
of $1,000 at an annual percentage rate of
12%, and a transferred balance of $2,000 that
was previously at a discounted annual
percentage rate of 5% but is now at an annual
percentage rate of 12%. Assume also that the
consumer pays $800 in excess of the required
minimum periodic payment. A federal credit
union using this method would allocate $500
to pay off the cash advance balance and
allocate the remaining $300 among the
purchase balance and the transferred balance
in the manner the federal credit union deems
appropriate.
23(b) Pro Rata Method
1. Total balance. A federal credit union
may, but is not required to, deduct amounts
paid by the consumer’s required minimum
periodic payment when calculating the total
balance for purposes of § 706.23(b)(3). See
comment 23(b)–2.iii.
2. Examples. For purposes of the following
examples, assume that none of the required
minimum periodic payment is allocated to
the balances discussed, unless otherwise

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stated, and that the amounts allocated to each
balance are rounded to the nearest dollar.
i. Assume that a consumer’s account has a
cash advance balance of $500 at an annual
percentage rate of 15% and a purchase
balance of $1,500 at an annual percentage
rate of 12% and that the consumer pays $555
in excess of the required minimum periodic
payment. A federal credit union using this
method would allocate 25% of the amount
($139) to the cash advance balance and 75%
of the amount ($416) to the purchase balance.
ii. Assume that a consumer’s account has
a cash advance balance of $100 at an annual
percentage rate of 15%, a purchase balance
of $300 at an annual percentage rate of 13%,
and a $600 protected balance on which the
10% annual percentage rate cannot be
increased pursuant to § 706.24. If the
consumer pays $130 in excess of the required
minimum periodic payment, a federal credit
union using this method would allocate 10%
of the amount ($13) to the cash advance
balance, 30% of the amount ($39) to the
purchase balance, and 60% of the amount
($78) to the protected balance.
iii. Assume that a consumer’s account has
a cash advance balance of $300 at an annual
percentage rate of 15% and a purchase
balance of $600 at an annual percentage rate
of 13%. Assume also that the required
minimum periodic payment is $50 and that
the federal credit union allocates this
payment first to the balance with the lowest
annual percentage rate, the $600 purchase
balance. If the consumer pays $300 in excess
of the $50 minimum payment, a federal
credit union using this method could allocate
based on a total balance of $850, consisting
of the $300 cash advance balance plus the
$550 purchase balance after application of
the $50 minimum payment. In this case, the
federal credit union would apply 35% of the
$300 ($105) to the cash advance balance and
65% of that amount ($195) to the purchase
balance. In the alternative, the federal credit
union could allocate based on a total balance
of $900, which does not reflect the $50
minimum payment. In that case, the federal
credit union would apply one-third of the
$300 excess payment ($100) to the cash
advance balance and two-thirds ($200) to the
purchase balance.
iv. Assume that a consumer’s account has
a cash advance balance of $500 at an annual
percentage rate of 15%, a purchase balance
of $1,000 at an annual percentage rate of
12%, and a transferred balance of $2,000 that
was previously at a discounted annual
percentage rate of 5%, but is now at an
annual percentage rate of 12%. Assume also
that the consumer pays $800 in excess of the
required minimum periodic payment. A
federal credit union using this method would
allocate 14% of the excess payment ($112) to
the cash advance balance and allocate the
remaining 86% ($688) among the purchase
balance and the transferred balance in the
manner the federal credit union deems
appropriate.
Section 706.24—Unfair Increases in Annual
Percentage Rates
1. Relationship to Regulation Z, 12 CFR
part 226. A federal credit union that
complies with the applicable disclosure

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requirements in Regulation Z, 12 CFR part
226, has complied with the disclosure
requirements in § 706.24. See 12 CFR 226.5a,
226.6, 226.9. For example, a federal credit
union may comply with the requirement in
§ 706.24(a) to disclose at account opening the
annual percentage rates that will apply to
each category of transactions by complying
with the disclosure requirements in 12 CFR
226.5a regarding applications and
solicitations and the requirements in 12 CFR
226.6 regarding account-opening disclosures.
Similarly, in order to increase an annual
percentage rate on new transactions pursuant
to § 706.24(b)(3), a federal credit union must
comply with the disclosure requirements in
12 CFR 226.9(c) or (g). However, nothing in
§ 706.24 alters the requirements in 12 CFR
226.9(c) and (g) that creditors provide
consumers with written notice at least 45
days prior to the effective date of certain
increases in the annual percentage rates on
open-end (not home-secured) credit plans.
24(a) General Rule
1. Rates that will apply to each category of
transactions. Section 706.24(a) requires
federal credit unions to disclose, at account
opening, the annual percentage rates that will
apply to each category of transactions on the
account. A federal credit union cannot satisfy
this requirement by disclosing at account
opening only a range of rates or that a rate
will be ‘‘up to’’ a particular amount.
2. Application of prohibition on increasing
rates. Section 706.24(a) prohibits federal
credit unions from increasing the annual
percentage rate for a category of transactions
on any consumer credit card account unless
specifically permitted by one of the
exceptions in § 706.24(b). The following
examples illustrate the application of the
rule:
i. Assume that, at account opening on
January 1 of year one, a federal credit union
discloses that the annual percentage rate for
purchases is a non-variable rate of 1% and
will apply for six months. The federal credit
union also discloses that, after six months,
the annual percentage rate for purchases will
be a variable rate that is currently 9% and
will be adjusted quarterly by adding a margin
of 8 percentage points to a publicly-available
index not under the federal credit union’s
control. Finally, the federal credit union
discloses that the annual percentage rate for
cash advances is the same variable rate that
will apply to purchases after six months. The
payment due date for the account is the
twenty-fifth day of the month and the
required minimum periodic payments are
applied to accrued interest and fees but do
not reduce the purchase and cash advance
balances.
A. On January 15, the consumer uses the
account to make a $2,000 purchase and a
$500 cash advance. No other transactions are
made on the account. At the start of each
quarter, the federal credit union adjusts the
variable rate that applies to the $500 cash
advance consistent with changes in the
index, pursuant to § 706.24(b)(2). All
required minimum periodic payments are
received on or before the payment due date
until May of year one, when the payment due
on May 25 is received by the federal credit
union on May 28. The federal credit union

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is prohibited by § 706.24 from increasing the
rates that apply to the $2,000 purchase, the
$500 cash advance, or future purchases and
cash advances. Six months after account
opening, July 1, the federal credit union
applies the previously-disclosed variable rate
determined using an 8-point margin pursuant
to § 706.24(b)(1). Because no other increases
in rate were disclosed at account opening,
the federal credit union may not
subsequently increase the variable rate that
applies to the $2,000 purchase and the $500
cash advance, except due to increases in the
index pursuant to § 706.24(b)(2). On
November 16, the federal credit union
provides a notice pursuant to 12 CFR 226.9(c)
informing the consumer of a new variable
rate that will apply on January 1 of year two,
calculated using the same index and an
increased margin of 12 percentage points. On
January 1 of year two, the federal credit
union increases the margin used to determine
the variable rate that applies to new
purchases to 12 percentage points pursuant
to § 706.24(b)(3). On January 15 of year two,
the consumer makes a $300 purchase. The
federal credit union applies the variable rate
determined using the 12-point margin to the
$300 purchase but not the $2,000 purchase.
B. Same facts as above, except that the
required minimum periodic payment due on
May 25 of year one is not received by the
federal credit union until June 30 of year one.
Because the federal credit union received the
required minimum periodic payment more
than 30 days after the payment due date,
§ 706.24(b)(4) permits the federal credit
union to increase the annual percentage rate
applicable to the $2,000 purchase, the $500
cash advance, and future purchases and cash
advances. However, the federal credit union
must first comply with the notice
requirements in 12 CFR 226.9(g). Thus, if the
federal credit union provided a 12 CFR
226.9(g) notice on June 25 stating that all
rates on the account would be increased to
a non-variable penalty rate of 15%, the
federal credit union could apply that 15%
rate beginning on August 9, to all balances
and future transactions.
ii. Assume that, at account opening on
January 1 of year one, a federal credit union
discloses that the annual percentage rate for
purchases will increase as follows: A nonvariable rate of 3% for six months; a nonvariable rate of 8% for an additional six
months; and thereafter a variable rate that is
currently 13% and will be adjusted monthly
by adding a margin of 5 percentage points to
a publicly available index not under the
federal credit union’s control. The payment
due date for the account is the fifteenth day
of the month and the required minimum
periodic payments are applied to accrued
interest and fees but do not reduce the
purchase balance. On January 15, the
consumer uses the account to make a $1,500
purchase. Six months after account opening,
July 1, the federal credit union begins
accruing interest on the $1,500 purchase at
the previously disclosed 8% non-variable
rate pursuant to § 706.24(b)(1). On September
15, the consumer uses the account for a $700
purchase. On November 16, the federal credit
union provides a notice pursuant to 12 CFR
226.9(c) informing the consumer of a new

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variable rate that will apply on January 1 of
year two, calculated using the same index
and an increased margin of 8 percentage
points. One year after account opening,
January 1 of year two, the federal credit
union begins accruing interest on the $2,200
purchase balance at the previously disclosed
variable rate determined using a 5-point
margin pursuant to § 706.24(b)(1). Because
the variable rate determined using the 8point margin was not disclosed at account
opening, the federal credit union may not
apply that rate to the $2,200 purchase
balance. Furthermore, because no other
increases in rate were disclosed at account
opening, the federal credit union may not
subsequently increase the variable rate that
applies to the $2,200 purchase balance
(except due to increases in the index
pursuant to § 706.24(b)(2)). The federal credit
union may, however, apply the variable rate
determined using the 8-point margin to
purchases made on or after January 1 of year
two pursuant to § 706.24(b)(3).
iii. Assume that, at account opening on
January 1 of year one, a federal credit union
discloses that the annual percentage rate for
purchases is a variable rate determined by
adding a margin of 6 percentage points to a
publicly available index outside of the
federal credit union’s control. The federal
credit union also discloses that, to the extent
consistent with § 706.24 and other applicable
law, a non-variable penalty rate of 15% may
apply if the consumer makes a late payment.
The due date for the account is the fifteenth
of the month. On May 30 of year two, the
account has a purchase balance of $1,000. On
May 31, the creditor provides a notice
pursuant to 12 CFR 226.9(c) informing the
consumer of a new variable rate that will
apply on July 16 for all purchases made on
or after June 8, calculated by using the same
index and an increased margin of 8
percentage points. On June 7, the consumer
makes a $500 purchase. On June 8, the
consumer makes a $200 purchase. On June
25, the federal credit union has not received
the payment due on June 15, and provides
the consumer with a notice pursuant to 12
CFR 226.9(g) stating that the penalty rate of
15% will apply as of August 9, to all
transactions made on or after July 2. On July
4, the consumer makes a $300 purchase.
A. The payment due on June 15 of year two
is received on June 25. On July 17,
§ 706.24(b)(3) permits the federal credit
union to apply the variable rate determined
using the 8-point margin to the $200
purchase made on June 8 but does not permit
the federal credit union to apply this rate to
the $1,500 purchase balance. On August 9,
§ 706.24(b)(3) permits the federal credit
union to apply the 15% penalty rate to the
$300 purchase made on July 4, but does not
permit the federal credit union to apply this
rate to the $1,500 purchase balance, which
remains at the variable rate determined using
the 6-point margin, or the $200 purchase,
which remains at the variable rate
determined using the 8-point margin.
B. Same facts as above, except the payment
due on September 15 of year two is received
on October 20. Section 706.24(b)(4) permits
the federal credit union to apply the 15%
penalty rate to all balances on the account

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and to future transactions because it has not
received payment within 30 days after the
due date. However, in order to apply the 15%
penalty rate to the entire $2,000 purchase
balance, the federal credit union must
provide an additional notice pursuant to 12
CFR 226.9(g). This notice must be sent no
earlier than October 16, which is the first day
the account became more than 30 days
delinquent.
C. Same facts as paragraph A above, except
the payment due on June 15 of year two is
received on July 20. Section 706.24(b)(4)
permits the federal credit union to apply the
15% penalty rate to all balances on the
account and to future transactions because it
has not received payment within 30 days
after the due date. Because the federal credit
union provided a 12 CFR 226.9(g) notice on
June 24 stating the 15% penalty rate, the
federal credit union may apply the 15%
penalty rate to all balances on the account as
well as any future transactions on August 9,
without providing an additional notice
pursuant to 12 CFR 226.9(g).
24(b) Exceptions
24(b)(1) Account Opening Disclosure
Exception
1. Prohibited increases in rate. Section
§ 706.24(b)(1) permits an increase in the
annual percentage rate for a category of
transactions to a rate disclosed at account
opening upon expiration of a period of time
that was also disclosed at account opening.
Section 706.24(b)(1) does not permit
application of increased rates that are
disclosed at account opening but are
contingent on a particular event or
occurrence or may be applied at the federal
credit union’s discretion. The following
examples illustrate rate increases that are not
permitted by § 706.24(a):
i. Assume that a federal credit union
discloses at account opening on January 1 of
year one that a non-variable rate of 8%
applies to purchases, but that all rates on an
account may be increased to a non-variable
penalty rate of 15% if a consumer’s required
minimum periodic payment is received after
the payment due date, which is the fifteenth
of the month. On March 1, the account has
a $2,000 purchase balance. The payment due
on March 15 is not received until March 20.
Section 706.24 does not permit the federal
credit union to apply the 15% penalty rate
to the $2,000 purchase balance. However,
pursuant to § 706.24(b)(3), the federal credit
union could provide a 12 CFR 226.9(c) or (g)
notice on November 16, informing the
consumer that, on January 1 of year two, the
15% rate (or a different rate) will apply to
new transactions.
ii. Assume that a federal credit union
discloses at account opening on January 1 of
year one that a non-variable rate of 5%
applies to transferred balances but that this
rate will increase to a non-variable rate of
15% if the consumer does not use the
account for at least $200 in purchases each
billing cycle. On July 1, the consumer
transfers a balance of $4,000 to the account.
During the October billing cycle, the
consumer uses the account for $150 in
purchases. Section 706.24 does not permit
the federal credit union to apply the 15% rate

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to the $4,000 transferred balance. However,
pursuant to § 706.24(b)(3), the federal credit
union could provide a 12 CFR 226.9(c) or (g)
notice on November 16 informing the
consumer that, on January 1 of year two, the
15% rate, or a different rate, will apply to
new transactions.
iii. Assume that a federal credit union
discloses at account opening on January 1 of
year one that interest on purchases will be
deferred for one year, although interest will
accrue on purchases during that year at a
non-variable rate of 15%. The federal credit
union further discloses that, if all purchases
made during year one are not paid in full by
the end of that year, the federal credit union
will begin charging interest on the purchase
balance and new purchases at 15% and will
retroactively charge interest on the purchase
balance at a rate of 15% starting on the date
of each purchase made during year one. On
January 1 of year one, the consumer makes
a purchase of $1,500. No other transactions
are made on the account. On January 1 of
year two, $500 of the $1,500 purchase
remains unpaid. Section 706.24 does not
permit the federal credit union to reach back
to charge interest on the $1,500 purchase
from January 1 through December 31 of year
one. However, the federal credit union may
apply the previously disclosed 15% rate to
the $500 purchase balance beginning on
January 1 of year two pursuant to
§ 706.24(b)(1).
2. Loss of grace period. Nothing in § 706.24
prohibits a federal credit union from
assessing interest due to the loss of a grace
period to the extent consistent with § 706.25.
3. Application of rate that is lower than
disclosed rate. Section 706.24(b)(1) permits
an increase in the annual percentage rate for
a category of transactions to a rate disclosed
at account opening upon expiration of a
period of time that was also disclosed at
account opening. Nothing in § 706.24
prohibits a federal credit union from
applying a rate that is lower than the
disclosed rate upon expiration of the period.
However, if a lower rate is applied to an
existing balance, the federal credit union
cannot subsequently increase the rate on that
balance unless it has provided the consumer
with advance notice of the increase pursuant
to 12 CFR 226.9(c). Furthermore, the federal
credit union cannot increase the rate on that
existing balance to a rate that is higher than
the increased rate disclosed at account
opening. The following example illustrates
the application of this rule:
i. Assume that, at account opening on
January 1 of year one, a federal credit union
discloses that a non-variable annual
percentage rate of 5% will apply to purchases
for one year and discloses that, after the first
year, the federal credit union will apply a
variable rate that is currently 15% and is
determined by adding a margin of 10
percentage points to a publicly available
index not under the federal credit union’s
control. On December 31 of year one, the
account has a purchase balance of $3,000.
A. On November 16 of year one, the federal
credit union provides a notice pursuant to 12
CFR 226.9(c) informing the consumer of a
new variable rate that will apply on January
1 of year two, calculated using the same

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index and a reduced margin of 8 percentage
points. The notice further states that, on July
1 of year two, the margin will increase to the
margin disclosed at account opening, 5
percentage points. On July 1 of year two, the
federal credit union increases the margin
used to determine the variable rate that
applies to new purchases to 10 percentage
points and applies that rate to any remaining
portion of the $3,000 purchase balance
pursuant to § 706.24(b)(1).
B. Same facts as above, except that the
federal credit union does not send a notice
on November 16 of year one. Instead, on
January 1 of year two, the federal credit
union lowers the margin used to determine
the variable rate to 8 percentage points and
applies that rate to the $3,000 purchase
balance and to new purchases. 12 CFR 226.9
does not require advance notice in these
circumstances. However, unless the account
becomes more than 30 days delinquent, the
federal credit union may not subsequently
increase the rate that applies to the $3,000
purchase balance except due to increases in
the index pursuant to § 706.24(b)(2).
24(b)(2) Variable Rate Exception
1. Increases due to increase in index.
Section 706.24(b)(2) provides that an annual
percentage rate for a category of transactions
that varies according to an index that is not
under the federal credit union’s control and
is available to the general public may be
increased due to an increase in the index.
This section does not permit a federal credit
union to increase the annual percentage rate
by changing the method used to determine a
rate that varies with an index, such as by
increasing the margin, even if that change
will not result in an immediate increase.
2. External index. A federal credit union
may increase the annual percentage rate if
the increase is based on an index or indices
outside the federal credit union’s control. A
federal credit union may not increase the rate
based on its own prime rate or cost of funds.
A federal credit union is permitted, however,
to use a published prime rate, such as that
in the Wall Street Journal, even if the federal
credit union’s own prime rate is one of
several rates used to establish the published
rate.
3. Publicly available. The index or indices
must be available to the public. A publicly
available index need not be published in a
newspaper, but it must be one the consumer
can independently obtain, by telephone, for
example, and use to verify the rate applied
to the outstanding balance.
4. Changing a non-variable rate to a
variable rate. Section 706.24 generally
prohibits a federal credit union from
changing a non-variable annual percentage
rate to a variable rate because such a change
can result in an increase in rate. However,
§ 706.24(b)(1) permits a federal credit union
to change a non-variable rate to a variable
rate if the change was disclosed at account
opening. Furthermore, following the first
year after the account is opened,
§ 706.24(b)(3) permits a federal credit union
to change a non-variable rate to a variable
rate with respect to new transactions, after
complying with the notice requirements in
12 CFR 226.9(c) or (g). Finally, § 706.24(b)(4)
permits a federal credit union to change a

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non-variable rate to a variable rate if the
required minimum periodic payment is not
received within 30 days of the payment due
date, after complying with the notice
requirements in 12 CFR 226.9(g).
5. Changing a variable annual percentage
rate to a non-variable annual percentage rate.
Nothing in § 706.24 prohibits a federal credit
union from changing a variable annual
percentage rate to an equal or lower nonvariable rate. Whether the non-variable rate
is equal to or lower than the variable rate is
determined at the time the federal credit
union provides the notice required by 12 CFR
226.9(c). For example, assume that on March
1 a variable rate that is currently 15% applies
to a balance of $2,000 and the federal credit
union sends a notice pursuant to 12 CFR
226.9(c) informing the consumer that the
variable rate will be converted to a nonvariable rate of 14% effective April 17. On
April 17, the federal credit union may apply
the 14% non-variable rate to the $2,000
balance and to new transactions even if the
variable rate on March 2 or a later date was
less than 14%.
6. Substitution of index. A federal credit
union may change the index and margin used
to determine the annual percentage rate
under § 706.24(b)(2) if the original index
becomes unavailable, as long as historical
fluctuations in the original and replacement
indices were substantially similar, and as
long as the replacement index and margin
will produce a rate similar to the rate that
was in effect at the time the original index
became unavailable. If the replacement index
is newly established and therefore does not
have any rate history, it may be used if it
produces a rate substantially similar to the
rate in effect when the original index became
unavailable.
24(b)(3) Advance Notice Exception
1. First year after the account is opened. A
federal credit union may not increase an
annual percentage rate pursuant to
§ 706.24(b)(3) during the first year after the
account is opened. This limitation does not
apply to accounts opened prior to July 1,
2010.
2. Transactions that occur more than seven
days after notice provided. Section
706.24(b)(3) generally prohibits a federal
credit union from applying an increased rate
to transactions that occur within seven days
after provision of the 12 CFR 226.9(c) or (g)
notice. This prohibition does not, however,
apply to transactions that are authorized
within seven days after provision of the 12
CFR 226.9(c) or (g) notice but are settled
more than seven days after the notice was
provided.
3. Examples.
i. Assume that a consumer credit card
account is opened on January 1 of year one.
On March 14 of year two, the account has a
purchase balance of $2,000 at a non-variable
annual percentage rate of 5%. On March 15,
the federal credit union provides a notice
pursuant to 12 CFR 226.9(c) informing the
consumer that the rate for new purchases
will increase to a non-variable rate of 15% on
May 1. The notice further states that the 5%
rate will apply for six months until
November 1, and states that thereafter the
federal credit union will apply a variable rate

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that is currently 15% and is determined by
adding a margin of 10 percentage points to
a publicly-available index that is not under
the federal credit union’s control. The
seventh day after provision of the notice is
March 22 and, on that date, the consumer
makes a $200 purchase. On March 24, the
consumer makes a $1,000 purchase. On May
1, § 706.24(b)(3) permits the federal credit
union to begin accruing interest at 15% on
the $1,000 purchase made on March 24. The
federal credit union is not permitted to apply
the 15% rate to the $2,200 purchase balance
as of March 22. After six months, November
2, the federal credit union may begin
accruing interest on any remaining portion of
the $1,000 purchase at the previouslydisclosed variable rate determined using the
10-point margin.
ii. Same facts as above except that the $200
purchase is authorized by the federal credit
union on March 22 but is not settled until
March 23. On May 1, § 706.24(b)(3) permits
the federal credit union to start charging
interest at 15% on both the $200 purchase
and the $1,000 purchase. The federal credit
union is not permitted to apply the 15% rate
to the $2,000 purchase balance as of March
22.
iii. Same facts as in paragraph i above,
except that on September 17 of year two,
which is 45 days before expiration of the
18% non-variable rate, the federal credit
union provides a notice pursuant to 12 CFR
226.9(c) informing the consumer that, on
November 2, a new variable rate will apply
to new purchases and any remaining portion
of the $1,000 balance, calculated by using the
same index and a reduced margin of 10
percentage points. The notice further states
that, on May 1 of year three, the margin will
increase to the margin disclosed at account
opening, 12 percentage points. On May 1 of
year three, § 706.24(b)(3) permits the federal
credit union to increase the margin used to
determine the variable rate that applies to
new purchases to 12 percentage points and
to apply that rate to any remaining portion
of the $1,000 purchase as well as to new
purchases. See comment 24(b)(1)–3. The
federal credit union is not permitted to apply
this rate to any remaining portion of the
$2,200 purchase balance as of March 22.
24(b)(5) Workout Arrangement Exception
1. Scope of exception. Nothing in
§ 706.24(b)(5) permits a federal credit union
to alter the requirements of § 706.24 pursuant
to a workout arrangement between a
consumer and the federal credit union. For
example, a federal credit union cannot
increase an annual percentage rate pursuant
to a workout arrangement unless otherwise
permitted by § 706.24. In addition, a federal
credit union cannot require the consumer to
make payments with respect to a protected
balance that exceed the payments permitted
under § 706.24(c).
2. Variable annual percentage rates. If the
annual percentage rate that applied to a
category of transactions prior to
commencement of the workout arrangement
varied with an index consistent with
§ 706.24(b)(2), the rate applied to that
category of transactions following an increase
pursuant to § 706.24(b)(5) must be

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determined using the same formula, index
and margin.
3. Example. Assume that, consistent with
§ 706.24(b)(4), the margin used to determine
a variable annual percentage rate that applies
to a $5,000 balance is increased from 5
percentage points to 15 percentage points.
Assume also that the federal credit union and
the consumer subsequently agree to a
workout arrangement that reduces the margin
back to 5 points on the condition that the
consumer pay a specified amount by the
payment due date each month. If the
consumer does not pay the agreed-upon
amount by the payment due date, the federal
credit union may increase the margin for the
variable rate that applies to the $5,000
balance up to 15 percentage points. 12 CFR
226.9 does not require advance notice of this
type of increase.
24(c) Treatment of Protected Balances
1. Protected balances. Because rates cannot
be increased pursuant to § 706.24(b)(3)
during the first year after account opening,
§ 706.24(c) does not apply to balances during
the first year. Instead, the requirements in
§ 706.24(c) apply only to ‘‘protected
balances,’’ which are amounts owed for a
category of transactions to which an
increased annual percentage rate cannot be
applied after the rate for that category of
transactions has been increased pursuant to
§ 706.24(b)(3). For example, assume that, on
March 15 of year two, an account has a
purchase balance of $1,000 at a non-variable
rate of 12% and that, on March 16, the
federal credit union sends a notice pursuant
to 12 CFR 226.9(c) informing the consumer
that the rate for new purchases will increase
to a non-variable rate of 15% on May 2. On
March 20, the consumer makes a $100
purchase. On March 24, the consumer makes
a $150 purchase. On May 2, § 706.24(b)(3)
permits the federal credit union to start
charging interest at 15% on the $150
purchase made on March 24 but does not
permit the federal credit union to apply that
15% rate to the $1,100 purchase balance as
of March 23. Accordingly, § 706.24(c) applies
to the $1,100 purchase balance as of March
23 but not the $150 purchase made on March
24.
24(c)(1) Repayment
1. No less beneficial to the consumer. A
federal credit union may provide a method
of repaying the protected balance that is
different from the methods listed in
§ 706.24(c)(1) so long as the method used is
no less beneficial to the consumer than one
of the listed methods. A method is no less
beneficial to the consumer if the method
amortizes the protected balance in five years
or longer or if the method results in a
required minimum periodic payment that is
equal to or less than a minimum payment
calculated consistent with § 706.24(c)(1)(ii).
For example, a federal credit union could
increase the percentage of the protected
balance included in the required minimum
periodic payment from 2% to 5% so long as
doing so would not result in amortization of
the protected balance in less than five years.
Alternatively, a federal credit union could
require a consumer to make a minimum
payment that amortizes the protected balance

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in less than five years so long as the payment
does not include a percentage of the balance
that is more than twice the percentage
included in the minimum payment before the
effective date of the increased rate. For
example, a federal credit union could require
the consumer to make a minimum payment
that amortizes the protected balance in four
years so long as doing so would not more
than double the percentage of the balance
included in the minimum payment prior to
the effective date of the increased rate.
2. Lower limit for required minimum
periodic payment. If the required minimum
periodic payment under § 706.24(c)(1)(i) or
(c)(1)(ii) is less than the lower dollar limit for
minimum payments established in the
cardholder agreement before the effective
date of the rate increase, the federal credit
union may set the minimum payment
consistent with that limit. For example, if at
account opening the cardholder agreement
stated that the required minimum periodic
payment would be either the total of fees and
interest charges plus 1% of the total amount
owed or $20, whichever is greater, the federal
credit union may require the consumer to
make a minimum payment of $20 even if
doing so would pay off the protected balance
in less than five years or constitute more than
2% of the protected balance plus fees and
interest charges.
Paragraph 24(c)(1)(i)
1. Amortization period starting from date
on which increased rate becomes effective.
Section 706.24(c)(1)(i) provides for an
amortization period for the protected balance
of no less than five years, starting from the
date on which the increased annual
percentage rate becomes effective. A federal
credit union is not required to recalculate the
required minimum periodic payment for the
protected balance if, during the amortization
period, that balance is reduced as a result of
the allocation of amounts paid by the
consumer in excess of the minimum payment
consistent with § 706.23 or any other practice
permitted by these rules and other applicable
law.
2. Amortization when applicable annual
percentage rate is variable. If the annual
percentage rate that applies to the protected
balance varies with an index consistent with
§ 706.24(b)(2), the federal credit union may
adjust the interest charges included in the
required minimum periodic payment for that
balance accordingly in order to ensure that
the outstanding balance is amortized in five
years. For example, assume that a variable
rate that is currently 10% applies to a
protected balance and that, in order to
amortize that balance in five years, the
required minimum periodic payment must
include a specific amount of principal plus
all accrued interest charges. If the 10%
variable rate increases due to an increase in
the index, the federal credit union may
increase the required minimum periodic
payment to include the additional interest
charges.
Paragraph 24(c)(1)(ii)
1. Required minimum periodic payment on
other balances. Section 706.24(c)(1)(ii)
addresses the required minimum periodic
payment on the protected balance. Section

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706.24(c)(1)(ii) does not limit or otherwise
address the federal credit union’s ability to
determine the amount of the required
minimum periodic payment for other
balances.
2. Example. Assume that the method used
by a federal credit union to calculate the
required minimum periodic payment for a
consumer credit card account requires the
consumer to pay either the total of fees and
interest charges plus 1% of the total amount
owed or $20, whichever is greater. Assume
also that the account has a purchase balance
of $2,000 at an annual percentage rate of 10%
and a cash advance balance of $500 at an
annual percentage rate of 15% and that the
federal credit union increases the rate for
purchases to 15%, but does not increase the
rate for cash advances. Under
§ 706.24(c)(1)(ii), the federal credit union
may require the consumer to pay fees and
interest plus 2% of the $2,000 purchase
balance. Section 706.24(c)(1)(ii) does not
prohibit the federal credit union from
increasing the required minimum periodic
payment for the cash advance balance.
24(c)(2) Fees and Charges
1. Fee or charge based solely on the
protected balance. A federal credit union is
prohibited from assessing a fee or charge
based solely on balances to which § 706.24(c)
applies. For example, a federal credit union
is prohibited from assessing a monthly
maintenance fee that would not be charged
if the account did not have a protected
balance. A federal credit union is not,
however, prohibited from assessing fees such
as late payment fees or fees for exceeding the
credit limit even if such fees are based in part
on the protected balance.
Section 706.25—Unfair Balance
Computation Method
25(a) General Rule
1. Two-cycle method prohibited. When a
consumer ceases to be eligible for a time
period provided by the federal credit union
within which the consumer may repay any
portion of the credit extended without
incurring a finance charge, a grace period, the
federal credit union is prohibited from
computing the finance charge using the socalled two-cycle average daily balance
computation method. This method calculates
the finance charge using a balance that is the
sum of the average daily balances for two
billing cycles. The first balance is for the
current billing cycle, and is calculated by
adding the total balance, including or
excluding new purchases and deducting
payments and credits, for each day in the
billing cycle, and then dividing by the
number of days in the billing cycle. The
second balance is for the preceding billing
cycle.
2. Examples.
i. Assume that the billing cycle on a
consumer credit card account starts on the
first day of the month and ends on the last
day of the month. The payment due date for
the account is the twenty-fifth day of the
month. Under the terms of the account, the
consumer will not be charged interest on
purchases if the balance at the end of a
billing cycle is paid in full by the following

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payment due date. The consumer uses the
credit card to make a $500 purchase on
March 15. The consumer pays the balance for
the February billing cycle in full on March
25. At the end of the March billing cycle,
March 31, the consumer’s balance consists
only of the $500 purchase and the consumer
will not be charged interest on that balance
if it is paid in full by the following due date,
April 25. The consumer pays $400 on April
25, leaving a $100 balance. The federal credit
union may charge interest on the $500
purchase from the start of the April billing
cycle, April 1, through April 24 and interest
on the remaining $100 from April 25 through
the end of the April billing cycle, April 30.
The federal credit union is prohibited,
however, from reaching back and charging
interest on the $500 purchase from the date
of purchase, March 15 to the end of the
March billing cycle, March 31.
ii. Assume the same circumstances as in
the previous example except that the
consumer does not pay the balance for the
February billing cycle in full on March 25
and therefore, under the terms of the account,
is not eligible for a time period within which
to repay the $500 purchase without incurring
a finance charge. With respect to the $500
purchase, the federal credit union may
charge interest from the date of purchase,
March 15, through April 24 and interest on
the remaining $100 from April 25 through
the end of the April billing cycle, April 30.
Section 706.26—Unfair Charging of Security
Deposits and Fees for the Issuance or
Availability of Credit to Consumer Credit
Card Accounts
26(a) Limitation for First Year
1. Majority of the credit limit. The total
amount of security deposits and fees for the
issuance or availability of credit constitutes
a majority of the initial credit limit if that
total is greater than half of the limit. For
example, assume that a consumer credit card
account has an initial credit limit of $500.
Under § 706.26(a), a federal credit union may
charge to the account security deposits and
fees for the issuance or availability of credit
totaling no more than $250 during the first
year (consistent with § 706.26(b)).
26(b) Limitations for First Billing Cycle and
Subsequent Billing Cycles
1. Adjustments of one dollar or less
permitted. When dividing amounts pursuant
to § 706.26(b)(2), a federal credit union may
adjust amounts by one dollar or less. For
example, if a federal credit union is dividing
$87 over five billing cycles, the federal credit
union may charge $18 for two months and
$17 for the remaining three months.
2. Examples.
i. Assume that a consumer credit card
account opened on January 1 has an initial
credit limit of $500. Assume also that the
billing cycles for this account begin on the
first day of the month and end on the last day
of the month. Under § 706.26(a), the federal
credit union may charge to the account no
more than $250 in security deposits and fees
for the issuance or availability of credit
during the first year after the account is
opened. If it charges $250, the federal credit
union may charge up to $125 during the first

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billing cycle. If it charges $125 during the
first billing cycle, it may then charge no more
than $25 in each of the next five billing
cycles. If it chooses, the federal credit union
may spread the additional security deposits
and fees over a longer period, such as by
charging $12.50 in each of the ten billing
cycles following the first billing cycle.
ii. Same facts as above except that on July
1 the federal credit union increases the credit
limit on the account from $500 to $750.
Because the prohibition in § 706.26(a) is
based on the initial credit limit of $500, the
increase in credit limit does not permit the
federal credit union to charge to the account
additional security deposits and fees for the
issuance or availability of credit, such as a
fee for increasing the credit limit.
26(c) Evasion Prohibited
1. Evasion. Section 706.26(c) prohibits a
federal credit union from evading the
requirements of this section by providing the
consumer with additional credit to fund the
consumer’s payment of security deposits and
fees that exceed the total amounts permitted
by § 706.26(a) and (b). For example, assume
that on January 1 a consumer opens a
consumer credit card account with an initial
credit limit of $400 and the federal credit
union charges to that account $100 in fees for
the issuance or availability of credit. Assume
also that the billing cycles for the account
coincide with the days of the month and that
the federal credit union will charge $20 in
fees for the issuance or availability of credit
in the February, March, April, May, and June
billing cycles. The federal credit union
violates § 706.26(c) if it provides the
consumer with a separate credit product to
fund additional security deposits or fees for
the issuance or availability of credit.
2. Payment with funds not obtained from
the federal credit union. A federal credit
union does not violate § 706.26(c) if it
requires the consumer to pay security
deposits or fees for the issuance or
availability of credit using funds that are not
obtained, directly or indirectly, from the
federal credit union. For example, a federal
credit union does not violate § 706.26(c) if a
$400 security deposit paid by a consumer to
obtain a consumer credit card account with
a credit line of $400 is not charged to a credit
account provided by the federal credit union
or its affiliate.
26(d) Definitions
1. Membership fees. Membership fees for
opening an account are fees for the issuance
or availability of credit. A membership fee to
join an organization that provides a credit or
charge card as a privilege of membership is
a fee for the issuance or availability of credit
only if the card is issued automatically upon
membership. If membership results merely in
eligibility to apply for an account, then such
a fee is not a fee for the issuance or
availability of credit.
2. Enhancements. Fees for optional
services in addition to basic membership
privileges in a credit or charge card account,
for example, travel insurance or cardregistration services, are not fees for the
issuance or availability of credit if the basic
account may be opened without paying such
fees. Issuing a card to each primary

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cardholder, not authorized users, is
considered a basic membership privilege and
fees for additional cards, beyond the first
card on the account, are fees for the issuance
or availability of credit. Thus, a fee to obtain
an additional card on the account beyond the
first card, so that each cardholder would
have his or her own card, is a fee for the
issuance or availability of credit even if the
fee is optional; that is, if the fee is charged
only if the cardholder requests one or more
additional cards.
3. One-time fees. Non-periodic fees related
to opening an account, such as application
fees or one-time membership or participation
fees, are fees for the issuance or availability
of credit. Fees for reissuing a lost or stolen
card, statement reproduction fees, and fees
for late payment or other violations of the
account terms are examples of fees that are
not fees for the issuance or availability of
credit.
By order of the Board of Governors of the
Federal Reserve System, December 18, 2008.
Jennifer J. Johnson,
Secretary of the Board.
Dated: December 16, 2008.
By the Office of Thrift Supervision,
John M. Reich,
Director.
By the National Credit Union
Administration Board, on December 18,
2008.
Mary F. Rupp,
Secretary of the Board.
[FR Doc. E8–31186 Filed 1–28–09; 8:45 am]
BILLING CODE 6720–01–P; 6720–01–P; 7535–01–P

FEDERAL RESERVE SYSTEM
12 CFR Part 230
[Regulation DD; Docket No. R–1315]

Truth in Savings
AGENCY: Board of Governors of the
Federal Reserve System.
ACTION: Final rule; official staff
commentary.
SUMMARY: The Federal Reserve Board
(Board) is amending Regulation DD,
which implements the Truth in Savings
Act, and the official staff commentary to
the regulation to require all depository
institutions to disclose aggregate
overdraft fees on periodic statements,
and not solely institutions that promote
the payment of overdrafts. The final rule
also addresses balance disclosures
provided to consumers through
automated systems. In addition, the
Board is separately issuing a proposed
rulemaking, published in today’s
Federal Register, to incorporate the
notice requirements into Regulation E
that were previously proposed under
Regulation DD.

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DATES: Effective Date: The rule is
effective January 1, 2010.
FOR FURTHER INFORMATION CONTACT:
Dana E. Miller, Attorney, or Ky TranTrong, Counsel, Division of Consumer
and Community Affairs, Board of
Governors of the Federal Reserve
System, Washington, DC 20551, at (202)
452–3667. For users of
Telecommunications Device for the Deaf
(TDD) only, contact (202) 263–4869.
SUPPLEMENTARY INFORMATION:

I. The Truth in Savings Act
The Truth in Savings Act (TISA), 12
U.S.C. 4301 et seq., is implemented by
the Board’s Regulation DD (12 CFR part
230). The purpose of the act and
regulation is to assist consumers in
comparing deposit accounts offered by
depository institutions, principally
through the disclosure of fees, the
annual percentage yield, the interest
rate, and other account terms. An
official staff commentary interprets the
requirements of Regulation DD (12 CFR
part 230 (Supp. I)). Credit unions are
governed by a substantially similar
regulation issued by the National Credit
Union Administration (NCUA).
The Board’s authority under section
269(a) of TISA provides that its
regulations may contain such
classifications, differentiations, or other
provisions, and may provide for such
adjustments and exceptions for any
class of accounts as, in the judgment of
the Board, are necessary or proper to
carry out the purposes of TISA, to
prevent circumvention or evasion of the
requirements of TISA, or to facilitate
compliance with the requirements of
TISA. 12 U.S.C. 4308. It is the purpose
of TISA to require the clear and uniform
disclosure of the fees that are assessable
against deposit accounts, so that
consumers can make a meaningful
comparison between the competing
claims of depository institutions with
regard to deposit accounts. 12 U.S.C.
4301.
In addition, under TISA and
Regulation DD, account disclosures
must be provided upon a consumer’s
request and before an account is
opened. Institutions are not required to
provide periodic statements; but if they
do, the act requires that fees, yields, and
other information be provided on the
statements.
TISA and Regulation DD contain rules
for advertising deposit accounts. TISA
and Regulation DD prohibit inaccurate
or misleading advertisements,
announcements, or solicitations, or
those that misrepresent the deposit
contract. TISA and Regulation DD also
prohibit institutions from advertising an

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