Compliance Blog

There has been quite a bit of confusion among credit unions regarding their courtesy periods and grace periods.  Part of the confusion stems from the term used to describe a period of time after the member's due date and prior to the charging of a late fee.  Some credit unions refer to this as a "grace period," but the Federal Reserve deems it more appropriate to call this a "courtesy period."

The Federal Reserve's Interim Final Rules states:

"For purposes of this paragraph [226.5(b)(2)(ii)], “grace period” means a period within which any credit extended may be repaid without incurring a finance charge due to a periodic interest rate." 12 C.F.R. 226.5(b)(2)(ii) - Page 68 of the 107 page PDF.

The official staff commentary then provides this regarding courtesy periods and due dates:

"i. Courtesy period following payment due date. Although the terms of the account agreement may require that payment be made by a certain date, some creditors provide an additional period of time after that date during which a late payment fee will not be assessed. In some cases, this period is set forth in the account agreement while in others it is provided as an informal policy or practice. Regardless, for purposes of § 226.5(b)(2)(ii), the payment due date is the due date according to the legal obligation between the parties, not the end of the additional period of time. For example, if an account agreement for a home equity plan subject to the requirements of § 226.5b provides that payment is due on the first day of the month but a late payment fee will not be assessed if the payment is received by the fifteenth day of the month, the payment due date for purposes of § 226.5(b)(2)(ii) is the first day of the month. Similarly, if a cardholder agreement provides that payment is due on the fifteenth day of the month but, under the creditor’s informal “courtesy” period, a late payment fee will not be assessed if the payment is received by the eighteenth day of the month, the payment due date for purposes of § 226.5(b)(2)(ii) is the fifteenth day of the month."  Comment 3-i of the Official Staff Commentary to 12 C.F.R. 226.5(b)(2)(ii) - Page 81 of the 107 page PDF.  (emphasis added).

This means that the following would not be deemed sufficient under the new rules (for this example, please disregard the Fed's temporary solution):

Statement Mailed:   September 3, 2009

Payment Due Date:   September 20, 2009

End of Courtesy Period: September 30, 2009

Notice that under these procedures, the member would be given 27 days from the mailing of the statement (September 3) until they would potentially be charged a late fee (September 30).  However, under the new rules this would not be sufficient as the payment due date is what Congress included in the Credit CARD Act - and this would only give the member 17 days to make a payment before the due date.

One solution would be to change the terms of your agreement to move the payment due date back to what used to be the end of the courtesy period.  This would remove the courtesy period but would result in the credit union having a payment due date - the legal obligation between the member and the credit union - more than 21 days after the statement was mailed.