Compliance Blog

Posted by Anthony Demangone

Did you hear a loud noise yesterday?  The Federal Reserve dropped the long-awaited final rule to amend the open-end portion of Regulation Z.  (That was what you heard.  611 pages makes quite a sound when it hits the floor.)

Go here to view the final rule.  It is a doozy, for sure.  The compliance deadline is July 1, 2010.  This final rule was far beyond my holiday cookie-clouded ability to analyze coherently for this posting.  But for now, understand that the rule is here.  (Happy Holidays from the Fed, everyone!) 

Here's something I read that might affect credit unions that offer open-end lending programs with sub-accounts:

The final rule generally adopts the proposal that would clarify that credit is not properly characterized as open-end credit if individual advances are separately underwritten. (Emphasis added.)

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Yesterday, NCUA, the Federal Reserve and Treasury joined together to issue a final rule to address unfair and deceptive acts and practices in the area of credit cards.  NCUA will house its rule under Part 706 of its rules and regulations.  Here's what you need to know now:

Compliance deadline.  This puppy doesn't go into affect until July 1, 2010.  That's a long time from now, but the changes outlined in the final rule may take a long time to implement.

On the editing floor.  Not everything that was in the proposal made it to the final rule.  The final rule does not address overdraft privilege programs.  Are we out of the clear?  Not so fast, my friend.  The Fed will address this issue with proposed changes to Regulation E.  The Fed released that proposal yesterday as well.  I haven't read through it yet.  There was enough depressing news from the Fed already.  I felt no need to dig deeper. 

What does this final rule do?

1. Late payments -- Prohibits treating a payment as late unless consumers are given a reasonable time period for payment. A credit card statement must be sent at least 21 days before payment is due.
2. Payment allocation -- Requires reasonable allocation of amounts paid in excess of a required minimum payment in relation to interest rate accruals The rule specifically requires allocation to segments with the highest APRs in descending order or among the balances in the same proportion to the total outstanding balance.
3. Application of interest rate increases to pre-existing balances -- Prohibits credit card issuers from applying an increased APR to existing balances except in cases of a variable rate account, where payments are 30 days late or do not comply with a workout arrangement, and when a “go to” rate has been previously disclosed on an account with a specified term or expiration date. 
4. Double cycle billing -- Prohibits a finance charge based on days in a prior billing cycle for an outstanding balance in the current cycle.
5. Security deposits and fees for providing credit -- Prohibits an FCU from financing a security deposit or other account opening fees if the charges constitute a majority of the available credit offered. The rule modifies the proposal to limit first month fees to no more than 25 percent of available credit, and requires that fees between 25 and 50 percent of available credit be spread equally over the next five months.

Now, the devil is in the details.  This is a broad overview.  Here would be my battle plan: go over the rule.  See what affects you.  And then call a meeting with everyone involved in credit cards to see what you need to do.  These changes may (let's be real, will) require changes to data processing systems, such as those that allocate payments.  This means most of you will be herding cats and bashing your head against a wall dealing with third parties to implement some changes.  Don't wait too long to get started.

Go here to read the final rule or if you want to kill a tree print it out.

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Have a great weekend everyone.  I hope your holiday shopping is in better shape than mine.  (The cookbook will be distributed soon.  And it will be a dandy!  Diets beware!)