CU Essentials

Regulation “Z”: The Important Changes

By Daniel R. Loritz, Partner, Okun Loritz, LLP

Most credit unions know by now that Regulation “Z,” which implements the Truth-in-Lending Act, has been completely overhauled and there are new requirements and new disclosures for credit cards and other open-end lines of credit. These changes have been implemented in four phases. The first phase of changes took effect on August 20, 2009. The next phase took place on February 22, 2010 and was followed by changes that took effect on July 1, 2010. The fourth and final phase of changes is scheduled to take effect on August 22, 2010.

This article will provide you with a brief introduction to the changes that took effect on February 22, 2010 and affect credit cards in the following ways:

1. The new limitations on increasing rates, fees, and charges
2. The new requirements for over-limit transactions
3. The new requirement to evaluate your member’s ability to repay; and
4. The new requirements for minimum payments.

The New Limitations on Increasing Rates, Fees and Charges
As of February 22, 2010, credit card issuers’ ability to change rates and certain fees and charges was dramatically reduced. For example, did you know that you can no longer increase the APR applicable to a credit card account during the first year the account is open?

Did you also know that, if you offer a temporary rate reduction sometime after the account is first opened, you cannot apply the increased rate that would apply after the temporary rate period expires to transactions that occurred prior to the temporary rate period or to transactions that occurred within 14 days of providing the notice to the cardholder about the temporary rate reduction?

And did you know that a temporary rate period must now be at least 6 months long?

Did you know that, if your credit card program features a variable rate but includes a minimum APR (i.e., floor rate), this no longer qualifies as a true variable-rate program under Regulation “Z” and therefore you would have to give 45 days advance notice before you could increase the APR?

Did you know that you cannot increase the APR on existing balance as the result of a late payment unless the cardholder is at least 60 days delinquent?

The New Requirements for Over-limit Transactions
Did you know that you cannot impose a fee or charge a credit card account for an over-the-limit transaction unless:

1. You provide notice that the cardholder must opt in.
2. You provide a reasonable opportunity for the cardholder to opt in.
3. The cardholder actually opts in.
4. You send a Confirmation Notice to the cardholder no later than the first periodic statement after the cardholder opted in.
5. You provide a Revocation Notice, which explains that the cardholder can opt out, following the assessment of any over-the-limit fee or charge.

Did you know that the Revocation Notice must appear on the front of any periodic statement that reflects an over-the-limit fee or charge?

Did you know that you cannot impose more than one over-the-limit fee or charge per billing cycle and only if the credit limit was exceeded in that billing cycle?

Did you know that you cannot impose an over-the-limit fee for more than three billing cycles for the same over-the-limit transaction?

The New Requirement to Evaluate Your Member’s Ability to Repay
Under the new Regulation “Z” rules, you cannot open a credit card account for a consumer or increase any credit limit applicable to the account unless you consider the cardholder’s ability to make the required minimum periodic payments based on the cardholder’s income or assets and current obligations. You also must establish and maintain reasonable written policies and procedures to consider a cardholder’s income or assets and current obligations.

Did you know that there is a safe harbor rule? Or what it is? And, if you use it, you will be deemed to be in compliance?

The New Requirements for Minimum Payments
Under the new rules, when a cardholder makes a payment in excess of the required minimum periodic payment, you must allocate the excess amount first to the balance with the highest APR and any remaining portion to the other balances in descending order based on the applicable APR.

Did you know that the rule does not govern the order in which you apply the payments within a particular balance; rather, it governs only which balance you apply the payments to first? For example, if your Credit Card Agreement states that payments are applied first to Late Charges, then to Collection-Related Charges, then to Finance Charges, and then to Principal, this is still “OK.”

Daniel R. Loritz is a partner at Okun Loritz, LLP, a law firm specializing in credit union law. Mr. Loritz is an author of numerous publications specific to legal issues affecting credit unions and is a frequent speaker at credit union events. The attorneys at Okun Loritz, LLP assist credit unions with a variety of credit union-related legal matters and compliance questions. To contact Mr. Loritz, call (818) 649-7547 or email him directly at Dan@OkunLoritz.com.

While we hope that this article helps you understand the new rules, the article is not intended, and should not be relied upon, as legal advice applicable to your credit union’s particular situation. If you have any questions concerning the new regulation on over-the-limit fees, you are strongly encouraged to seek the advice of an attorney with specific Regulation “Z” expertise.

See the CU Essentials webcast
The questions raised by Mr. Loritz in this article were among those addressed in WesCorp’s CU Essentials webcast featuring Mr. Loritz, Reg. Z: Important Changes and Hidden Issues, which ran on July 27. Click here to view an archive recording of the webcast.